>I am not sure why mortgage interest deduction gets such a bad rap. It allows a lot of people to be able to afford homes which they couldn't otherwise. It helps the housing market/industry and banking industry.
No, it doesn't. The prospect of getting the deduction drives up demand for home purchases and therefore the price (relative to income). If we got rid of it, the same mortgage would take more money out of your income, but you would need a smaller mortgage to get any home.
(The effects don't exactly cancel, of course, but it's not some big dealbreaker like you suggest.)
In addition, it's not unreasonable to make this kind of distinction, between:
1) Free money for failing/misfortune/doing nothing (welfare policies)
vs
2) "Free" money that you have to earn through positive work somehow. (production subsidies, government jobs, innovation awards)
Food stamps and the interest deduction are the same, in being intended as subsidies, but for the the second you at least have to be productive, earning an income, approved for a house, make all the necessary commitments, etc, and then you get some of it defrayed.
That's not to say the distinction is justified, but it shouldn't be hard to at least understand why people would put them in a different bucket.
I wouldn't be so sure that removing mortgage interest deduction would do anything to help pricing in home markets.
People owning rental properties get to deduct interest on financing used for the property. If we eliminated the mortgage interest deduction for home owners, we would be strongly favouring rent seeking behaviour - literally.
That's why you also have to tax away all capital gains associated with land (not structures) value appreciation beyond the real inflation rate. Land (outside of reclamation edge case) is not created by humans, and when land becomes private property it is necessarily depriving the public of the use of that land, thus the land owner owes the public for the right to deprive them of the land in the form of land tax, and since the land owner did not create the land, they are not entitled to any appreciation in the value of the land, that belongs to the public. The land owner is entitled to the returns of their productive investment, i.e. building structures etc. Land price then is largely set by what sort of productive return it can generate, not by the supply of credit and lending standards and supply of greater fools.
If capital gains were taxed away, that would counteract the situation where mortgage tax breaks feed directly into increased prices.
What I suggest above will be very very unattractive to many people, as real estate speculation represents one of the best 'money for nothing' speculations most people can engage in, but speculation is by definition unproductive, and it would seem to be a good idea, if unpopular to engineer a system that discourages real estate bubbles.
Let's say someone takes out a loan to buy land with a set of apartments built upon it. After subtracting loan payment costs (including interest on the loan), they're making a positive cashflow. How much of that cashflow is from the land and how much is from the apartment structure? Perhaps it's just that I'm unfamiliar with the split you're proposing, but it seems really naive to think that one can simply "tax away all capital gains associated with the land" when there doesn't seem to be any clean way to differentiate what comes from land.
No, it doesn't. The prospect of getting the deduction drives up demand for home purchases and therefore the price (relative to income). If we got rid of it, the same mortgage would take more money out of your income, but you would need a smaller mortgage to get any home.
(The effects don't exactly cancel, of course, but it's not some big dealbreaker like you suggest.)
In addition, it's not unreasonable to make this kind of distinction, between:
1) Free money for failing/misfortune/doing nothing (welfare policies)
vs
2) "Free" money that you have to earn through positive work somehow. (production subsidies, government jobs, innovation awards)
Food stamps and the interest deduction are the same, in being intended as subsidies, but for the the second you at least have to be productive, earning an income, approved for a house, make all the necessary commitments, etc, and then you get some of it defrayed.
That's not to say the distinction is justified, but it shouldn't be hard to at least understand why people would put them in a different bucket.