IDEAS home Printed from https://ideas.repec.org/a/sae/pubfin/v42y2014i5p582-607.html
   My bibliography  Save this article

Housing Market Distortions and the Mortgage Interest Deduction

Author

Listed:
  • Andrew Hanson

    () (Department of Economics, Marquette University, Milwaukee, WI, USA)

  • Hal Martin

    (Department of Economics, Georgia State University, Atlanta, GA, USA)

Abstract

Housing market distortions from the mortgage interest deduction (MID) typically focus on a single choice measure such as home size or self-reported amount of debt on a new mortgage. We estimate the amount of mortgage interest deducted on federal tax returns to capture the full range of housing market distortions from the MID. Our primary results show that for every one percentage point increase in the tax rate that applies to deductibility, the amount of mortgage interest deducted increases by US$303 to US$590. Empirical estimates imply elasticities of mortgage interest deducted with respect to the after-tax cost of housing between −0.78 and −1.62, and deadweight loss estimates ranging from 16 to 36 percent of MID tax expenditure.

Suggested Citation

  • Andrew Hanson & Hal Martin, 2014. "Housing Market Distortions and the Mortgage Interest Deduction," Public Finance Review, , vol. 42(5), pages 582-607, September.
  • Handle: RePEc:sae:pubfin:v:42:y:2014:i:5:p:582-607
    as

    Download full text from publisher

    File URL: http://pfr.sagepub.com/content/42/5/582.abstract
    Download Restriction: no

    References listed on IDEAS

    as
    1. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 67-92, Fall.
    2. 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.
    3. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 729-752.
    4. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
    5. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769, October.
    6. Christopher Winship & Larry Radbill, 1994. "Sampling Weights and Regression Analysis," Sociological Methods & Research, , vol. 23(2), pages 230-257, November.
    7. Anderson, John E. & Clemens, Jeffrey & Hanson, Andrew, 2007. "Capping the Mortgage Interest Deduction," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(4), pages 769-785, December.
    8. Jones, Lawrence D., 1995. "Net wealth, marginal tax rates and the demand for home mortgage debt," Regional Science and Urban Economics, Elsevier, vol. 25(3), pages 297-322, June.
    9. Rosen, Harvey S., 1979. "Housing decisions and the U.S. income tax : An econometric analysis," Journal of Public Economics, Elsevier, vol. 11(1), pages 1-23, February.
    10. 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.
    11. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
    12. Hanson, Andrew, 2012. "Size of home, homeownership, and the mortgage interest deduction," Journal of Housing Economics, Elsevier, vol. 21(3), pages 195-210.
    13. 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.
    14. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
    15. Smith, Lawrence B & Rosen, Kenneth T & Fallis, George, 1988. "Recent Developments in Economic Models of Housing Markets," Journal of Economic Literature, American Economic Association, vol. 26(1), pages 29-64, March.
    16. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    17. Rosen, Harvey S., 1979. "Owner occupied housing and the federal income tax: Estimates and simulations," Journal of Urban Economics, Elsevier, vol. 6(2), pages 247-266, April.
    18. 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.
    19. Ling, David C. & McGill, Gary A., 1998. "Evidence on the Demand for Mortgage Debt by Owner-Occupants," Journal of Urban Economics, Elsevier, vol. 44(3), pages 391-414, November.
    20. Poterba, James M, 1992. "Taxation and Housing: Old Questions, New Answers," American Economic Review, American Economic Association, vol. 82(2), pages 237-242, May.
    21. 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.
    22. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Martin, Hal, 2018. "The Impact of the Tax Cuts and Jobs Act on Local Home Values," Working Paper 1806, Federal Reserve Bank of Cleveland.
    3. Fatica, Serena & Prammer, Doris, 2017. "Housing and the tax system: how large are the distortions in the euro area?," Working Paper Series 2087, European Central Bank.

    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:sae:pubfin:v:42:y:2014:i:5:p:582-607. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (SAGE Publications). General contact details of provider: .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.