Taxation and Debt Financing of Home Acquisition: Evidence from the Finnish 1993 Tax Reform
AbstractThe 1993 Finnish tax reform reduced the incentives to use debt financing in home acquisition for high-income households. Before the reform mortgage interest was deductible according to a progressive schedule creating a so-called upside-down effect, which means that the benefit from the deduction was the greater the higher was taxpayer?s income. After the reform, the deduction is made according to a flat schedule, and thus, the size of the benefit no longer depends on taxpayer?s income. We use household level data from the Income Distribution Survey of Statistics Finland to study whether high-income households have responded to the reform. Using tobit, Heckman and two-part model on repeated cross-sectional data from 1990?2000 we find that the probability of having a mortgage debt is clearly less dependent on the income of household?s head after the tax reform. This income variable measures the tax deduction effect and we conclude that the 1993 tax reform was behind the observed behavioural change. The results for the amount of mortgage debt conditional on a positive amount are more ambiguous. It seems that the tax reform had no or very little effect on the demand for the amount of mortgage debt.
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Bibliographic InfoPaper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 366.
Date of creation: 06 Apr 2005
Date of revision:
Find related papers by JEL classification:
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
- R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
- D10 - Microeconomics - - Household Behavior - - - General
- H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-11 (All new papers)
- NEP-PBE-2006-07-18 (Public Economics)
- NEP-URE-2006-07-13 (Urban & Real Estate Economics)
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