I kind of disagree on your conclusion about higher end property values suffering. They may fall a little, but they will find an equilibrium without anything like the drop of the last few years.
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The interest deduction on a 800K loan is something like 48K per year (at 6%). For someone making 250K per year, that amounts to a deduciton worth somewhere in the neighborhood of 19K.
I personally believe that 19K per year increase in costs is relevant to people who make ~ 250-300K. This will reduce the amount households in the 200-400K income can afford to pay for housing and thus will significantly impact the price of housing in the categories that these people buy.
Regardless of the mechanism, it is naive to believe that the Government will recover the amount of dollars they anticipate by enacting this change. People will react and adapt to the changes in a way that reduces the overall take of the government.
I don’t disagree that in the long run the removal of this subsidy would make the economy more efficient, it’s just that the reaosn for doing so (to generate more revenue for the Government) may not come to pass.
