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Tax-Induced Portfolio Reshuffling: The Case of the Mortgage Interest Deduction

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  • Robert M. Dunsky
  • James R. Follain
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    Abstract

    Several provisions of the Tax Reform Act of 1986 had an indirect impact upon the demand for home mortgage debt. These include the elimination of the deductibility of interest on consumer credit, the increase in the standard deduction, and the reduction in the number of expenses that can be itemized. These provisions and the 1983-1989 panel sample of the Survey of Consumer Finances provide an opportunity to study the responsiveness of the demand for home mortgage debt to its tax status relative to the tax treatment of equity-financed investments in housing and consumer credit. The results are strongly supportive of a highly elastic demand for mortgage debt with respect to its tax price. The best point estimate of this elasticity is -1, but substantial variation is found among certain groups. More generally, the results provide strong support for the phenomenon of portfolio reshuffling. Copyright American Real Estate and Urban Economics Association.

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    Bibliographic Info

    Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

    Volume (Year): 28 (2000)
    Issue (Month): 4 ()
    Pages: 683-718

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    Handle: RePEc:bla:reesec:v:28:y:2000:i:4:p:683-718

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    Cited by:
    1. Crowe, Christopher & Dell’Ariccia, Giovanni & Igan, Deniz & Rabanal, Pau, 2013. "How to deal with real estate booms: Lessons from country experiences," Journal of Financial Stability, Elsevier, vol. 9(3), pages 300-319.
    2. James M. Poterba & Todd M. Sinai, 2008. "Income Tax Provisions Affecting Owner-Occupied Housing: Revenue Costs and Incentive Effects," NBER Working Papers 14253, National Bureau of Economic Research, Inc.
    3. Pau Rabanal & Christopher W. Crowe & Giovanni Dell'Ariccia & Deniz Igan, 2011. "How to Deal with Real Estate Booms," IMF Working Papers 11/91, International Monetary Fund.
    4. Patric H. Hendershott & Gwilym Pryce, 2005. "The Sensitivity of Homeowner Leverage to the Deductibility of Home Mortgage Interest," NBER Working Papers 11489, National Bureau of Economic Research, Inc.
    5. Heather Boushey & Christian E. Weller, 2006. "Inequality and Household Economic Hardship in the United States of America," Working Papers 18, United Nations, Department of Economics and Social Affairs.
    6. Patric H. Hendershott & Dr. Gwilyn Pryce & Dr. Michael White, 2002. "Household Leverage and the Deductibility of Home Mortgage Interest: Evidence from UK House Purchasers," NBER Working Papers 9207, National Bureau of Economic Research, Inc.

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