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Tax Incentives and Household Portfolios: A Panel Data Analysis

  • Sule Alan
  • S�ren Leth-Petersen

This paper investigates the responsiveness of household portfolios to tax incentives by exploiting a substantial tax reform that altered after-tax returns and cost of debt for a large number of households. An extraordinary panel data set that covers two years before and after the reform is used for the analysis. Our empirical findings suggest that households reshuffle their balance sheets in the case of a partial deductibility phase-out. In particular, heavily taxed, interest-bearing assets are used to pay off mortgage debt. Furthermore, we find that taxes have a significant impact on the structure of household portfolios even after controlling for unobserved heterogeneity.

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Paper provided by McMaster University in its series Social and Economic Dimensions of an Aging Population Research Papers with number 163.

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Length: 35 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:mcm:sedapp:163
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  1. Sule Alan, 2005. "Entry Costs and Stock Market Participation Over the Life Cycle," Working Papers 2005_1, York University, Department of Economics.
  2. Honore, Bo E, 1992. "Trimmed LAD and Least Squares Estimation of Truncated and Censored Regression Models with Fixed Effects," Econometrica, Econometric Society, vol. 60(3), pages 533-65, May.
  3. 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.
  4. Luigi Guiso & Tullio Jappelli, 2000. "Household Portfolios in Italy," CSEF Working Papers 43, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  5. Hubbard, Robert Glenn, 1985. "Personal Taxation, Pension Wealth, and Portfolio Composition," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 53-60, February.
  6. Feldstein, Martin S, 1976. "Personal Taxation and Portfolio Composition: An Econometric Analysis," Econometrica, Econometric Society, vol. 44(4), pages 631-50, July.
  7. James M. Poterba, 2001. "Taxation and Portfolio Structure: Issues and Implications," NBER Working Papers 8223, National Bureau of Economic Research, Inc.
  8. King, Mervyn A. & Leape, Jonathan I., 1998. "Wealth and portfolio composition: Theory and evidence," Journal of Public Economics, Elsevier, vol. 69(2), pages 155-193, June.
  9. Jappelli, Tullio & Pistaferri, Luigi, 2007. "Do people respond to tax incentives? An analysis of the Italian reform of the deductibility of home mortgage interests," European Economic Review, Elsevier, vol. 51(2), pages 247-271, February.
  10. Martins, Nuno C. & Villanueva, Ernesto, 2006. "The impact of mortgage interest-rate subsidies on household borrowing," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1601-1623, September.
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