Wednesday, December 22, 2010

Is the Mortgage Interest Deduction a "Middle-class" benefit?

Yesterday, I was on the Larry Mantle program on KPCC debating Lawrence Yun about the merits of the mortgage interest deduction.  Lawrence is the chief economist of NAR, and is, as such, not disinterested about the issue, but he is an honest advocate (full disclosure: when I was a graduate student, I worked for Wisconsin Realtors, and I consulted on benchmarking the Existing Home Sales series in the late 90s and around 2002 or so ).

He said a couple of things, however, that bothered me.  He sort of dissed renters, by saying they pay only five percent of federal income taxes, ignoring the fact that they pay FICA, state and local taxes.  One would think Realtors would like renters, since they do, after all, pay rent to property owners.  But he also characterized the mortgage interest deduction as being a "middle-class" deduction.  This all depends on the defintion of "middle-class."

Let me turn to Eric Toder and colleagues:

The percentage reduction in after-tax income from eliminating the deduction would be largest for taxpayers in the 80th to 99th percentiles of the distribution. These upper-middle-income households would be affected more than tax units in the bottom four quintiles because they are more likely to own homes and itemize deductions and because the higher marginal tax rates they face make deductions worth more to them than to lower-income taxpayers. The very highest income taxpayers, however, will experience a relatively small drop in income (about 0.4 percent on average) because, at the very highest income levels, mortgage interest payments decline sharply as a share of income.
So it is probably correct to characterize the mortgage interest deduction as an "upper-middle-class" deduction.  The very rich don't benefit that much from it, because they don't really need mortgages.  The bottom 80 percent don't benefit much, because their marginal tax rates are low, they are more likely to be renters and perhaps don't itemize their tax deductions.  My guess is that people between the 80th and 99th percentile don't need a lot of encouragement to become homeowners.