UC San Diego

The home mortgage interest deduction (HMID) is a provision of U.S. federal personal income tax law that permits personal income tax payers to deduct from their annual income the interest accrued on mortgage debts of up to $1 million that were incurred to purchase a first or second home. This paper presents new evidence concerning the effects of the HMID on family income over the income distribution and by racial identity. The method identifies distributional effects of the HMID by drawing on economic sociology to model counterfactual resource distributions that might obtain in its absence. The effect of the HMID on inequality across the income distribution is sensitive to assumptions about how the foregone revenue would be spent, but its effect is close to that of the most inegalitarian policy possible. Its effect on categorical inequality between white and black families is insensitive to a range of assumptions about counterfactual fiscal policy and housing market behavior in its absence. The HMID appears to approximate a target-efficient racial subsidy for white families.