Tax Incentives and Demand for Mortgage Debt: Evidence from the Finnish 1993 Tax Reform
The 1993 Finnish tax reform reduced the incentives to use mortgage financing in home acquisition for high-income households. Before the reform, mortgage interest was deductible according to a progressive schedule which meant that the benefit from the deduction was the greater the higher was the taxpayer 's marginal income tax rate. After the reform, the deduction is made according to a flat schedule and the benefit no longer depends on taxpayer 's marginal income tax rate. This setting can be seen as a natural experiment, where one can distinguish multiple treatment groups and a control group. This paper uses household level repeated cross-section data from before and after the reform to study whether Finnish households responded to these changes in incentives to borrow. The results, based on difference-in-differences estimates, show that high income households with high marginal tax rates responded to the reform by clearly reducing their mortgage borrowing compared to the control group which was unaffected by the reform.
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Volume (Year): 10 (2010)
Issue (Month): 1 ()
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