The NIMBY of Inequality

Charles Lane has turned his attention to the largest single tax break that goes to benefit the wealthy—the home mortgage interest deduction:

In the debate over economic inequality, most of the discussion is about new things the federal government should do to make the distribution of our society’s resources more even: raise the minimum wage, say, or impose higher tax rates on the rich.

But what about getting Washington to stop some policies that skew after-tax income distribution upward?

Exhibit A is the tax code’s favorable treatment of residential real estate, specifically through the tax deductions for mortgage interest and property taxes. These are projected to cost the Treasury $70.3 billion and $31.7 billion in fiscal 2014, respectively, according to President Obama’s most recent budget proposal. Home-sale capital gains up to $500,000 are also tax-free; that’s expected to cost the Treasury $52.5 billion.

These housing breaks account for roughly 15 percent of the U.S. government’s $1 trillion in annual tax expenditures.

These tax breaks go overwhelming to the highest income earners (30% to the top 1% of income earners, 73% to the top quintile) and preponderantly to the states that vote most reliably Democratic, e.g. New York, California, Massachusetts, Washington, Washington, DC.

The choice doesn’t need to be between the present home mortgage interest deduction and no mortgage interest deduction. The home mortgage interest deduction could be capped, say, at $100,000 per year in interest. That virtually by definition keeps it in place for 97% of Americans which would seem to me to be pretty inclusive of the middle class.

The kernel of Mr. Lane’s column is that if you’re in favor of a more egalitarian society you should favor measures that actually make the society more egalitarian, even if they affect your pocketbook or your lifestyle. Sadly, he jumbles income inequality, wealth inequality, and inequality, generally. He’s also assuming that outcries about income inequality are sincere expressions of conviction rather than just finding a handy cudgel to beat your political opponents with. Or just making yourself feel good about how egalitarian you are without actually being egalitarian.

3 comments… add one
  • Guarneri

    Concerning the last two paragraphs…..amen.

    First, do no harm. Don’t dick around with marginal rates or the min wage. Those have harmful side effects for the very people who can’t deal with them. I agree, get rid (phased and totally preferred) or really reduce of the interest deduction. We currently cap our mortgages such that we fit within the million dollar deduction cap. No need for this crap, unless you are the national association of realtors, or as you say, a faux egalitarian. And while we are at it, about those farm subsidies…..and Aunt Yellen’s interest rates…..

  • steve

    I would prefer it all go away, but capping at $100,000 is fine with me. While you are at it, get rid of most of the other tax expenditures also.


  • Andy

    Well, I agree completely. I think Ezra Klein posted earlier today about how the mortgage deduction is a cause for the huge increase in average and median home square footage.

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