The mortgage interest deduction (MID) is linked positively with
intergenerational mobility – a measure of economic opportunity –
according to new academic research from economists at Harvard and
Berkeley. This paper comes on the heels of separate research showing
that trading the MID for lower individual income tax rates results in
lower economic growth.
Using matched tax panel data, the team of economists examined the impact
certain tax policies had on differences between the income percentile
of children (born in 1980 or 1981 and now adults in the labor market)
and the income percentile of their parents when those parents were young
workers in the labor force. Differences in income rankings between
parents and now adult children are indicative of intergenerational
mobility. In contrast, high correlation between parents’ rankings and
adult children’s rankings suggest low mobility and less dynamism and
economic opportunity.
The tax policies examined include a measure of progressivity of tax
expenditures, as well as specific policies including the MID, the state
income tax deduction, and state-level earned income tax credits.
In explaining why the MID would be linked to economic mobility the academics note:
“These deductions may impact economic opportunity by providing
opportunities for credit-constrained middle and low income families to
become homeowners.”
With respect to the efficacy of the MID in promoting economic mobility, the authors state:
“Mortgage interest deductions are also positively related to intergenerational mobility.”
and:
“In sum, there is some evidence that CZs (commuting zones) with larger
mortgage interest deductions as a fraction of AGI are more economically
mobile”
Summarizing their statistical findings the team writes:
“…we find evidence that the tax expenditure components of mortgage
interest deductions, state income taxes, and state EITCs each have
individually positive effects on intergenerational mobility. The
progressivity of overall tax expenditures and state income taxes also
have a robust, significant relationship with higher intergenerational
mobility. Overall, these results suggest that tax expenditures aimed at
low-income taxpayers can have significant impacts on economic
opportunity. Hence, the short-term fiscal gains from reducing such
expenditures must be weighed against the potentially large long-term
costs of reduced income growth for low income individuals.”
The research is generally consistent with data and analysis as sembled
by NAHB examining the beneficiaries of the MID. Among our findings, we
have noted the importance of the housing tax incentives for younger
homebuyers, aged 44 and below, who tend to be more credit constrained
and are thus paying greater amounts of mortgage interest as a share of
adjusted gross income (AGI). By reducing the after-tax cost of buying a
home with a mortgage, the MID facilitates homeownership for a broader
base of households and reduces the age of a typical first-time
homebuyer.
Eliminating the MID would increase the cost of buying a home with a
mortgage for most homebuyers, delaying or deferring homeownership for
such households. By reducing housing demand, prices would fall, thereby
imposing a windfall wealth loss for existing homeowners. Cash buyers
would benefit, but because the MID is not entirely capitalized into
prices, buyers using a mortgage to finance their purchase are worse off
as the after-tax cost of debt increases more than prices fall.
The NAHB research conclusions are reinforced by the academic paper cited
above, which provides evidence that communities with taxpayers claiming
larger MIDs as a share of AGI produce more economic opportunity by
increasing the affordability of homeownership. The MID thus facilitates
homeownership and economic mobility.
View this original article on the NAHB blog, Eye on Housing.
Reprinted with permission from RISMedia. ©2013. All rights reserved.