Comment on Song: Mortgage Interest Deduction

Abstract

In his letter commenting on the Constitutionality of the Affordable Care Act, Edward Song compares the mortgage interest “tax deduction scheme” to the penalty imposed for failure to purchase health insurance under the ACA’s individual mandate. He notes that “renters pay a higher proportional income tax than home owners do” and suggests that a deduction for mortgage interest is “an individual mandate to buy a home.” As the German economist Georg Shanz first laid out in the late 19th century (and as was developed by American economists Robert Haig and Henry Simons in the 1920s and 30s) income is equal to consumption plus change in net worth over a specific time period. In determining net income, therefore, interest received is included while interest paid is deducted, including mortgage interest. This has nothing to do with an individual mandate to purchase a house and everything to do with the proper computation of an income tax base. A better tax analogy for Mr. Song would be to the failure of the U.S. to include the rental value of owner-occupied housing in its income tax base. In essence, a homeowner may couple a deduction (of interest expense) with an exclusion (tax-free rental value), which we tax professors often describe as the Promised Land.