Should the Mortgage Interest Deduction Be Eliminated?

The Simpson-Bowles plan coming out of the deficit commission is in the headlines. There’s a lot to digest in it, but I’d like to focus particularly on the elimination of the home mortgage tax deduction. They present two possible plans for this deduction. One abolishes it entirely, and the other one eliminates it for second homes, home equity mortgages, and any mortgages over $500,000 in value. Is this a good idea?

The first question to ask is what is the goal of the deduction in the first place and how well does it achieve that goal. The tax credit is part of the larger political project of encouraging homeownership. One might think at this point in the housing recession we’ve collectively moved beyond the point where this is thought to be a good idea, but our general anger at homeownership promoting policies doesn’t change the economic argument for them, which is based on externalities.