Abolish the Mortgage Interest Deduction?

As the subprime woes continue unabated and the rest of the banking and brokerage world feels the strain, it's worth thinking about first principles again: Why do we subsidize mortgage interest? More than Social Security--the benefits of which are taxed--it's the most sacred cow in the Federal Budget. But it's a truism that a subsidy yields higher prices. Home sellers can charge more because buyers are effectively subsidized by their ability to deduct mortgage interest. The purpose of the deduction is to encourage home ownership even though the deduction extends to people who hardly need government largesse. Canada has no mortgage interest deduction and yet its rates of home ownership are comparable to those in the United States. In other words, if we phased out the deduction, it probably wouldn't reduce the rate of home ownership. I've written about this before in a piece on Jim Johnson, the former head of Fannie Mae. (Don't get me started on the subsidies afforded Fannie Mae.) The mortgage interest deduction now costs us close to $100 billion a year. We should have a debate about whether we really need it any more and how it might be phased out without disrupting the economy and the lives of homeowners, many of whom already find themselves in turmoil because of the subprime collapse.