A couple of people in the comments section to my post on tax reform suggested that the home mortgage interest deduction is something that could be done away with without any kind of replacement policy.
That’s probably right over the long term. But here’s the problem in the short term. If you say that starting in 2014, interest on home mortgages will no longer be tax deductible what happens is that the price of land and houses declines all across the United States. Which would be fine except that all kinds of people have taken out loans premised on the subsidized values of the houses. Suddenly axing the interest deduction risks creating a new class of “underwater” homeowners who owe more on their mortgage than the underlying house is worth, which could prompt new defaults and banking problems. This is hardly an insurmountable obstacle and certainly doesn’t make subsidizing mortgage debt a good idea, but there is a transitional issue that may have to be dealt with.