The Simpson-Bowles plan propose a two options to reduce of eliminate the Mortgage Interest Deductions entirely! The 2nd option would eliminate the Mortgage Interest Deduction for Second Homes, Home Equity Mortgages and mortgages over $500,000 in value. Would your decision to buy real estate change if the Mortgage Interest Deductions were eliminated?!
We won’t be debating the politics of a subsidy on home ownership by the Federal Government specially since we are still subsidizing Oil companies. But we will explore the potential impact of such a deduction on the housing market.
According to The Tax Foundation shows that in 2003 only 9% of the folks with $30,000 adjusted gross income (AGI) took advantage of the Mortgage Interest Deductions while representing more than 50% of tax filers. In contrast, 36% of the deductions went to filers with more than $100,000 in income. Looking at data from 1998, Glaeser and Shapiro find that over 50% of itemized income goes to the top 10% of households.
Clearly, this subsidy disproportionately benefits high income tax payers which would purchase the home regardless of deduct-ability of the interest payments.
So, who is the subsidy really helping!? Even if the impact of the subsidy might be a statistical anomaly, but just like any other Federal Government program that has been in place for a long time, unplugging the Mortgage Interest Deductions might have un-intended consequences that should be considered with care
o cause externalize. Therefore we advise strong caution before the Simpson-Bowles recommendations are adopted as the new law of the land.