The mortgage interest deduction is a political sacred cow. Mention of abolishing it is the political equivalent of touching the electrified third rail. Even Reagan, who opposed the deduction, caved to political pressure. That's because homeowners have long relied on the MID to put cash in their pockets.
That said, getting rid of the MID can actually benefit the middle class if combined with a sufficient increase in the standard deduction.
The oft proposed solution calls for an increase in the standard deduction at the same time that the MID loophole is abolished. Depending on the increase to the standard deduction, homeowners with modest homes and small mortgages could end up with a larger deduction in the end. Many in the middle class could end up with the same tax bill. It would be the wealthier homeowners, who typically itemize their deductions, that would see higher taxes.
Contrary to popular belief, the MID was not established to help the middle class buy homes. In fact, it is a regressive tax benefiting the wealthy. And like many of the provisions in our tax code, the MID loophole is simply an accident of history. One that can be corrected.
In 1913, all interest was tax deductible because it was assumed that all debt was business related. Personal debt was rare. Eventually, personal debt entered the economic landscape and Congress had to differentiate between business debt and personal debt so that the interest deductions could be applied only to the former. Somehow, in the wake of this change, there remained a loophole for mortgage interest deductions on residential real estate.
At the time the MID loophole was created, mortgages were not as prevalent as they are today and the interest deduction was not a significant burden on the tax base. But as the number of mortgages increased, Congress began to consider the wisdom of this anachronistic deduction.
Bartlett, Bruce, The Benefit And The Burden, Simon & Schuster, January 24, 2012
Entry, Dennis J. Jr., The Accidental Deduction: A History and Critique of the Tax Subsidy for Mortgage Interest, 44 NAT'L TAX J. 147, 154 (1991),