"Currently, married taxpayers can deduct mortgage interest paid on total residence loans (up to $750,000 or...

"Currently, married taxpayers can deduct mortgage interest paid on total residence loans (up to $750,000 or $1,000,000 of principal depending on when the loan was originated). Discuss the effects on government tax revenue, housing prices and consumer balance sheets if the mortgage deduction were to be eliminated." Professor wants 2-3 paragraphs for this assignment. Thanks!

Expert Solution

Taxpayers currently deduct mortgage interest paid on total residence loans (up to $750,000 or $1,000,000 of principal depending on when the loan was originated) as a way to avoid tax.

This way of avoidance promotes potential home buyers to invest in houses.This promotes housing sector. It also increases disposable income with them as tax liability reduces. This helps economy to maintain / increase aggregate demand.

If these deductions available are eliminated then:

Govt. tax revenue : Will be better off as govt. will get more revenue. However, the total effect also depends on elasticity of housing demand. If it is inelastic then govt. is further better off. If i is elastic then the temporary increase may be affected in medium term as housing demand and tax collection through it will go down.

Housing prices : As people have substitutes of rental house, demand will shift to left and sellers may decrease price.

Consumer balance sheets: Worse off as they will be left with less disposable income. They will have to make more provisions for current expenses as tax deductions are eliminated.

Rahul Sunny answered 1 year ago

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"Currently, married taxpayers can deduct mortgage interest paid on total residence loans (up to $750,000 or...

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