IDEAS home Printed from https://ideas.repec.org/p/pri/cepsud/251.html
   My bibliography  Save this paper

The Mortgage Interest Deduction: Revenue and Distributional Effects

Author

Listed:
  • Austin J. Drukker

    (Brookings Institution)

  • Ted Gayer

    (Brookings Institution)

  • Harvey S. Rosen

    (Princeton University)

Abstract

Conventional estimates of the size and distribution of the mortgage interest deduction (MID) in the personal income tax fail to account for potentially important responses in household behavior. As noted by Gervais and Pandey (2008) and Poterba and Sinai (2011), among others, were the MID to be eliminated, households would sell financial assets such as stocks and bonds to pay down their mortgage debt, and the smaller holdings of these taxable assets would offset some of the revenue gains from taxing mortgage interest. Conventional estimates therefore overstate the increase in revenues associated with eliminating the MID. Conventional estimates also overstate the progressivity of eliminating the MID, because households with higher levels of non-residential assets would respond by selling their taxable, non-residential assets. This paper builds on previous work that estimates the consequences of removing the MID using a framework that allows for the possibility of portfolio rebalancing. Unlike previous studies, we analyze data for several years — every third year from 1988 to 2012, inclusive. This reduces the likelihood that our estimates are due to the idiosyncrasies of some particular year, and allows us to investigate how and why the differences between estimates with and without a portfolio response have evolved over time. We then turn to the distributional implications of eliminating the MID, again looking at multiple years. A noteworthy feature of our distributional analyses is that we focus on both wealth and income as classifying variables. Our main findings are: (i) The revenue loss associated with the MID is smaller if one allows for rebalancing, with the ratio of the rebalancing-adjusted revenue loss to the conventionally estimated revenue loss varying from 76 percent in 1997 to 90 percent in 2009. While not dramatic, these are non-trivial effects. (ii ) During our sample period, changes in the ratio of the 2 revenue loss estimates were due primarily to changes in the relative stocks of assets to mortgage debt as opposed to changes in rates of return and the tax system, (iii) Portfolio rebalancing attenuates the increase in progressivity associated with elimination of the MID.

Suggested Citation

  • Austin J. Drukker & Ted Gayer & Harvey S. Rosen, 2017. "The Mortgage Interest Deduction: Revenue and Distributional Effects," Working Papers 251, Princeton University, Department of Economics, Center for Economic Policy Studies..
    • Handle: RePEc:pri:cepsud:251
    as

