Eliminating or curtailing mortgage interest deduction would have modest long-run effects on economy

Jan 16, 2013

Eliminating or curtailing the mortgage interest deduction (MID) would initially result in declines in housing prices and investment but would have only modest aggregate macroeconomic effects in the long run, according to a new paper from Rice University's Baker Institute for Public Policy.

The MID is the second-largest individual income tax expenditure, according to the congressional Joint Committee on Taxation. Given the severity of the fiscal problems currently faced by the U.S., many recent tax reform proposals have included measures that would curtail or eliminate the home MID.

"The MID is, of course, an extremely popular and thus highly politically sensitive provision," said John Diamond, the Edward A. and Hermena Hancock Kelly Fellow in Public Finance at the Baker Institute. "It was one of the few provisions that was deemed to be untouchable during the deliberations preceding enactment of the landmark Tax Reform Act of 1986, a highly successful effort at fundamental tax reform that is widely believed to be the most sweeping reform of the income tax since its enactment." Diamond co-authored the paper with George Zodrow, the university's Allyn R. and Gladys M. Cline Chair of Economics and a Baker Institute Rice Scholar.

The study uses a developed by Diamond and Zodrow to simulate both the short-run and long-run dynamic aggregate macroeconomic effects of several plans that propose eliminating or curtailing the MID. The model is a dynamic, overlapping-generations, computable general equilibrium model of the U.S. economy.

The most dramatic reform the authors analyze is complete elimination of the MID. In this case, they find that GDP decreases slightly in the short run, due to the adjustment costs incurred in reallocating the capital stock, and increases slightly by 0.1 percent in the long run. Overall investment increases by less than 1 percent and reflects the expected reform-induced increases in investment in the nonhousing sectors and the rental sector, coupled with a decrease in investment in the owner-occupied housing sector, of about 6 percent initially and 3 percent in the long run. Asset values increase in the nonhousing sectors by less than 2 percent and by 3.5 percent in the rental housing sector and are coupled with a decline in the value of owner-occupied housing of roughly 4 percent.

The effects of the other two reforms analyzed—replacing the MID with a 12 percent nonrefundable credit subject to a $25,000 interest cap and limiting the MID to primary residences—are qualitatively similar but significantly smaller. For example, for the capped credit, housing investment in the owner-occupied sector declines by 2.6 percent initially and by 1.5 percent in the long run, and the value of owner-occupied housing declines by roughly 2 percent. By comparison, the effects of the far more modest reform of limiting the to principal residences are quite small, with investment in owner-occupied housing falling by 0.7 percent initially and by 0.4 percent in the long run, and the value of owner-occupied housing falling by only 0.5 percent.

Explore further: Facial selection technique for ads can increase buyers by 15 percent

More information: "The Dynamic Effects of Eliminating or Curtailing the Home Mortgage Interest Deduction," paper: bakerinstitute.org/publications/TEPP-pub-DiamondZodrowHomeMortgageInterestDeduction-120712.pdf

add to favorites email to friend print save as pdf

Related Stories

Obamas Paid Too Much in Taxes, Says Tax Expert

May 17, 2010

(PhysOrg.com) -- President Barack Obama and first lady Michelle Obama paid too much in taxes last year compared with their peers in the same income group, says Dorothy Brown, professor of tax law at Emory University School ...

Recommended for you

Sharing = Stealing: Busting a copyright myth

Apr 11, 2014

Consumers copy and share digital files. This has been blamed for a potentially catastrophic decline in certain markets. But why do consumers copy? And is it as economically harmful as often thought?

How widespread is tax evasion?

Apr 10, 2014

Tax evasion is widely assumed to be an eternal problem for governments—but how widespread is it? For the first time, a new study, co-authored by an MIT professor, has put a cost on a particular kind of tax evasion, known ...

China looks to science and technology to fuel its economy

Apr 10, 2014

Maintaining stability in the face of rapid change and growth, and proactively partaking in cooperative global ties in science and technology fields will be key in helping China become an innovation-based economy, according ...

User comments : 9

Adjust slider to filter visible comments by rank

Display comments: newest first

5 / 5 (1) Jan 17, 2013
That's right, give the housing sector another hit. This is just another reason for rents to rise, housing prices to fall, and home ownership to fall. This will have a direct negative affect on the middle class. IF these discussions are to be made, do it when the economy isn't struggling, not when it's having tepid growth, at best.
5 / 5 (1) Jan 17, 2013
Why eliminate this boon to home ownership? Do eliminate the deduction for second or vacation homes. Do put a cap on the deduction so that those buying trophy homes do not get a helping hand from the US Treasury.
But DO NOT eliminate the mortgage deduction for first time and low income buyers.
NO, I'm not one of those who fit into these categories.
2.1 / 5 (7) Jan 17, 2013
Let's eliminate the income tax.
'Progressive' tax policy punishes those who earn more and rewards those who earn less.
The FAIR tax should be the one the 'progressive' anti-capitalists should support. The more one consumes the more tax they pay. Punish consumption and reward savings and frugality.
5 / 5 (2) Jan 17, 2013
'Progressive' tax policy punishes those who earn more and rewards those who earn less.
Russia has a 13% flat tax, ryggie
2.3 / 5 (6) Jan 17, 2013
'Progressive' tax policy punishes those who earn more and rewards those who earn less.
Russia has a 13% flat tax, ryggie

What's wrong with that?
4 / 5 (4) Jan 17, 2013
"Why eliminate this boon to home ownership?" - Rwinners

To pay for tax cuts for the wealthiest Americans and corporations.

It is the Republican way.
3.7 / 5 (3) Jan 17, 2013
There is nothing wrong with the concept of a flat tax in my view.

However I note that every flat tax proposal made by Republicans includes provisions to exempt capital gains from all taxation.

"What's wrong with that?" - RyggTard
5 / 5 (2) Jan 17, 2013
RyggTard is wrong from the very first statement.

"Progressive' tax policy punishes those who earn more" - RyggTard

Taxes aren't punishment, but the price of living in a civilized society.

If RyggTard thinks that the price is too high, then he can move to the Libertarian Paradise of Somalia.

He doesn't of course, because he knows how good he has it in the U.S. and how horrible life is in his Libertarian paradise.
5 / 5 (2) Jan 18, 2013
The wealthiest among us also benefit the most from living in an open and free society. I say, pay for what you get.

More news stories

Online reviews: When do negative opinions boost sales?

When purchasing items online, reading customer reviews is a convenient way to get a real-world account of other people's opinions of the product. According to a new study in the Journal of Consumer Research, negative review ...

ESO image: A study in scarlet

This new image from ESO's La Silla Observatory in Chile reveals a cloud of hydrogen called Gum 41. In the middle of this little-known nebula, brilliant hot young stars are giving off energetic radiation that ...

First direct observations of excitons in motion achieved

A quasiparticle called an exciton—responsible for the transfer of energy within devices such as solar cells, LEDs, and semiconductor circuits—has been understood theoretically for decades. But exciton movement within ...

Patent talk: Google sharpens contact lens vision

(Phys.org) —A report from Patent Bolt brings us one step closer to what Google may have in mind in developing smart contact lenses. According to the discussion Google is interested in the concept of contact ...

Warm US West, cold East: A 4,000-year pattern

Last winter's curvy jet stream pattern brought mild temperatures to western North America and harsh cold to the East. A University of Utah-led study shows that pattern became more pronounced 4,000 years ago, ...