42 Pages Posted: 25 Aug 2016 Last revised: 24 Sep 2016
Date Written: August 24, 2016
The mortgage interest deduction is often criticized for contributing to after-tax income inequality. Yet the effects of the mortgage interest deduction on income inequality are more nuanced than the conventional wisdom would suggest. We show that the mortgage interest deduction causes high-income households (i.e., those in the top 10% and top 1%) to bear a larger share of the total tax burden than they would if the deduction were repealed. We further show that the effect of the mortgage interest deduction on income inequality is highly sensitive to the alternative scenario against which the deduction is evaluated. These findings demonstrate that claims about the distributional effects of the mortgage interest deduction depend critically on the counterfactual to which the status quo is compared. We extend our analysis to the deduction for state and local taxes and the charitable contribution deduction. We conclude that the appropriate counterfactual for distributional claims is dependent upon political context — and, in particular, on the feasible set of politically acceptable reforms up for consideration.
Keywords: mortgage interest deduction, inequality, tax expenditures, state and local tax deduction, charitable contribution deduction, political economy
JEL Classification: K34, H20, H22, H23, H24, R38, D63
Suggested Citation: Suggested Citation
Hemel, Daniel Jacob and Rozema, Kyle, Inequality and the Mortgage Interest Deduction (August 24, 2016). Forthcoming, Tax Law Review, 2017; University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 775; U of Chicago, Public Law Working Paper No. 593; Kreisman Working Papers Series in Housing Law and Policy No. 39. Available at SSRN: https://ssrn.com/abstract=2828970