Mortgage Interest Tax Break Has ‘No Effect’ on Homeownership, Study Finds

By Richard Rubin of The WSJ. Excerpt:

"Letting taxpayers deduct mortgage interest encourages them to buy bigger homes and more expensive homes – but it doesn’t change that fundamental decision about whether to buy in the first place.

“Over multiple time periods, and considering multiple empirical strategies, we find no effect of the tax policy change on whether households own or rent,” wrote the authors, Jonathan Gruber of the Massachusetts Institute of Technology, Henrik Kleven of Princeton University and Amalie Jensen of the University of Copenhagen.

The paper uses data from Denmark in the 1980s, where the combination of a tax policy change and available housing data allowed the authors to observe a sort of natural experiment. Denmark isn’t the U.S., and there may be cultural or economic differences that make the comparison inapt. Still, the findings confirm what economists had already thought about the U.S. deduction, Mr. Gruber said in an interview Monday. Past cross-country studies have found little difference in homeownership rates between places that allow a deduction and others that don’t.

“I really view this as putting a nail in the coffin of the idea that this tax break affects homeownership,” he said in an interview Monday. If policy makers wanted a tax break to promote homeownership, a tax credit for first-time homebuyers or a deduction capped in line with median regional home prices would be more effective than the current rules, he said.

The paper’s finding lands with a thud in the current political debate, right as lawmakers are considering the biggest revamp of the tax system since 1986. The mortgage interest deduction – only available to the roughly 30% of households that itemize their deductions – will reduce government tax collections by $72.4 billion in fiscal 2018, according to the congressional Joint Committee on Taxation."