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Tax-Induced Portfolio Reshuffling: The Case of the Mortgage Interest Deduction

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  • Robert M. Dunsky
  • James R. Follain

Abstract

Several provisions of the Tax Reform Act of 1986 had an indirect impact upon the demand for home mortgage debt. These include the elimination of the deductibility of interest on consumer credit, the increase in the standard deduction, and the reduction in the number of expenses that can be itemized. These provisions and the 1983-1989 panel sample of the Survey of Consumer Finances provide an opportunity to study the responsiveness of the demand for home mortgage debt to its tax status relative to the tax treatment of equity-financed investments in housing and consumer credit. The results are strongly supportive of a highly elastic demand for mortgage debt with respect to its tax price. The best point estimate of this elasticity is -1, but substantial variation is found among certain groups. More generally, the results provide strong support for the phenomenon of portfolio reshuffling. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • Robert M. Dunsky & James R. Follain, 2000. "Tax-Induced Portfolio Reshuffling: The Case of the Mortgage Interest Deduction," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(4), pages 683-718.
  • Handle: RePEc:bla:reesec:v:28:y:2000:i:4:p:683-718
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    Cited by:

    1. Patric H. Hendershott & Dr. Gwilyn Pryce & Dr. Michael White, 2002. "Household Leverage and the Deductibility of Home Mortgage Interest: Evidence from UK House Purchasers," NBER Working Papers 9207, National Bureau of Economic Research, Inc.
    2. 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.
    3. Crowe, Christopher & Dell’Ariccia, Giovanni & Igan, Deniz & Rabanal, Pau, 2013. "How to deal with real estate booms: Lessons from country experiences," Journal of Financial Stability, Elsevier, vol. 9(3), pages 300-319.
    4. Veronica John Muellbauer & Veronica David M Williams, 2012. "Credit conditions and the real economy: the elephant in the room," BIS Papers chapters,in: Bank for International Settlements (ed.), Property markets and financial stability, volume 64, pages 95-101 Bank for International Settlements.
    5. David Rappoport, 2016. "Do Mortgage Subsidies Help or Hurt Borrowers?," Finance and Economics Discussion Series 2016-081, Board of Governors of the Federal Reserve System (U.S.).
    6. Anthony A. DeFusco & Andrew Paciorek, 2017. "The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit," American Economic Journal: Economic Policy, American Economic Association, vol. 9(1), pages 210-240, February.
    7. 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.
    8. 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.
    9. Martin, Hal & Hanson, Andrew, 2016. "Metropolitan area home prices and the mortgage interest deduction: Estimates and simulations from policy change," Regional Science and Urban Economics, Elsevier, vol. 59(C), pages 12-23.
    10. 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.
    11. Hendershott, Patric H. & Pryce, Gwilym, 2006. "The sensitivity of homeowner leverage to the deductibility of home mortgage interest," Journal of Urban Economics, Elsevier, vol. 60(1), pages 50-68, July.
    12. 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 531-564, June.
    13. Heather Boushey & Christian E. Weller, 2006. "Inequality and Household Economic Hardship in the United States of America," Working Papers 18, United Nations, Department of Economics and Social Affairs.
    14. Evridiki Tsounta, 2011. "Home Sweet Home; Government's Role in Reaching the American Dream," IMF Working Papers 11/191, International Monetary Fund.

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