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Who Cares About Mortgage Interest Deductibility?

  • Martin Gervais
  • Manish Pandey

We use the US 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 36 and 66 percent of the estimates produced by the US 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 effects of this program are much smaller than conventionally believed. While the focus of this paper is on the elimination of mortage interest deductibility in the US, the results of this study shed some light on the impact and distributional consequences to expect should mortgage interest deductibility be introduced in Canada.

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Article provided by University of Toronto Press in its journal Canadian Public Policy.

Volume (Year): 34 (2008)
Issue (Month): 1 (March)
Pages: 1-24

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Handle: RePEc:cpp:issued:v:34:y:2008:i:1:p:1-24
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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. Kevin Milligan, 2004. "Life-Cycle Asset Accumulation and Allocation in Canada," NBER Working Papers 10860, National Bureau of Economic Research, Inc.
  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. 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.
  5. Maki, Dean M., 1996. "Portfolio Shuffling and Tax Reform," National Tax Journal, National Tax Association, vol. 49(3), pages 317-29, September.
  6. 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.
  7. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers 9807, University of Western Ontario, Department of Economics.
  8. 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.
  9. 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.
  10. 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.
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