The mortgage interest deduction is a Federal tax subsidy offered to homeowners.

Question

The mortgage interest deduction is a Federal tax subsidy offered to homeowners. In determining their Federal income tax liability, homeowners are able to deduct from income the value of the interest paid on their mortgages.

a) One argument against the mortgage interest deduction is that it benefits wealthy homeowners more than less wealthy homeowners. Is this an argument about economic efficiency? Or equity?

b) Empirical evidence shows that the mortgage interest deduction does not incentivize renters to become homeowners. However, it incentivizes purchases of larger homes by taxpayers who would buy homes even in the absence of such a subsidy. Is this an argument about economic efficiency? Or equity?

c) Explain the difference between policy arguments about economic efficiency versus equity. Define economic efficiency. Define equity.

Explanation / Answer

a) The argument is about equity as equity is concerned about how resources are distributed among the society, it can be true that higher the value of the home higher is the absolute benefit in terms of tax subsidy, which ultimately benefits the rich home owners which is againt the theory of equity in the economy

b) The argument is about economic efficiency because the mortgage interest deduction does not distort economic behavior of the people as it does not incentivize the renters to become owners therefore we can put it under economic efficiency but it incentivize purchases of larger homes by tax payers who would buy homes even in the absence of a subsidy

c) Economic efficiency is considered about optimal allocation of resources as well as optimal production of resources. On the other hand equity is considered how resources are distributed thorugh the society.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.