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Who Benefits from the Mortgage Interest Deduction?

Wealthy suburbanites.

1:45 PM, Dec 21, 2011 • By ANDREW HANSON, IKE BRANNON and ZACH HAWLEY
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One of the costliest tax deductions in the IRS code is the one that allows homeowners to deduct their mortgage interest from their income. The $477 billion in deductions taxpayers claimed last year (which includes second homes and home equity loans, and covers mortgages up to $1 million) is highly skewed to upper income households concentrated in the suburbs of a few major metropolitan areas and along the coasts.

One of us did a piece in THE WEEKLY STANDARD earlier this year arguing against the deduction for precisely this reason (since these people don’t need a government subsidy to buy a home) but some recent data allows us to clearly illustrate the inequitable distribution of benefits across the country. The map below—which we compiled using IRS data—shows the percentage of people in each congressional district that claim the mortgage interest deduction, and it demonstrates the extent to which claimants of the mortgage interest deduction are in the wealthier regions of the country. (A more detailed breakdown of where the beneficiaries of the mortgage interest deduction live can be found in our academic paper on the subject.)

But even this map understates the extent to which these elite communities benefit from the deduction: not only are they more likely to be buying houses and taking the deduction in Greenwich than in Peoria, but the very nature of any tax deduction in a progressive tax code means that the average benefits of the Greenwich homeowner dwarf what the Peorian is getting. Someone with a $1 million mortgage who earns over $300,000 a year could see the government essentially giving him a $20,000 a year subsidy for his home, while a family making $70,000 a year with a $150,000 mortgage would not receive a penny, since his puny deduction (under $2,000) would be less than the standard deduction.

The president and his supporters have been clamoring for a more progressive tax code that collects more money and makes the rich pay their “fair share.” Here is a tax break that costs the treasury over $100 billion a year that goes almost solely to the wealthy. Incidentally, the $100 billion is almost equal to the amount of revenue that would be gained by repealing the Bush tax cuts for people earning over $250,000 a year.

Andrew Hanson and Zach Hawley are professors at Georgia State University in Atlanta. Ike Brannon is director of Economic Policy at the American Action Forum.

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