Wealth and the Mortgage Interest Deduction
44 Pages Posted: 14 Jun 2016 Last revised: 18 Apr 2018
Date Written: April 5, 2018
Legal scholars have long been interested in understanding who benefits from tax expenditures, with a particular interest in how tax expenditures contribute to inequality. Prior research has focused on the extent to which higher income households obtain larger tax breaks from tax expenditure provisions. Although household income and wealth are far from perfectly correlated, the distinction between income and wealth has been ignored in the context of tax expenditures.
In this article, I first argue that the distributional consequences of a tax expenditure should be defined as the degree to which it widens the after-tax distribution of economic welfare, which incorporates both an income and wealth dimension. Next, I investigate whether households with higher wealth obtain larger tax breaks from the mortgage interest deduction. Using detailed information on income and wealth from the Survey of Consumer Finances, I find that tax breaks from the mortgage interest deduction are increasing in wealth for the wealthiest 10 percent of households. Combined with the evidence that higher income households obtain higher tax breaks from the mortgage interest deduction, the findings provide evidence that the mortgage interest deduction contributes to inequality more than previously thought.
Keywords: Tax Expenditures, Inequality, Mortgage Interest Deduction
JEL Classification: H24, H22, D63, K34
Suggested Citation: Suggested Citation