Income Tax Provisions Affecting Owner-Occupied Housing: Revenue Costs and Incentive Effects
AbstractThe mortgage interest deduction, the property tax deduction, the unique treatment of capital gains on owner-occupied homes, and the absence of taxation on imputed rent from owner-occupied homes all influence the effective cost of housing services. They also affect federal income tax revenues and the distribution of income tax liabilities. We draw on household-level data from the 2004 Survey of Consumer Finances to analyze how several potential reforms would affect incentives for housing consumption as well as the distribution of income tax burdens. Our analysis recognizes that changing the mortgage interest deduction would induce changes in household financial behavior. We estimate that repealing the mortgage interest deduction in 2003 would have raised income tax revenues by $72.4 billion in the absence of any portfolio adjustments, but by only $61.9 billion if homeowners responded by drawing down a limited set of financial assets to partially replace their mortgage debt. The revenue effects of changing the property tax deduction similarly depend on how state and local governments alter their mix of revenue instruments in response to federal tax reform. Our results underscore the importance of recognizing behavioral responses when calculating the revenue costs of income tax provisions relating to owner-occupied housing.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14253.
Date of creation: Aug 2008
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Publication status: published as James M. Poterba, Todd Sinai. "Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing," in James M. Poterba, organizer, "Economic Analysis of Tax Expenditures" National Tax Journal, (National Tax Association), Vol. 64, no. 2, part 2 (2011)
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Find related papers by JEL classification:
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-21 (All new papers)
- NEP-PBE-2008-08-21 (Public Economics)
- NEP-PUB-2008-08-21 (Public Finance)
- NEP-URE-2008-08-21 (Urban & Real Estate Economics)
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