The home mortgage interest deduction allows taxpayers with a mortgage to reduce their taxable income by the amount of mortgage interest paid. The rationale typically given by proponents of the mortgage interest deduction is that it increases homeownership by reducing the cost of a home to the consumer.
However, studies have shown that the deduction does not have much of an impact on the rate of homeownership. Rather, the main effect is that the market price of homes is artificially increased, with the increase in price offset by the tax savings created by the deduction.
Furthermore, the mortgage interest deduction creates a subsidy that benefits some people while harming others. The real estate industry is subsidized at the expense of other industries. Homeowners are subsidized at the expense of non-homeowners. This creates a massive redistribution of wealth, to the tune of over $70 billion of revenue lost to the US Treasury due to the deduction, without even considering other distortions the subsidy causes to the market and to society.
The market distortion penalizes low income homeowners whose mortgage interest is not larger than the standard deduction. Classes of society with higher homeownership rates, such as married people and families are favored over those with lower homeownership rates, such as singles.
The tax treatment of home mortgages distorts investment choices, causing a much larger level of investment in housing than would be the case without the subsidy.