The tax deduction for mortgage interest does not increase homeownership, according to a new study based on an experiment in Denmark.
That finding, which is highly relevant for the tax reform that Republicans are currently mulling that could curb the deduction over the housing lobby’s objections, comes from a working paper released by the National Bureau of Economic Research Monday. The paper, which has not gone through peer review, is co-authored by MIT economist Jonathan Gruber, often referred to as the architect of Obamacare.
The mortgage interest deduction “has a precisely estimated zero effect on homeownership, even in the very long run,” concludes the study, written by Gruber and economists from Princeton and the University of Copenhagen.
They write that their paper’s results “strongly dispute the notion that the tax subsidy is justified” by the argument that it promotes homeownership.
While the break doesn’t boost homeownership, it does lead people to borrow more and to buy bigger and more expensive homes, the paper finds.
The deduction for interest payments on mortgages is one of the biggest tax breaks in the U.S. tax code. It will total $69 billion this year, according to the Treasury, and around $950 billion over 10 years.
The Trump administration and congressional Republicans have said they will not eliminate the deduction as part of the tax reform effort currently underway. But they have discussed some changes that would make it so that the deduction isn’t relevant for many people. For example, Republicans have talked about doubling the standard deduction, which would lead more taxpayers to claim the standard deduction rather than itemizing specific deductions like the one for mortgage interest.
Real estate interests have defended an itemized deduction for mortgage interest, in part on the grounds that it increases homeownership. In the wake of the recession, the homeownership rate has declined to the lowest levels in decades, down from 69 percent during the housing bubble to 63.6 percent, a rate not seen since the mid-1980s.
The economists studied the impact of the mortgage interest deduction through a 1987 tax reform in Denmark that changed the value of the break for high income earners, but not for other groups. Using tax data, they then found that there was no difference afterward in the rates of homeownership for high earners versus others.
