In the U.S. income tax code, a number of expenditures are "deductible." For most tax payers, the largest tax deduction comes from the portion of the income tax code that permits taxpayers to deduct home mortgage interest (on both a primary and a vacation home). This means that taxpayers who use this deduction do not have to pay income tax on the portion of their income that is spent on paying interest on their home mortgage(s). For purposes of this exercise, assume that the entire yearly price of housing is interest expense.

An alternative way for the government to encourage home ownership would be to offer a tax credit instead of a tax deduction. A tax credit would allow all taxpayers to subtract a fraction "k" of their annual mortgage payments directly from the tax bill they would otherwise owe. (Note: Be careful. A tax credit is deducted from tax payments that are due, not from the taxable income.) For a household with an income of $200,000 that faces a tax rate of 40%, with the price of a square foot of housing at $50, how does this alter its budget if k=0.25?