Housing, Taxes, and the sub-prime crisis

This article in December's Atlantic gives a current perspective on the relationship between tax policy, the housing market, and the economy. One of its arguments is that the benefit of mortgage deductions tends to accrue to people with expensive houses and to encourage people to spend more than they, perhaps, should on their houses.

The current deduction costs nearly $80 billion a year in forgone federal revenues. It is available only to the minority of households—typically affluent— that itemize their taxes. Households at the margin of choosing between renting and owning are not, for the most part, itemizers. The deduction has no effect on their choice, and thus does almost nothing to promote homeownership. What it does promote, studies show, is spending on housing—that is, people who would have been owners anyway pay more for their houses. Prices are higher than they would otherwise have been, and mortgages are bigger. As many owners have learned abruptly, this can worsen economic insecurity.