I'd say that was more of a welfare benefit than a tax loophole. It's just that we don't like to label money going to average middle class families as welfare. Much government social expenditure is structured this way: if you are poor you are really made to know that you are receiving welfare, and sometimes they don't even give you real money. On the other hand, middle class people don't get 'welfare', just 'tax breaks'.
The result of this is that better off people underestimate how much direct government assistance they have received [1]. I won't comment on the potential political motivations for dividing up the welfare state in this way
The mortgage interest deduction benefits wealthy households much more than "average middle class" households. The tax advantage of home ownership is also reflected in higher prices for those houses, so it's not much of a win in any case.
I only used the terminology 'average middle class' because the parent had. I'm British and terms like working class and middle class seem to have slightly different meanings in the US so usually I try to avoid using them.
Also, even if it is not much of a win for the wealthy households, higher property prices generally mean higher rents so it disadvantages the class of people that rent. A similar argument applies to housing benefit in the uk, which is something you receive if you are poor (working or not). The recipient doesn't really see the money, but it helps to keep rents high so it's more of a 'landlords benefit', much like your mortgage deduction seems to be of more benefit to the banks than home owners.
Just to be clear, there are two problems with the mortgage interest deduction. First, it's regressive; by the numbers, the people who benefit most from the deduction are those least in need of a benefit from the government. Second, regardless of your income level, the mortgage interest deduction artificially increases the desirability of residential real estate, which drives up the prices, which acts as a shadow tax on home ownership.
The first problem you could address by capping the benefit somehow. The latter you cannot.
My microecon is a little rusty but isn't the second problem essentially a wash? It seems that the shadow tax should never exceed the mortgage interest deduction (assuming rational markets).
To a first approximation, the MID pushes up the costs of housing by as much as the tax deduction. Making it entirely useless for "encouraging home ownership."
Honestly, it's hard to say exactly how much money the government has given someone. If I agree to a compromise where my taxes go up by $10,000 but I now get to deduct my frobozzes and so they go down $1,000, am I being given $1,000?
Or, if the government decides to tax everyone at 100%, but then gives out a series of "tax breaks" that lands everyone at their current tax level, is whatever government people get to keep welfare?
I don't want to go to far in the other direction. It's 100% possible for politicians to spend money via tax breaks. So neither worldview really works, but you have to have something between them.
The result of this is that better off people underestimate how much direct government assistance they have received [1]. I won't comment on the potential political motivations for dividing up the welfare state in this way
[1] http://themonkeycage.org/blog/2011/02/08/the_invisible_ameri...