Why Do We Subsidize Mansions?

by Dish Staff

Danny Vinik wants to know:

The traditional defense of these [homeowner] tax breaks is that they promote homeownership, which has been shown to have numerous additional benefits including improved health. But there’s a big problem with this argument: these deductions don’t actually subsidize homeownership. They subsidize bigger homes and more debt instead.

Consider the mortgage interest deduction that allows homeowners to deduct their interest payments on loans up to $1 million. The larger the debt (up to $1 million), the larger the interest payments—and the more the homeowner can deduct in taxes. As Nick Bunker, a research associate at the Center for Equitable Growth, wrote Wednesday, “The deduction gets pitched as an effort to increase homeownership, but academic research finds that really it just increases the size of homes purchased.” At the Washington Post, Catherine Rampell shows how the median house size has increased over the past 40 years. It’s at a record-high, after a slight dip post-Great Recession. Homeowners are incentivized to build larger houses thanks to the mortgage-interest deduction.