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Who Cares about Mortgage Interest Deductibility?

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Abstract

We use the Survey of Consumer Finances to measure the change in federal tax liability that would result should mortgage interest no longer be deductible from taxable income. We argue that the elimination of this housing tax provision would lead households to reshuffle their balance sheet, thereby lowering the amount of interest income taxes collected. We find that the cost of this tax provision is between 35 and 65 percent of the estimates produced by the Office of Management and Budget, depending on the types of assets one assumes would be used to lower mortgage debt following the removal of the provision. Furthermore, since mostly rich households would be in a position to reshuffle their balance sheet following such a change in tax policy, the distributional effect of this program are much smaller than conventionally believed.

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File URL: http://economics.uwo.ca/epri/workingpapers_docs/wp2005/Gervais_Pandey_09.pdf
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Paper provided by University of Western Ontario, Economic Policy Research Institute in its series University of Western Ontario, Economic Policy Research Institute Working Papers with number 20059.

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Date of creation: 2005
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Handle: RePEc:uwo:epuwoc:20059

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Postal: Economic Policy Research Institute, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/epri_workingpapers.html

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Keywords: mortgage interest deductibility; housing; taxation; redistribution;

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  1. Berkovec, James & Fullerton, Don, 1992. "A General Equilibrium Model of Housing, Taxes, and Portfolio Choice," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 390-429, April.
  2. Maki, Dean M., 1996. "Portfolio Shuffling and Tax Reform," National Tax Journal, National Tax Association, vol. 49(3), pages 317-29, September.
  3. Sule Alan & S�ren Leth-Petersen, 2006. "Tax Incentives and Household Portfolios: A Panel Data Analysis," Social and Economic Dimensions of an Aging Population Research Papers 163, McMaster University.
  4. Edward L. Glaeser & Jesse M. Shapiro, 2002. "The Benefits of the Home Mortgage Interest Deduction," NBER Working Papers 9284, National Bureau of Economic Research, Inc.
  5. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October.
  6. Jonathan Skinner & Daniel Feenberg, 1990. "The Impact of the 1986 Tax Reform Act on Personal Saving," NBER Working Papers 3257, National Bureau of Economic Research, Inc.
  7. Kevin Milligan, 2004. "Life-cycle Asset Accumulation and Allocation in Canada," Social and Economic Dimensions of an Aging Population Research Papers 122, McMaster University.
  8. Richard K. Green & Patric H. Hendershott & Dennis R. Capozza, 1996. "Taxes, Mortgage Borrowing and House Prices," Wisconsin-Madison CULER working papers 96-06, University of Wisconsin Center for Urban Land Economic Research.
  9. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  10. Arthur B. Kennickell & Martha Starr-McCluer & Brian J. Surette, 2000. "Recent changes in U. S. family finances: results from the 1998 Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-29.
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Cited by:
  1. Sule Alan & Søren Leth-Petersen, 2006. "Tax Incentives and Household Portfolios: A Panel Data Analysis," CAM Working Papers 2006-13, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  2. 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, vol. 64(2), pages 531-64, June.
  3. Jonas D. M. Fisher & Martin Gervais, 2009. "Why has home ownership fallen among the young?," IFS Working Papers W09/08, Institute for Fiscal Studies.
  4. Sang-Wook Stanley Cho & Johanna Francis, 2008. "Tax Treatment of Owner Occupied Housing and Wealth Inequality," Fordham Economics Discussion Paper Series dp2008-17, Fordham University, Department of Economics.
  5. Christian A. L. Hilber & Tracy M. Turner, 2013. "The mortgage interest deduction and its impact on homeownership decisions," LSE Research Online Documents on Economics 49843, London School of Economics and Political Science, LSE Library.
  6. Cole, Adam J. & Gee, Geoffrey & Turner, Nicholas, 2011. "The Distributional And Revenue Consequences Of Reforming The Mortgage Interest Deduction," National Tax Journal, National Tax Association, vol. 64(4), pages 977-1000, December.
  7. 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.
  8. Jim MacGee, 2010. "Not Here? Housing Market Policy and the Risk of a Housing Bust," e-briefs 105, C.D. Howe Institute.
  9. Sami Alpanda & Sarah Zubairy, 2013. "Housing and Tax Policy," Working Papers 13-33, Bank of Canada.
  10. 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.

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