As the 2020 election approaches, here’s a tax idea that’s guaranteed to be unpopular: eliminate the mortgage interest tax deduction and lower rates across the board.

Why? A lot of economists think we should get rid of the mortgage interest tax deduction. It saves upper- and middle-class homeowners like me a lot of money every year, but a lot of economists agree that it should be discarded and replaced with lower tax rates.

To understand why we turn to the nineteenth-century French economist Frederic Bastiat. The seen benefits are clear as the policy produces very visible winners. But that’s not enough for us to say “we should use the tax code to privilege owner-occupied housing.”

We have to look at more than just the beneficiaries in order to determine whether a particular policy is a good or bad idea. This can’t be emphasized enough: I personally save a lot of money because of the tax benefits of homeownership. The local homebuilders make more money because people are buying more single-family detached houses. Maybe there are benefits for lawn services that get hired to take care of acres of suburban grass.

However, the tax treatment of mortgage interest pushes people to over-invest in housing. The policy likely changes the pattern of economic activity, but not the total amount—and it likely pushes it in an inefficient direction.

Misdirection is the key here. The big change in relative prices means that people buy more and larger houses and fewer trips, fewer restaurant meals, and so on. Indeed, homeowners are presumably better citizens, but they can also be worse citizens who work to protect their property values with red tape.

There are important benefits and costs to home ownership. Homeownership stabilizes communities (a good thing), but since it leads people to put down roots it also makes the labor market less dynamic. There are tradeoffs, and we have to know whether the positive spillover benefits exceed the negative spillover costs.

Encouraging homeownership creates a sort of “forced saving” in that one’s mortgage payment goes toward establishing ownership of a very valuable asset, but it also encourages people to overload their portfolio with a single asset linked to the economic performance of a single community. Suppose you own a home in a city with one major employer. Almost all of your assets then depend on the performance of that company.

There’s another way to frame this, too: holding everything else constant, should we impose extra taxes on renters? That’s effectively and implicitly what we’re doing when we provide special tax privileges for homeowners. By rewarding people for doing one thing, we’re implicitly punishing people for doing something else. All else equal, it’s not clear that renters should carry more of the tax burden than homeowners.

Of course, there are a lot of people who would have their oxen gored if the mortgage interest tax deduction were eliminated, and they will be very vocal about it. I’m not optimistic about even a grand bargain that would change the tax treatment of owner-occupied housing in exchange, perhaps, for lower tax rates. But I can—and will—hope.

Readers might also be interested in this episode of Macro Musings in which host David Beckworth discusses “Land Use Regulations, the Rise of NIMBYism, and Options for Reform” with his Mercatus Center colleague Salim Furth.