Research Links the MID with Economic Opportunity

The mortgage interest deduction (MID) is linked positively with intergenerational mobility – a measure of economic opportunity – according to new academic research from economists at Harvard and Berkeley. This paper comes on the heels of separate research showing that trading the MID for lower individual income tax rates results in lower economic growth.

Using matched tax panel data, the team of economists examined the impact certain tax policies had on differences between the income percentile of children (born in 1980 or 1981 and now adults in the labor market) and the income percentile of their parents when those parents were young workers in the labor force. Differences in income rankings between parents and now adult children are indicative of intergenerational mobility. In contrast, high correlation between parents’ rankings and adult children’s rankings suggest low mobility and less dynamism and economic opportunity.

The tax policies examined include a measure of progressivity of tax expenditures, as well as specific policies including the MID, the state income tax deduction, and state-level earned income tax credits.

In explaining why the MID would be linked to economic mobility the academics note:

These deductions may impact economic opportunity by providing opportunities for credit-constrained middle and low income families to become homeowners.

With respect to the efficacy of the MID in promoting economic mobility, the authors state:

Mortgage interest deductions are also positively related to intergenerational mobility.

and:

In sum, there is some evidence that CZs (commuting zones) with larger mortgage interest deductions as a fraction of AGI are more economically mobile.

Summarizing their statistical findings the team writes:

…we find evidence that the tax expenditure components of mortgage interest deductions, state income taxes, and state EITCs each have individually positive effects on intergenerational mobility. The progressivity of overall tax expenditures and state income taxes also have a robust, significant relationship with higher intergenerational mobility. Overall, these results suggest that tax expenditures aimed at low-income taxpayers can have significant impacts on economic opportunity. Hence, the short-term fiscal gains from reducing such expenditures must be weighed against the potentially large long-term costs of reduced income growth for low income individuals.

The research is generally consistent with data and analysis assembled by NAHB examining the beneficiaries of the MID. Among our findings, we have noted the importance of the housing tax incentives for younger homebuyers, aged 44 and below, who tend to be more credit constrained and are thus paying greater amounts of mortgage interest as a share of adjusted gross income (AGI). By reducing the after-tax cost of buying a home with a mortgage, the MID facilitates homeownership for a broader base of households and reduces the age of a typical first-time homebuyer.

Eliminating the MID would increase the cost of buying a home with a mortgage for most homebuyers, delaying or deferring homeownership for such households. By reducing housing demand, prices would fall, thereby imposing a windfall wealth loss for existing homeowners. Cash buyers would benefit, but because the MID is not entirely capitalized into prices, buyers using a mortgage to finance their purchase are worse off as the after-tax cost of debt increases more than prices fall.

The NAHB research conclusions are reinforced by the academic paper cited above, which provides evidence that communities with taxpayers claiming larger MIDs as a share of AGI produce more economic opportunity by increasing the affordability of homeownership. The MID thus facilitates homeownership and economic mobility.

3 Responses to Research Links the MID with Economic Opportunity

  1. […] View Original: Research Links the MID with Economic Opportunity […]

  2. […] macroeconomic consequences, research from a team of Harvard and Berkeley economists found that the MID is positively linked with economic opportunity. By reducing the after-tax cost of buying a home with a mortgage, the MID increases income mobility […]

  3. […] economic research has linked the use of the MID with intergenerational income mobility. And macroeconomic modeling by the Tax Foundation found that repealing the MID to lower-income tax […]

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