Last week I posted the results of a survey that found that many beneficiaries of government programs don’t recognize themselves as participating in a federal program at all. For instance, 60% of respondents who have written off their mortgage interest on their taxes didn’t see that as a government benefit or themselves as program beneficiaries. Basically, programs and policies that are disproportionately used by the middle- and upper-classes are taken for granted. I wrote,
…allowing you to write off mortgage interest (but not rent), or charitable donations, or the money you put aside for a child’s education, are all forms of government programs, ones that benefit some more than others. But the “submerged” nature of these policies hides the degree to which the middle and upper classes use and benefit from federal programs.
Brian McCabe, over at FiveThirtyEight, recently wrote a post about who benefits from the mortgage interest tax deduction program, which remains enormously popular among the general public. McCabe says,
Commentators often talk about the mortgage interest deduction as a prized middle-class benefit that enables households to achieve the American dream of homeownership. But despite their strong support for the deduction, middle-class Americans are not the primary beneficiaries of this federal tax subsidy.
If you aren’t familiar with the program, basically when you’re doing your taxes, you are allowed to reduce your taxable income by subtracting the amount you paid in mortgage interest that year. Home ownership isn’t treated equally — the tax deduction is worth more as the price of the home, and thus the amount of interest paid, goes up. McCabe points out that in 2009, this program meant that the federal government took in about $80 billion less than it would have otherwise, making it one of the most expensive tax policies and the single most expensive deduction offered to homeowners (much more than deductions for putting in energy-efficient windows, etc.).
But this expensive program is disproportionately used by relatively wealthy individuals. For instance, about a quarter of taxpayers making $40,000 – 50,000 a year claim the deduction, while over 75% of those making above $100,000 a year do:
The differences in usage is partly because the wealthy are more likely to own* homes. In addition, those with lower incomes generally buy cheaper houses and often find that they reduce their taxable income so little by writing off the mortgage interest that they’re better off taking the standard tax deduction than to itemize.
Because wealthier individuals are more likely to use the program at all, and when they do, generally have more mortgage interest to deduct, the benefits of the program go disproportionately to those with higher incomes. This image shows the proportion of all tax filers that fall into each income category, and the proportion of the total tax deduction benefit that goes to each category:
This is similar to what we see with farm subsidies: while small- and mid-sized farms benefit, the money spent on the program disproportionately goes to the largest farms. The mortgage interest deduction program is discussed as a method for helping the middle-class achieve the American Dream of homeownership. And certainly it does make home ownership more attractive to many middle- and lower-income individuals. But it overwhelmingly benefits upper-income home buyers, at a significant loss of tax income for the federal government.
* On a side note, I find it odd that we say someone “owns” their home when they owe a mortgage on it. The second I signed a mortgage last year, I entered the much-praised category of the home-owning citizen. Yet as my mortgage-hating farm family has made me very aware, I’m not even close to truly owning my home at this point; I’m more of a special category of rent-to-own resident whose landlord is the bank or mortgage company.