The Efficiency and Equity of the Home Mortgage Interest Deduction

John C. Weicher
Hudson Institute

Point of Contention: The Home Mortgage Interest Deduction
For this issue’s Point of Contention, we asked four observers with substantial knowledge of the topic to argue for or against the following proposition—"The federal mortgage interest deduction serves a public purpose that justifies the potential drawbacks of the tax expenditure." Please contact alastair.w.mcfarlane@hud.gov to suggest other thought-provoking areas of controversy.

Economists strongly favor an economically neutral tax system, and, when the National Commission on Fiscal Responsibility and Reform (the Simpson-Bowles Commission) suggested terminating the mortgage interest deduction for homeowners, many economists agreed on the basis that the deduction creates a bias in favor of homeownership. This argument would be valid if housing were simply a consumer good, but that perspective is incomplete. An owner-occupied home is an asset in addition to being a place to live. It is, as many in the housing industry have often said, "the biggest investment most people will ever make." A homeowner is therefore both an investor and a consumer— someone who owns a house and is renting it to himself or herself. Economic neutrality requires taking both aspects into consideration.