With the approach of the 2020 election, the talk about the current tax code will start to pick up. Like every election before it and probably every election after it, the 2020 election will feature taxes in some form. One of the most accessible parts of the tax code to change would be the mortgage interest tax deduction. If the deduction was eliminated, then other rates could be lowered.

The reasons behind the deduction

The reasoning behind the mortgage tax deduction is very much rooted in our history, where owning a home was seen a great investment. To help prospective buyers out in a way, the deduction was introduced to save middle-class and upper-class homeowners a good chunk of change. To replace the tax deduction, the IRS could impose lower tax rates to achieve the same effect but help more people.

Another reasoning behind the mortgage interest deduction is that it makes people feel like winners. This deduction also gives incentive to non-homeowners a drive to help the housing market. 

Why it would be a good idea

The positives that would come out of eliminating the deduction will be the drop of interest in the housing market for the average investor. Since the 2008 financial crisis in American and other housing bubbles around the world, the dangers of an over-inflated housing market’s risks have been shown.

The drop in investing will lead to other less desirable outcomes, but the potential drop in tax rates will more than make up for the blow to the economy. The relative prices of the housing market will fluctuate depending on the area. In areas that have seen a recent build up, there will be a stable price. However, in more established neighborhoods that see only a few sales per year with properties being listed for long periods, a drop in price will be inevitable.  

While there will be a drop in the housing market and the home repair market, there will be an expansion in the renters market. With a decrease in home purchases, more and more millennials will look at renting. In recent years many members of the millennial generation have felt the burdens of the previous generation’s economic decisions upon themselves. If the tax deduction were eliminated with the lowering of the general tax rate, the millennial taxpayer would sigh in relief.

With the elimination of the mortgage interest tax deduction in favor of a standard lower tax rate, several things will happen. The housing market and home repair markets will take a hit, but the renters market will increase. But the most important thing is that many Americans will have more disposable income since they won’t be saving for a mortgage or a home repair.