Casey Mulligan’s weird defense of the mortgage-interest deduction
It’s not easy to find an economist who thinks the mortgage interest tax deduction is a good idea, but the NYT has managed it, with this column from Casey Mulligan. Unfortunately, it makes no sense. Here, for instance, is the first paragraph, in full:
The home-mortgage interest deduction does not by itself significantly distort housing markets. Too much owner-occupied housing has been built because housing is excluded from sales and other taxes owed by businesses.
That’s the last we hear about sales tax: the argument isn’t fleshed out anywhere else. But apparently if you’re an economics professor at the University of Chicago, then this is all the argument that’s needed: houses aren’t subject to sales tax, therefore the mortgage-interest tax deduction doesn’t distort housing markets. It’s a non sequitur, and the bit about sales taxes isn’t even true. In New York City, for instance, real property transfer taxes, plus the “mansion tax” on properties over $1 million, plus the mortgage tax, can amount to 4.75% of the purchase price between them.
But never mind that, because soon we’re getting to the meat of Mulligan’s argument:
One person’s mortgage interest payment produces interest income for another person or a business. The lender may well owe taxes on the interest income.
More home-mortgage borrowing means more home-mortgage lending, and the latter means more interest income that can be taxed. In theory, home-mortgage borrowing could even add revenue to the Treasury if the lender is in a higher tax bracket than the borrower (or if the borrower is not itemizing her tax deductions).
This is quite possibly the silliest thing I’ve seen the Economix blog ever print. Confidential to Professor Mulligan: mortgages are made by banks, and the margins on mortgage lending are razor-thin: it’s simply impossible for the taxes on the profit a bank makes from a mortgage to exceed the amount of the tax deduction on that mortgage. Oh, and right now, most mortgage lending is done by the government, in one form or another. How much tax are Fannie and Freddie paying on the mortgages they write?
Mulligan’s not finished, though:
Landlords can also take out mortgages on their properties and deduct the interest payments from their taxable income (that benefit may, in turn, affect the rent they set). In that sense, the possibility of deducting mortgage-interest payments from income taxes does not by itself discourage renting rather owning.
It’s that “does not by itself” construction again! Which doesn’t make any more sense the second time it’s used. Of course the mortgage interest tax deduction discourages renting rather than owning, because it’s available only to owners rather than renters. And as any Chicago economist knows, rent is set by the market: landlords will look to maximize the amount of rental income they get on their properties, regardless of what their taxable income might be. Does Mulligan have any evidence that the deduction decreases rents? Of course not, because there is no such evidence.
Naturally, Mulligan completely ignores the host of excellent reasons why the deduction should be abolished, from the fact that it’s distributed incredibly unevenly, mainly going to rich people on the coasts, to the more salient fact, in these fiscally-conscious times, that it costs a whopping $100 billion a year. I can think of a lot of better uses for that kind of money — including simple deficit reduction — and few worse ones. Which is true no matter how many times someone comes up with a facile argument about how one man’s loan payment is another man’s income.