Who Cares about Mortgage Interest Deductibility?

We use the U.S. Survey of Consumer Finances to measure the change in federal tax liability that would result should mortgage interest no longer be deductible from taxable income. We argue that the elimination of this housing tax provision would lead households to reshuffle their balance sheet, thereby lowering the amount of interest income taxes collected. We find that the cost of this tax provision is between 36 and 66 percent of the estimates produced by the U.S. Office of Management and Budget, depending on the types of assets one assumes would be used to lower mortgage debt following the removal of the provision. Furthermore, since mostly rich households would be in a position to reshuffle their balance sheet following such a change in tax policy, the distributional effect of this program are much smaller than conventionally believed. Journal of Economic Literature Classification Numbers: E62; G11; H24; H31 keywords: Mortgage Interest Deductibility; Housing; Taxation; Redistribution ∗We would like to thank participants at the Bank of Canada Housing Conference and the Canadian Public Economics Study Group for helpful comments, as well as Ken McKenzie who discussed a previous version of the paper. We are grateful to Kevin Moore at the Federal Reserve Board who provided us with his code to compute taxes. The first author gratefully acknowledges financial support from the Social Sciences and Humanities Research Council of Canada. The second author gratefully acknowledges financial support from the Board of Regents, the University of Winnipeg.