Why Do We Give Tax Deductions on Mortgage Interest Payments?

On a thirty-year mortgage at 5% interest, about half of our total payments to the bank end up being interest payments.

In the Netherlands, Switzerland, and the United States, taxpayers can deduct their full mortgage interest payments from their taxable income. The reasoning is that this makes it easier to own a home, which some argue saves a family money in the long run and of course builds asset value, where rental money is “gone forever” in a sense. In the United States, at least, the reasoning is that we want to help people own homes because it’s a good long-term investment for middle-class families.

But if we look at it another way, the biggest winners in the tax may not be middle-class families.

The higher one’s income, the more likely one is to own a home:

It’s also the case that those with higher incomes own more expensive homes, almost at a linear rate (if you make twice as much money, your home is on average worth about twice as much).

("Housing and Income". Licensed under CC BY 2.5 via Wikipedia)

Something to consider: looking at this from the lens of tax policy, it’s a highly regressive tax: those that make the most money are more likely to buy and buy bigger. This means that if they get a mortgage, they get far larger tax deductions than those with lower income who either get cheaper houses or just keep renting.

Some states (like Massachusetts) give some state-level tax deductions for rental income, but these deductions are for much less than half the rent, and state tax rates are lower than federal ones. From one perspective, one could say that lower-income renters are subsidizing tax-breaks for higher-income owners.

Is there real value in providing tax breaks to help people buy homes? Is this something we should continue as-is, stop, or modify in some way? Let us know your thoughts in comments below.

4 Comments

Erik Fogg

We do politics, but we don't do the thinking for you.