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Tax arbitrage incentives for mortgage prepayment behavior: Evidence from Dutch micro data

Author

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  • Stefan Groot
  • Arjan Lejour

    (CPB Netherlands Bureau for Economic Policy Analysis)

Abstract

This paper exploits a unique set of Dutch micro data to analyze the response in prepayment behavior to changes in incentives for prepaying. The paper shows that the effect of mortgage interest rates on the value of prepaying a mortgage (also taking taxes and returns on savings into account) is equivalent to a change in the tax rate on financial wealth. This feature is used to estimate tax elasticities (i.e. the elasticity of changes in wealth tax revenues resulting from changes in prepayment with respect to the wealth tax rate). Using a linear probability model with the Arellano-Bond estimator, the paper finds that the prepayment probability increases by 0.5% point if the prepayment value as a fraction of the mortgage increases by 1% point. The effect is about six times as high for households owning more than 200,000 euro and it is not statistically significant for households with little financial wealth.

Suggested Citation

  • Stefan Groot & Arjan Lejour, 2017. "Tax arbitrage incentives for mortgage prepayment behavior: Evidence from Dutch micro data," CPB Discussion Paper 350, CPB Netherlands Bureau for Economic Policy Analysis.
    • Handle: RePEc:cpb:discus:350
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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