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Implications of a Mortgage Interest Credit for the United States

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  • Austin J. Drukker

Abstract

The US mortgage interest deduction (MID) allows homeowners to deduct the interest paid on their mortgages from their federal tax returns, provided that they itemize deductions. Since the benefit depends on a taxpayer’s marginal tax rate, which increases with income, the MID is an “upside-down subsidy†that becomes more valuable for higher-income homeowners. I analyze the implications of converting the US MID to a mortgage interest credit (MIC) and evaluate the effects on federal revenue and the distribution of income. I argue that a MIC could be better targeted at low- and middle-income taxpayers on the margin of homeownership while also being more progressive and less expensive than the current MID.

Suggested Citation

  • Austin J. Drukker, 2021. "Implications of a Mortgage Interest Credit for the United States," Public Finance Review, , vol. 49(4), pages 573-588, July.
    • Handle: RePEc:sae:pubfin:v:49:y:2021:i:4:p:573-588
    DOI: 10.1177/10911421211028821
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    References listed on IDEAS

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    1. Jonathan Gruber & Amalie Jensen & Henrik Kleven, 2021. "Do People Respond to the Mortgage Interest Deduction? Quasi-experimental Evidence from Denmark," American Economic Journal: Economic Policy, American Economic Association, vol. 13(2), pages 273-303, May.
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    3. Christian A. L. Hilber & Tracy M. Turner, 2014. "The Mortgage Interest Deduction and its Impact on Homeownership Decisions," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 618-637, October.
    4. Martin, Hal & Hanson, Andrew, 2016. "Metropolitan area home prices and the mortgage interest deduction: Estimates and simulations from policy change," Regional Science and Urban Economics, Elsevier, vol. 59(C), pages 12-23.
    5. Green, Richard K. & Vandell, Kerry D., 1999. "Giving households credit: How changes in the U.S. tax code could promote homeownership," Regional Science and Urban Economics, Elsevier, vol. 29(4), pages 419-444, July.
    6. James Poterba & Todd Sinai, 2008. "Tax Expenditures for Owner-Occupied Housing: Deductions for Property Taxes and Mortgage Interest and the Exclusion of Imputed Rental Income," American Economic Review, American Economic Association, vol. 98(2), pages 84-89, May.
    7. David Splinter, 2019. "The Mortgage Interest Deduction: Causes of Fluctuations in a Procyclical Tax Expenditure," Public Finance Review, , vol. 47(5), pages 807-827, September.
    8. Arthur B. Kennickell & R. Louise Woodburn, 1999. "CONSISTENT WEIGHT DESIGN FOR THE 1989, 1992 AND 1995 SCFs, AND THE DISTRIBUTION OF WEALTH," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 45(2), pages 193-215, June.
    9. repec:cbo:report:521421 is not listed on IDEAS
    10. Congressional Budget Office, 2016. "Options for Reducing the Deficit: 2017 to 2026," Reports 52142, Congressional Budget Office.
    11. Robert M. Dunsky & James R. Follain, 2000. "Tax-Induced Portfolio Reshuffling: The Case of the Mortgage Interest Deduction," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(4), pages 683-718.
    12. Congressional Budget Office, 2016. "Options for Reducing the Deficit: 2017 to 2026," Reports 52142, Congressional Budget Office.
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    14. Hanson, Andrew, 2020. "Taxes and Borrower Behavior: Evidence from the Mortgage Interest Deductibility Limit," Journal of Urban Economics, Elsevier, vol. 118(C).
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    Cited by:

    1. Michael P Keane & Xiangling Liu, 2024. "Tax preferences and housing affordability: Exploration using a life-cycle model," IFS Working Papers W24/48, Institute for Fiscal Studies.
    2. Maxence Valentin, 2024. "Subsidizing housing with deductions," Journal of Economic Surveys, Wiley Blackwell, vol. 38(4), pages 1490-1515, September.

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