The home mortgage interest deduction should be eliminated in the United States

Housing prices: My opponent claims that housing prices could fall by as much as 10 percent if the home mortgage interest deduction were eliminated. He claims that this value is consistent with my first reference in round one. However, this assertion is misleading at best. My reference simply stated that, “At the extreme, Capozza, Green, and Hendershott (1996) estimate an upper-bound estimate of the effect on prices at 10 percent, assuming that the housing stock is totally inelastic.” However, as my reference acknowledges, this is an extreme upper limit. In reality, housing prices are actually relatively elastic. Generally, the demand for a good is said to be elastic when the price elasticity of demand is greater than one in absolute value. As professors Topel and Rosen concluded, the price elasticity of housing supply is around 1.0 in the short-term, and 3.0 in the long-term (1). Thus, it’s extremely unlikely that house prices would drop 10 percent if the mortgage interest deduction were eliminated. America’s net worth: Housing prices would decline very slightly if the mortgage interest deduction were eliminated. However, this decline in prices, and its effect on household wealth, is likely to vary among different income levels. This is simply because individuals in the upper marginal tax brackets receive the greatest benefit from the mortgage interest deduction. As the following table demonstrates, this deduction reduces the after tax income of individuals in the top income quintile more so than any other group. Percentage increase in after tax income (2): Lowest Quintile...................................0.0 Second Quintile..................................0.1 Middle Quintile....................................0.6 Fourth Quintile....................................1.0 Top Quintile........................................1.3 Clearly, ending the deductibility of mortgage interest would have the largest affect on wealthier individuals. These people tend to own larger homes, and therefore, the most expensive homes would experience the largest decline in value. Nevertheless, wealthier individuals would benefit from other affects of eliminating the mortgage interest deduction. For example, as the subsidy for purchased housing ends, the value of other investments will rise. Wealthier individuals tend to place more of their wealth in other investments, as my opponent points out. Thus, any potential decline in housing prices would most likely be mitigated by changes in the value of other assets. Economic equality: Eliminating the home mortgage interest deduction would lower after-tax income by 1 percent for the whole population. However, the loss as a share of after-tax income increases greatly as income grows. As Dr. Toder and his colleagues concluded, “Higher-income taxpayers lose relatively more as a group because they are more likely to own homes and claim itemized deductions instead of the standard deduction and because deductions are worth more to taxpayers in higher marginal rate brackets” (2). Clearly, my opponent’s claims are not correct. Eliminating the home mortgage interest deduction would indeed reduce economic inequality in the United States. This assertion is based on several experts' conclusions. Financial Responsibility: As extensive economic research shows, the mortgage interest deduction has encouraged several Americans to purchase larger and more expensive houses than they otherwise would have (3). This can have disastrous consequences. In the event of an economic downturn, these individuals would have larger mortgage payments to fulfill and fewer savings to rely on. By eliminating the home mortgage interest deduction, we are promoting financial responsibility by encouraging Americans to live within their means. Conclusion: The home mortgage interest deduction is entirely unnecessary. There is absolutely no reason why the average homeowner should have to subsidize loans on houses worth up to a million dollars. I urge everyone to vote pro! Reference: http://econpapers.repec.org... http://98.129.116.148/scepa/publications/Distributional%20effects%20of%20tax%20expenditures%20final.pdf http://www.economics.harvard.edu...