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Reluctant Savers and Mortgage Subsidies

Listed author(s):
  • Sevin Yeltekin

    (Carnegie Mellon University)

  • Antonio Bellofatto

    (University of Queensland)

The Mortgage Interest Deduction (MID) costs the federal government more than 200 billion dollars per year and ranks among the largest US tax subsidies. Despite the many proposals aiming to revise the MID, the ultimate effects of modifying it are still ambiguous and controversial. One argument against MID points to its regressivity, as it mostly benefits wealthy homeowners. On the other hand, homeownership could alleviate self-control problems if used as a commitment device. This paper focuses on this interaction between progressivity and self-control by evaluating MID reforms within a quantitative life-cycle model. Our model economy is populated by overlapping generations of households who are subject to labor productivity shocks and borrowing constraints. In each period, households choose between owning and renting. Homes can be financed by mortgage loans. Crucially, agents have Gul-Pesendorfer preferences which embed self-control issues. We calibrate the model to US data and study various policy reforms to the MID scheme such as, eliminating the MID, allowing to deduct only a fraction of mortgage interest payments, and replacing the MID for a subsidy on first homebuyers’ down payments via a revenue-neutral reform. We quantify the impact of these policies on redistribution, homeownership, social welfare, and government revenues.

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Paper provided by Society for Economic Dynamics in its series 2016 Meeting Papers with number 1164.

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Date of creation: 2016
Handle: RePEc:red:sed016:1164
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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