The US mortgage interest deduction (MID) allows homeowners to deduct the interest paid on their mortgages from their federal tax returns, provided that they itemize deductions. Since the benefit depends on a taxpayer’s marginal tax rate, which increases with income, the MID is an “upside-down subsidy” that becomes more valuable for higher-income homeowners. I analyze the implications of converting the US MID to a mortgage interest credit (MIC) and evaluate the effects on federal revenue and the distribution of income. I argue that a MIC could be better targeted at low- and middle-income taxpayers on the margin of homeownership while also being more progressive and less expensive than the current MID.
BradyPeterCroninJulie-AnneHouserScott. 2003. “Regional Differences in the Utilization of the Mortgage Interest Deduction.” Public Finance Review31 (4): 327–66.
2.
Congressional Budget Office. 2016. Options for Reducing the Deficit: 2017 to 2026. Washington, DC: Congressional Budget Office.
3.
Council of Economic Advisers. 2017. Evaluating the Anticipated Effects of Changes to the Mortgage Interest Deduction. Washington, DC: Council of Economic Advisers.
4.
DamenSvenVastmansFrankBuystErik. 2016. “The Effect of Mortgage Interest Deduction and Mortgage Characteristics on House Prices.” Journal of Housing Economics34: 15–29.
5.
DavisMorris A.2012. Questioning Homeownership as a Public Policy Goal. Washington, DC: Cato Institute.
6.
Domenici–Rivlin Debt Reduction Task Force. 2010. Restoring America’s Future: Reviving the Economy, Cutting Spending and Debt, and Creating a Simple, Pro-growth Tax System. Washington, DC: Bipartisan Policy Center.
7.
DrukkerAustin J.GayerTedRosenHarvey S.. 2021. “The Mortgage Interest Deduction: Revenue and Distributional Effects.” Journal of Housing Research30 (1): 1–33.
8.
DunskyRobert M.FollainJames R.. 2000. “Tax-induced Portfolio Reshuffling: The Case of the Mortgage Interest Deduction.” Real Estate Economics28 (4): 683–718.
9.
FeenbergDanielCouttsElisabeth. 1993. “An Introduction to the TAXSIM Model.” Journal of Policy Analysis and Management12 (1): 189–94.
10.
FollainJames R.DunskyRobert M.. 1997. “The Demand for Mortgage Debt and the Income Tax.” Journal of Housing Research18 (2): 155–99.
11.
GaleWilliam G.GruberJonathanStephens-DavidowitzSeth. 2007. “Encouraging Homeownership through the Tax Code.” Tax Notes, June18: 1171–89.
12.
GlaeserEdward L.ShapiroJesse M.. 2003. “The Benefits of the Home Mortgage Interest Deduction.” In Tax Policy and the Economy, Vol. 17, edited by PoterbaJames M., 37–82. Cambridge, MA: MIT Press.
13.
GreenRichard K.VandellKerry D.. 1999. “Giving Households Credit: How Changes in the U.S. Tax Code Could Promote Homeownership.” Regional Science and Urban Economics29 (4): 419–44.
14.
GruberJonathanJensenAmalieKlevenHenrik. 2021. “Do People Respond to the Mortgage Interest Deduction? Quasi-experimental Evidence from Denmark.” American Economic Journal: Economic Policy13 (12): 273–303.
15.
GyourkoJosephSinaiTodd. 2003. “The Spatial Distribution of Housing-related Ordinary Income Tax Benefits.” Real Estate Economics31 (4): 527–75.
16.
HansonAndrew. 2012a. “The Incidence of the Mortgage Interest Deduction: Evidence from the Market for Home Purchase Loans.” Public Finance Review40 (3): 339–59.
17.
HansonAndrew. 2012b. “Size of Home, Homeownership, and the Mortgage Interest Deduction.” Journal of Housing Economics21 (3): 195–210.
18.
HansonAndrew. 2020. “Taxes and Borrower Behavior: Evidence from the Mortgage Interest Deductibility Limit.” Journal of Urban Economics118: Article 103256.
19.
HansonAndrewMartinHal. 2014. “Housing Market Distortions and the Mortgage Interest Deduction.” Public Finance Review42 (5): 582–602.
20.
HembreErik. 2018. “An Examination of the First-time Homebuyer Tax Credit.” Regional Science and Urban Economics73: 196–216.
21.
HilberChristian A. L.TurnerTracy M.. 2014. “The Mortgage Interest Deduction and Its Impact on Homeownership Decisions.” Review of Economics and Statistics96 (4): 618–37.
22.
Internal Revenue Service. 2018. “Interest on Home Equity Loans Often Still Deductible under New Law.” Internal Revenue Service News Release, February 21.
23.
Joint Committee on Taxation. 1987. General Explanation of the Tax Reform Act of 1986. Washington, DC: Joint Committee on Taxation.
24.
Joint Committee on Taxation. 2018. Estimates of Federal Tax Expenditures for Fiscal Years 2017–2021. Washington, DC: Joint Committee on Taxation.
25.
KennickellArthur B.Louise WoodburnR.. 1999. “Consistent Weight Design for the 1989, 1992 and 1995 SCFs, and the Distribution of Wealth.” Review of Income and Wealth45 (2): 193–215.
26.
LingDavid C.McGillGary A.. 1998. “Evidence on the Demand for Mortgage Debt by Owner-occupants.” Journal of Urban Economics44 (3): 391–414.
27.
MartinHalHansonAndrew. 2016. “Metropolitan Area Home Prices and the Mortgage Interest Deduction: Estimates and Simulations from Policy Change.” Regional Science and Urban Economics59: 12–23.
28.
MooreKevin. 2003. “The Effects of the 1986 and 1993 Tax Reforms on Self-employment.”Federal Reserve Board Finance and Economics Discussion Series, Washington, DC.
29.
PoterbaJames M.SinaiTodd. 2008. “Tax Expenditures for Owner-occupied Housing: Deductions for Property Taxes and Mortgage Interest and the Exclusion of Imputed Rental Income.” American Economic Review98 (2): 84–89.
30.
President’s Advisory Panel on Federal Tax Reform. 2005. Simple, Fair, and Pro-growth: Proposals to Fix America’s Tax System. Washington, DC: President’s Advisory Panel on Federal Tax Reform.
31.
Simpson–Bowles Commission. 2010. The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform. Washington, DC: The White House.
32.
SommerKamilaSullivanPaul. 2018. “Implications of US Tax Policy for House Prices, Rents, and Homeownership.” American Economic Review108 (2): 241–74.
33.
SplinterDavid. 2019. “The Mortgage Interest Deduction: Causes of Fluctuations in a Procyclical Tax Expenditure.” Public Finance Review47 (5): 807–27.
34.
ViardAlan D.2013. “Proposal 8: Replacing the Home Mortgage Interest Deduction.” In 15 Ways to Rethink the Federal Budget, edited by GreenstoneMichaelHarrisMaxLiKarenLooneyAdamPatashnikJeremy, 45–52. Washington, DC: The Hamilton Project.
