Who Really Profits From Mortgage Interest Deductions?

Most homeowners regard the mortgage interest deduction on their homes as an inalienable right, which they guard with the ferocity of a lioness defending her cubs. But the mortgage interest tax subsidy now overwhelmingly favors higher-income taxpayers, reports economist James M. Poterba of Massachusetts Institute of Technology in a new study.

By lowering marginal tax rates and particularly by raising the standard deduction in the 1986 tax law, tax reform legislation in the 1980s significantly reduced the value of the deduction for homeowners. Indeed, Poterba notes that from 1985 to 1991 the number of tax returns claiming mortgage interest deductions fell from 28.1 million to about 24.1 million, even though the number of homeowners grew by several million.

More significant is the change in the ranks of those benefiting from the interest deduction. By 1988, notes Poterba, over 52% of the total tax savings from the deduction accrued to the 8.5% of taxpayers with the highest incomes. By contrast, 79% of taxpayers (those with incomes below $40,000) received only 19.2% of the largess doled out through tax savings. The percent of taxpayers with incomes between $30,000 and $40,000 who claimed the mortgage deduction declined sharply from 47.2% in 1986 to 39.8% in 1988, while the percentage claiming the deduction actually increased at higher income levels.

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