Why We Should Kill the Mortgage-Interest Deduction Once and for All: Podcast

One of the most-controversial parts of Republican tax reform is the Senate's proposal to sharply limit the amount of mortgage interest homeowners can deduct from their taxes.

Under current law, homeowners can deduct interest on mortgage loans of up to $1 million for two houses, plus interest on home equity loans worth another $100,000. That currently costs the federal government about $70 billion in foregone revenue, making it one of the biggest "tax expenditures" in the federal budget. The Senate tax bill would allow homeowners to deduct the interest on $500,000 of mortgage debt for a single residence.

But even that lower level is too much of a giveaway, says Anthony Randazzo, the director of economic research at Reason Foundation. He notes that countries such as Great Britain and Canada don't allow deductions for mortgage interest and yet have higher home-ownership rates than the United States, that the deduction increases the price of houses, and that only about 20 percent of tax filers take the mortgage-interest deduction. It is, in his analysis, a classic case of special interests—the housing trade, realtors, and existing homeowners—extracting a concentrated benefit while spreading the cost around to relatively poorer and less-powerful people.

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