The greatest threats to the United States are the rise of China and, as I noted on Thursday, the federal deficit. President Donald Trump and Congress have a window to address the China problem. But the federal deficit must be addressed today. The drivers of the deficit are spending on Social Security, Medicare, Medicaid, and paying interest on the debt which now stands at 100% of gross domestic product. All four spending categories that are causing out-of-control spending are growing faster than the economy is growing. So, each year the deficit climbs as a percentage of GDP.

To reduce the threat that the deficit poses, spending must be addressed, revenue raisers must be considered, and the president and Congress must put into place policies that will accelerate economic growth. Faster growth produces additional revenue. But growth policies only realize results over time. The economy does not suddenly grow faster. 

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Reducing spending is very difficult and almost impossible because entitlements — Social Security, Medicare, and Medicaid — are very popular. So, that leaves tax reform which raises revenue as the only plausible way to immediately reduce the deficit. 

Almost all mainstream, nonideological economists agree the best path to achieve tax reform is to broaden the tax base and eliminate deductions that misallocate resources and often just benefit slivers of the population. Unfortunately, the Republican-controlled Congress will pass Trump’s “big, beautiful bill,” which will dig the deficit hole deeper. 

But as soon as the bill becomes law, Congress on a bipartisan basis should consider revenue raising legislation. A prime candidate for tax reform is the mortgage interest deduction. Congress should vote to eliminate the tax deduction for mortgage interest payments. Studies show that ending the deduction for mortgage interest payments could generate over $1 trillion in revenues over a decade. This is real money. Over a year eliminating the mortgage interest deduction could generate almost $80 billion, or around 0.25% of GDP. This would be a great first step in bending the arc of the deficit.

Some homeowners would scream as would the powerful residential real estate lobby. But eliminating the deduction would demonstrate seriousness about the deficit and would almost certainly reduce borrowing costs for the federal government. Moreover, it is important to explain that only households that itemize deductions benefit from the mortgage interest deduction. And over 90% of households do not itemize deductions. They take the standard deduction instead. The mortgage interest deduction, indeed, helps a sliver of the population. 

Relative to core inflation, 2.1% on a 12-month basis, U.S. Treasury yields are elevated. The real yield, the difference between the actual yield and the rate of inflation, is over 2% on the 10-year U.S. Treasury, which is the benchmark financial instrument for the economy and for pricing mortgage interest rates. On a historical basis, this is very high. Historically, the real yield on the 10-year Treasury is around 0.95%.

Demonstrating resolve on the deficit could cause the yield on the 10-year Treasury to fall from the current level of about 4.35% to well under 4%. In fact, the yield on the 10-year Treasury could fall toward 3%, according to historical valuation data. Imagine how the residential real estate market would respond to a 1% or more drop in interest rates?

Mortgage rates are priced off of the 10-year Treasury. If the yield on the 10-year Treasury fell by about 1%, then mortgage rates would arguably fall by a comparable amount. Such a fall in mortgage rates would more than compensate for the elimination in the mortgage interest deduction. Moreover, all homeowners benefit from lower mortgage rates. Only a small fraction of homeowners benefit from the mortgage deduction.

THE SENATE IS SET TO DELIVER ON HISTORIC DIGITAL ASSETS LEGISLATION

In addition, households who rent would benefit from lower interest rates. About 35% of households do not own a home. 

Finally, demonstrating resolve on the federal deficit by eliminating the deduction for mortgage interest payments almost certainly would lower borrowing costs for the federal government. A 1% fall in borrowing costs would reduce the annual deficit by 1%. That is $300 billion a year in savings.  Eliminating the mortgage interest deduction would be a win-win for the country and the economy. 

James Rogan is a former U.S. foreign service officer who has worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be followed on X and reached at [email protected].