    Download full text from publisher

    File URL: https://gceps.princeton.edu/wp-content/uploads/2017/10/251rosen.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Irina A. Telyukova, 2013. "Household Need for Liquidity and the Credit Card Debt Puzzle," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(3), pages 1148-1177.
    2. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 149-185.
    3. Maki, Dean M., 1996. "Portfolio Shuffling and Tax Reform," National Tax Journal, National Tax Association;National Tax Journal, vol. 49(3), pages 317-329, September.
    4. Amromin, Gene & Huang, Jennifer & Sialm, Clemens, 2007. "The tradeoff between mortgage prepayments and tax-deferred retirement savings," Journal of Public Economics, Elsevier, vol. 91(10), pages 2014-2040, November.
    5. Edward L. Glaeser & Jesse M. Shapiro, 2003. "The Benefits of the Home Mortgage Interest Deduction," NBER Chapters, in: Tax Policy and the Economy, Volume 17, pages 37-82, National Bureau of Economic Research, Inc.
    6. Jonathan Gruber & Amalie Jensen & Henrik Kleven, 2017. "Do People Respond to the Mortage Interest Deduction? Quasi-Experimental Evidence from Denmark," NBER Working Papers 23600, National Bureau of Economic Research, Inc.
    7. James M. Poterba & Arturo Ramirez Verdugo, 2008. "Portfolio Substitution and the Revenue Cost of Exempting State and Local Government Interest Payments from Federal Income Tax," NBER Working Papers 14439, National Bureau of Economic Research, Inc.
    8. James Poterba & Todd Sinai, 2008. "Tax Expenditures for Owner-Occupied Housing: Deductions for Property Taxes and Mortgage Interest and the Exclusion of Imputed Rental Income," American Economic Review, American Economic Association, vol. 98(2), pages 84-89, May.
    9. Maki, Dean M., 1996. "Portfolio Shuffling and Tax Reform," National Tax Journal, National Tax Association, vol. 49(3), pages 317-29, September.
    10. James M. Poterba & Steven F. Venti & David A. Wise, 1996. "How Retirement Saving Programs Increase Saving," Journal of Economic Perspectives, American Economic Association, vol. 10(4), pages 91-112, Fall.
    11. Arthur B. Kennickell & R. Louise Woodburn, 1999. "CONSISTENT WEIGHT DESIGN FOR THE 1989, 1992 AND 1995 SCFs, AND THE DISTRIBUTION OF WEALTH," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 45(2), pages 193-215, June.
    12. Poterba, James M. & Verdugo, Arturo Ramírez, 2011. "Portfolio Substitution and the Revenue Cost of the Federal Income Tax Exemption for State and Local Government Bonds," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(2), pages 591-613, June.
    13. Nancy Jianakoplos & Paul Menchik & Owen Irvine, 1989. "Using Panel Data to Assess the Bias in Cross-sectional Inferences of Life-Cycle Changes in the Level and Composition of Household Wealth," NBER Chapters, in: The Measurement of Saving, Investment, and Wealth, pages 553-644, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Martin Gervais & Manish Pandey, 2008. "Who Cares About Mortgage Interest Deductibility?," Canadian Public Policy, University of Toronto Press, vol. 34(1), pages 1-24, March.
    2. Geng Li & Paul A. Smith, 2009. "New evidence on 401(k) borrowing and household balance sheets," Finance and Economics Discussion Series 2009-19, Board of Governors of the Federal Reserve System (U.S.).
    3. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
    4. Poterba, James M. & Sinai, Todd, 2011. "Revenue Costs and Incentive Effects of the Mortgage Interest Deduction for Owner-Occupied Housing," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(2), pages 531-564, June.
    5. Collins, J. Michael & Hembre, Erik & Urban, Carly, 2020. "Exploring the rise of mortgage borrowing among older Americans," Regional Science and Urban Economics, Elsevier, vol. 83(C).
    6. Geng Li & Paul A. Smith, 2008. "Borrowing from yourself: 401(k) loans and household balance sheets," Finance and Economics Discussion Series 2008-42, Board of Governors of the Federal Reserve System (U.S.).
    7. Cifuentes, Rodrigo & Margaretic, Paula & Saavedra, Trinidad, 2020. "Measuring households' financial vulnerabilities from consumer debt: Evidence from Chile," Emerging Markets Review, Elsevier, vol. 43(C).
    8. John Y. Campbell, 2016. "Restoring Rational Choice: The Challenge of Consumer Financial Regulation," American Economic Review, American Economic Association, vol. 106(5), pages 1-30, May.
    9. Mankart, Jochen, 2014. "The (Un-) importance of Chapter 7 wealth exemption levels," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 1-16.
    10. Carolina Laureti, 2015. "The Debt Puzzle in Dhaka’s Slums: Do Poor People Co-hold for Liquidity Needs?," Working Papers CEB 15-021, ULB -- Universite Libre de Bruxelles.
    11. Meta Brown & Andrew F. Haughwout & Donghoon Lee & Wilbert Van der Klaauw, 2011. "Do we know what we owe? A comparison of borrower- and lender-reported consumer debt," Staff Reports 523, Federal Reserve Bank of New York.
    12. Andersen, Henrik Yde, 2021. "Pension taxation, household debt and the real economy," Nationaløkonomisk tidsskrift, Nationaløkonomisk Forening, vol. 2021(1), pages 1-14.
    13. Green, Richard K. & Vandell, Kerry D., 1999. "Giving households credit: How changes in the U.S. tax code could promote homeownership," Regional Science and Urban Economics, Elsevier, vol. 29(4), pages 419-444, July.
    14. Andrew Bauer & Alan Macnaughton & Anindya Sen, 2015. "Income splitting and anti-avoidance legislation: evidence from the Canadian “kiddie tax”," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(6), pages 909-931, December.
    15. Olafsson, Arna & Gathergood, John, 2020. "The Co-holding Puzzle: New Evidence from Transaction-Level Data," CEPR Discussion Papers 14799, C.E.P.R. Discussion Papers.
    16. Gary V. Engelhardt & Anil Kumar, 2007. "Employer Matching and 401(k) Saving: Evidence from the Health and Retirement Study," NBER Chapters, in: Public Policy and Retirement, Trans-Atlantic Public Economics Seminar (TAPES), pages 1920-1943, National Bureau of Economic Research, Inc.
    17. Alejandro Ponce & Enrique Seira & Guillermo Zamarripa, 2017. "Borrowing on the Wrong Credit Card? Evidence from Mexico," American Economic Review, American Economic Association, vol. 107(4), pages 1335-1361, April.
    18. Christian A. L. Hilber & Tracy M. Turner, 2014. "The Mortgage Interest Deduction and its Impact on Homeownership Decisions," The Review of Economics and Statistics, MIT Press, vol. 96(4), pages 618-637, October.
    19. Kalina Koleva, 2005. "Seeking for an optimal tax administration: the efficiency costs’ approach [A la recherche de l'administration fiscale optimale : l'approche par les coûts d'efficience]," Post-Print halshs-00195354, HAL.
    20. Deborah Lucas & Jorge Jimenez Montesinos, 2020. "A Fair Value Approach to Valuing Public Infrastructure Projects and the Risk Transfer in Public-Private Partnerships," NBER Chapters, in: Economic Analysis and Infrastructure Investment, pages 369-402, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pri:cepsud:251. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bobray Bordelon (email available below). General contact details of provider: https://edirc.repec.org/data/ceprius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.