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Comment by awa | Hacker News Reader

I am not sure why mortgage interest deduction gets such a bad rap. It allows a lot of people to be able to afford homes which they couldn't otherwise. It helps the housing market/industry and banking industry.

Apart from that a lot of other countries has it. If I had to change something I would actually add a rental deduction to help those who can't afford to buy housing instead of removing mortgage interest deduction.

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>I am not sure why mortgage interest deduction gets such a bad rap. It allows a lot of people to be able to afford homes which they couldn't otherwise. It helps the housing market/industry and banking industry.

No, it doesn't. The prospect of getting the deduction drives up demand for home purchases and therefore the price (relative to income). If we got rid of it, the same mortgage would take more money out of your income, but you would need a smaller mortgage to get any home.

(The effects don't exactly cancel, of course, but it's not some big dealbreaker like you suggest.)

In addition, it's not unreasonable to make this kind of distinction, between:

1) Free money for failing/misfortune/doing nothing (welfare policies)

2) "Free" money that you have to earn through positive work somehow. (production subsidies, government jobs, innovation awards)

Food stamps and the interest deduction are the same, in being intended as subsidies, but for the the second you at least have to be productive, earning an income, approved for a house, make all the necessary commitments, etc, and then you get some of it defrayed.

That's not to say the distinction is justified, but it shouldn't be hard to at least understand why people would put them in a different bucket.

I wouldn't be so sure that removing mortgage interest deduction would do anything to help pricing in home markets.

People owning rental properties get to deduct interest on financing used for the property. If we eliminated the mortgage interest deduction for home owners, we would be strongly favouring rent seeking behaviour - literally.

That's why you also have to tax away all capital gains associated with land (not structures) value appreciation beyond the real inflation rate. Land (outside of reclamation edge case) is not created by humans, and when land becomes private property it is necessarily depriving the public of the use of that land, thus the land owner owes the public for the right to deprive them of the land in the form of land tax, and since the land owner did not create the land, they are not entitled to any appreciation in the value of the land, that belongs to the public. The land owner is entitled to the returns of their productive investment, i.e. building structures etc. Land price then is largely set by what sort of productive return it can generate, not by the supply of credit and lending standards and supply of greater fools.

If capital gains were taxed away, that would counteract the situation where mortgage tax breaks feed directly into increased prices.

What I suggest above will be very very unattractive to many people, as real estate speculation represents one of the best 'money for nothing' speculations most people can engage in, but speculation is by definition unproductive, and it would seem to be a good idea, if unpopular to engineer a system that discourages real estate bubbles.

Let's say someone takes out a loan to buy land with a set of apartments built upon it. After subtracting loan payment costs (including interest on the loan), they're making a positive cashflow. How much of that cashflow is from the land and how much is from the apartment structure? Perhaps it's just that I'm unfamiliar with the split you're proposing, but it seems really naive to think that one can simply "tax away all capital gains associated with the land" when there doesn't seem to be any clean way to differentiate what comes from land.

It is done all the time via depreciation calculations.

The mortgage interest deduction distorts the market in several ways. Making credit more available does allow people to spend more on homes, but this is then priced into the market. As you hint at, the subsidy is net neutral for homeowners, as it ultimately benefits the housing and banking industries. People who owned suburban land at the implementation of the deduction also benefited hugely, but now that prices are artificially inflated, any removal of the deduction would take money away from homeowners.

Additionally, it makes paying cash for a home unrealistic, making the housing market (more) dependent on banks and their attendant federal regulations. Over time this has had numerous negative effects on land use patterns and urban health by encouraging car-oriented sprawl and devaluing urban mixed-use neighborhoods. There's also the whole race-based redlining thing. The worst of these policies have been mitigated in the recent past, but they still pose obstacles to certain kinds of development (that are highly desirable lately) and would not have existed in the first place without government intervention in home mortgages.

The main reason for the mortgage interest deduction is that for corporations various expenses (like interest on debt) are in fact deductible from income for tax purposes, because we tax profits, not revenue.

So if there were no mortgage interest deduction for individuals that would simply be incentive for people to form a corporation they are sole shareholders for, for the specific purpose of buying the home. This would be especially true for people who are contracting or otherwise self-employed anyway and hence can have totally legitimate income for this corporation...

Now having the mortgage interest deduction but no imputed rent income due to the owner-occupancy, that part is arguably weird.

"It allows a lot of people to be able to afford homes which they couldn't otherwise."

That may be true, but if it's having that effect for a lot of people, then surely it's also contributing to higher housing prices, which of course negates (at least in part) the supposed increase in affordability..

That's like saying you don't understand why the government just sending Altay a $1billion check with the pre-condition that he spends it all gets a bad rap.

There's no reason to favor home ownership -- look at home ownership rates in Germany vs S. Europe. Then look at the health of their economies and living conditions.

I would rather the government do more to actually balance the system, than just throw a bone to too-poor homeowners.

I would rather every middle class worker simply have a much higher paycheck, so that the mortgage interest deduction could be eliminated without anyone feeling a thing.

This NPR podcast explains it as well as other economic policies that receive support from the majority of economists across the political spectrum: http://www.npr.org/sections/money/2012/07/18/156928675/episo...

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