Edward Glaeser warms my wonky heart by clearly explaining the problems with the mortgage deduction. Problem one, he says, is that "the size of the tax benefit is proportional to your debt." As such, "the deduction essentially encourages us to make leveraged bets on the swings of the housing market." The last few years haven't just been a gamble on housing. They've been a government subsidized gamble on housing, which has made the gamble bigger.Problem two, he says, is that the deduction pushes up prices in constrained markets. Since you can't really build new housing stock in New York, subsidizing purchases just drives up prices. Rather than making housing more affordable, it makes sellers richer.Problem three, and this is the big one, is that it's wildly regressive. Glaeser nods to new research from James Poterba and Todd Sinai showing that "the tax savings for households earning more than $250,000 is 10 times the tax savings for households earning between $40,000 and $75,000." And, renters, of course, don't get any of the subsidy, but they pay for it by paying higher taxes on other things. Problem four is that the deduction encourages bigger homes, which are more energy intensive. "If global warming is a serious problem, then the government should be encouraging us to live in smaller, not bigger, dwellings," writes Glaeser.Problem five is that the deduction doesn't even carry out its stated purpose of encouraging home ownership among those who couldn't otherwise afford it. The deduction is only available to those who itemize their taxes. Low-income folks often don't itemize. And so they don't get the deduction. So rather than encouraging home ownership, it encourages those who would buy a home anyway to buy a bigger home. And renters and low-income home-owners subsidize them.Glaeser also has a nice policy proposal for this: "Enact legislation now that will gradually decrease the cap on the mortgage principal for which homeowners can deduct interest payments by $100,000 per year over the next seven years until it hits $300,000." Most homeowners would still get the deduction. In 2005, the median home price was $213,900. It may well be lower come next year. And though no one is arguing that this would be an obvious political winner, it's actually well-aligned with the current moment. We've learned, I think, that it's bad policy to encourage bigger bets on bigger mortgages for bigger homes under the idea that housing is always and everywhere a safe and desirable investment. Now we just need to reform the policies that do that. END THE MORTGAGE DEDUCTION!
Edward Glaeser warms my wonky heart by clearly explaining the problems with the mortgage deduction. Problem one, he says, is that "the size of the tax benefit is proportional to your debt." As such, "the deduction essentially encourages us to make leveraged bets on the swings of the housing market." The last few years haven't just been a gamble on housing. They've been a government subsidized gamble on housing, which has made the gamble bigger.Problem two, he says, is that the deduction pushes up prices in constrained markets. Since you can't really build new housing stock in New York, subsidizing purchases just drives up prices. Rather than making housing more affordable, it makes sellers richer.Problem three, and this is the big one, is that it's wildly regressive. Glaeser nods to new research from James Poterba and Todd Sinai showing that "the tax savings for households earning more than $250,000 is 10 times the tax savings for households earning between $40,000 and $75,000." And, renters, of course, don't get any of the subsidy, but they pay for it by paying higher taxes on other things. Problem four is that the deduction encourages bigger homes, which are more energy intensive. "If global warming is a serious problem, then the government should be encouraging us to live in smaller, not bigger, dwellings," writes Glaeser.Problem five is that the deduction doesn't even carry out its stated purpose of encouraging home ownership among those who couldn't otherwise afford it. The deduction is only available to those who itemize their taxes. Low-income folks often don't itemize. And so they don't get the deduction. So rather than encouraging home ownership, it encourages those who would buy a home anyway to buy a bigger home. And renters and low-income home-owners subsidize them.Glaeser also has a nice policy proposal for this: "Enact legislation now that will gradually decrease the cap on the mortgage principal for which homeowners can deduct interest payments by $100,000 per year over the next seven years until it hits $300,000." Most homeowners would still get the deduction. In 2005, the median home price was $213,900. It may well be lower come next year. And though no one is arguing that this would be an obvious political winner, it's actually well-aligned with the current moment. We've learned, I think, that it's bad policy to encourage bigger bets on bigger mortgages for bigger homes under the idea that housing is always and everywhere a safe and desirable investment. Now we just need to reform the policies that do that. 
