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Bigger Homes for Wealthy People, Thanks to the Home Mortgage Tax Break

David Callahan
I've been complaining about the deduction for home mortgage interest for years, so it's hard to say to something bad about this tax break that I haven't said myself. But a recent article published in the National Interest manages to do just that, not by making a fresh argument, but rather by pulling together new numbers and boiling everything down to a simple stinging indictment: That this tax break -- along with the deduction for state and local taxes, and the exemption cap for home sales from capital gains -- basically just helps wealthy people build bigger homes and doesn't actually encourage home ownership. 
The way these subsidies mainly benefit the affluent is hardly news, but the article provides some great data to underscore that point, looking at what percentage of tax filers making over and under $100,000 take advantage of the break on mortgage interest. In Boston, 77 percent of affluent filers benefit from this break, compared to just 21 percent for those making under $100k. The numbers are similar for most other major cities. 
Of course, if you make six-figures you probably don't really need the government's help in buying a home and have plenty of incentive to do so, like building equity and having a sense of permanence. Really, it's the people lower down the income ladder who need extra help -- but aren't getting it. 
The point about incentivizing larger homes is especially interesting, because the article actually quantifies this, drawing on a study published in 2012 in the Journal of Housing Economics:
At the high end of the spectrum, estimates suggest that homes are substantially larger due to housing tax expenditures — as much as 1,400 square feet larger in the Washington, D.C., metropolitan area. In other areas, like Philadelphia, Los Angeles, and New York City, the effect of housing tax expenditures on the size of homes is smaller but still quite significant, encouraging people to buy homes that are at least 800 square feet larger. Even at the bottom of the distribution, tax benefits still have a real effect, increasing home sizes by more than 250 square feet in all metropolitan areas. 
This helps explain why there are so many bloated McMansions out there, as you'll notice if you peruse higher end real estate ads. Homes that are 5,000 to 8,000 square feet have become very common. And that has negative environmental consequences: Bigger homes don't just consume more energy, and produce more greenhouse gases, they require more resources to build in the first place: more lumber, more granite, more marble tile for all those bathrooms that people will rarely actually use. 
The authors also note that tax preferences for homeownership make it easier for people to afford vacation homes, which are even more environmentally offensive: All that energy and resource use when nobody is even there most of the time.  
If you think about the excesses of consumerism these days, no area springs more quickly to mind than lavish homes. And it's all underwritten by $175 billion in tax subsidies every year. 
The environmental consequences aren't the only reason to fret about all this: Another is that these resources aren't going elsewhere. The economist Robert Frank has written persuasively that we Americans would be happier if we spent less wealth on big homes and more on mass transit, parks, and other public goods that demonstrably improve our lives. Imagine if we could wave a magic wand to whack home ownership subsidies by $100 billion a year and spend that money on infrastructure projects? Affluent home owners would take a hit, along with the housing industry, but the benefits to society would be enormous. 
Of course, nobody can wave a magic wand in Washington, and certainly not when it comes to an entrenched tax code. There are many powerful protectors of housing tax subsidies, including -- as I wrote here yesterday -- liberal Democrats who represent the affluent urban and suburban home owners in coastal America who benefit most from the subsidies. 
In fact, the more I think about it, the more I think that housing entitlements for the wealthy represents a profound test for the liberal wing of the Democratic Party in Congress: Okay, you say you want to reduce inequality, but are you ready to take on giant tax breaks that benefit your wealthy constituents?