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Taxes and Borrower Behavior: Evidence from the Mortgage Interest Deductibility Limit

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  • Hanson, Andrew

Abstract

This paper estimates the behavioral response to mortgage interest tax deductibility by studying the discrete change in the net-of-tax marginal interest rate that occurs at $1 million in mortgage debt. Using data on 2004-2016 mortgage originations, I estimate excess bunching in the loan distribution based on a counterfactual that accounts for bunching at salient loan amounts. Findings suggest excess of about 54,000 loans at the deductibility limit, or 4.5% of the sample. The level of bunching implies an average reduction in borrowing around the $1 million limit of 9.4 percent, and mortgage demand elasticities between − 0.132 to − 0.115 for home purchase loans. Estimated elasticities imply that from 2004-2016 the MID induced $49.52 billion in deadweight loss in the mortgage market.

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  • Hanson, Andrew, 2020. "Taxes and Borrower Behavior: Evidence from the Mortgage Interest Deductibility Limit," Journal of Urban Economics, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:juecon:v:118:y:2020:i:c:s0094119020300279
    DOI: 10.1016/j.jue.2020.103256
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    3. Austin J. Drukker, 2021. "Implications of a Mortgage Interest Credit for the United States," Public Finance Review, , vol. 49(4), pages 573-588, July.

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    More about this item

    Keywords

    Mortgage Demand; Mortgage Interest Deduction; Tax Policy; Bunching;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • R22 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Other Demand

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