The Great Policy That Dare Not Speak Its Name: Repealing the Home-Mortgage-Interest Tax Deduction

As Eleanor Clift reported last week, Housing and Urban Development Secretary Shaun Donovan

That's too bad, because they should. The mortgage-interest deduction, which costs the national treasury an estimated $120 billion per year, is one of the most inefficient, counterproductive federal policies. By favoring money spent on buying a home over money spent on rent or home renovation, which are not tax deductible, we have encouraged people to buy new houses in ever farther suburbs, rather than investing in older houses in the urban core. Perversely, it still manages to push up prices in the more desirable urban areas, often beyond the reach of middle-class Americans, because it increases demand to buy homes in places where supply cannot be increased because they are already developed.

The result for cities? Massive disinvestment from the urban core, leading to streets pockmarked with abandoned buildings and empty lots, and the ensuing middle-class flight, with the crime and poor public schools that follow. The result for the countryside? Small towns on the far urban fringe mushrooming into ugly exurbs, with open space disappearing and traffic backing up. The result for our health and environment? Record rates of obesity caused partly by people sitting in their cars instead of walking, and the world's highest greenhouse-gas emissions.

We also deprive the government of much-needed revenue while contributing to the speculative bubble for housing that precipitated the foreclosure crises and Great Recession, and transferring wealth from the lower classes (renters) to the upper classes (owners). So what's the upside? Supposedly that it helps more afford to buy homes. But a lot of Americans shouldn't buy homes, and a dearth of homeownership, as opposed to taking on too much debt, such as, say, a mortgage, is not a problem with our economy. Anyway, it appears not to be true: Harvard economist Edward Glaeser found that since the poorer prospective homeowners it is supposed to help often do not itemize their taxes it does not benefit them. "My own research in this area," writes Glaeser, " found that when the value of the interest deduction rose, during periods of high inflation, there was no observable increase in the homeownership rate."

No wonder Jonathan Chait calls eliminating this wasteful, harmful policy "one of those reforms that economists across the political spectrum agree on" and Glaeser calls his support of reducing the subsidy "progressive libertarianism." If you are a conservative, you should be for eliminating any government program that perverts the market to perfect society, and if you are a liberal, you should oppose it on environmental and public-health grounds. Alas, people like their tax cuts, especially their aspirational ones, so Chait says he would be "stunned if it happened." But I think it will happen right after we eliminate subsidies to big agribusiness and reform Defense procurement.