In recent months I have come across an increasing number of comments in financial articles putting the mortgage interest tax deduction in a negative light. Various arguments were used to support this characterization, including but not limited to: The deduction costs the government $X billion dollars of lost tax revenue. Most of the benefit goes to the rich. Country Y doesn't have the deduction and their home ownership rate is still Z%. The deduction encourages home ownership, which as we all know is what lead the world's economies to their doom.
It seems to me that allowing mortgage interest to be deducted is necessary to provide a level playing field between renting and buying. Someone who buys a house and then rents it out would deduct the mortgage interest as a business expense, and legitimately so. So someone cutting out the middleman and buying their own house directly, should get that same cost break.
Am I wrong?
I've thought about the same thing and also noticed the discussion in the media about eliminating it. I think the discussion is driven by the need for the government to increase tax collections. If the deduction were eliminated then some think the government would collect more in taxes.
I'm not so sure. If the deduction were eliminated I think many people might sell their homes and rent. That would further depress home prices and the economy! It would also be extremely unpopular so I don't see Congress ever voting for that.
I also don't think many of the arguments make sense. If I had $1,000,000 and wanted to buy a house, I could pay cash and forego the deduction or I could borrow
money at 4%, get the deduction, and have an after tax cost of capital of around 3%. That would be attractive since I could then take my money and earn a higher return on it by saving or investing it. That is something the government encourages.
My benefit, the government's loss on the subsidy is about 1% of the value of the house I might buy, every year, though it declines. If I take the money and invest it to earn anything about 4% the government actually makes more money than it loses because of the takes I pay on that income (in round numbers with a few other caveats). The bottom line is that I think getting rid of the deduction would be largely revenue-neutral for the rich but it would be a huge loss for the middle class.