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Costly reversals of bad policies: the case of the mortgage interest deduction

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Listed:
  • Markus Karlman

    (IIES, University of Stockholm)

  • Karin Kinnerud

    (IIES, University of Stockholm)

  • Kasper Kragh-Sorensen

    (IIES, University of Stockholm)

Abstract

This paper measures the welfare effects of removing the mortgage interest deduction under a variety of implementation scenarios. To this end, we build a life-cycle model with heterogeneous households calibrated to the U.S. economy, which features long-term mortgages and costly refinancing. In line with previous research, we find that most households would prefer to be born into an economy without the deductibility. However, when we incorporate transitional dynamics, less than forty percent of households are in favor of a reform and the average welfare effect is negative. This result holds under a number of removal designs. (Copyright: Elsevier)

Suggested Citation

  • Markus Karlman & Karin Kinnerud & Kasper Kragh-Sorensen, 2021. "Costly reversals of bad policies: the case of the mortgage interest deduction," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 85-107, April.
    • Handle: RePEc:red:issued:19-217
    DOI: 10.1016/j.red.2020.08.003
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    Cited by:

    1. Kasper Kragh Balke & Markus Karlman & Karin Kinnerud, 2024. "Winners and Losers from Property Taxation," Working Papers 04/2024, Centre for Household Finance and Macroeconomic Research (HOFIMAR), BI Norwegian Business School.
    2. Jiaqian Chen & Daria Finocchiaro & Jesper Linde & Karl Walentin, 2023. "The costs of macroprudential deleveraging in a liquidity trap"," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 991-1011, December.
    3. Daniel Jonas Schmidt, "undated". "Property transfer taxes, residential mobility, and welfare," Tinbergen Institute Discussion Papers 22-042/VI, Tinbergen Institute.
    4. Shahar Rotberg, 2022. "The Implications Of Housing For The Design Of Wealth Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 125-159, February.
    5. Kasper Kragh Balke & Markus Karlman & Karin Kinnerud, 2024. "Down-payment requirements: Implications for portfolio choice and consumption," Working Papers 03/2024, Centre for Household Finance and Macroeconomic Research (HOFIMAR), BI Norwegian Business School.
    6. Gamber, William & Graham, James & Yadav, Anirudh, 2023. "Stuck at home: Housing demand during the COVID-19 pandemic," Journal of Housing Economics, Elsevier, vol. 59(PB).
    7. Rotberg, Shahar & Steinberg, Joseph B., 2024. "Mortgage interest deductions? Not a bad idea after all," Journal of Monetary Economics, Elsevier, vol. 144(C).
    8. Carlos Canizares Martinez, 2023. "Leaning against housing booms fueled by credit," Working and Discussion Papers WP 9/2023, Research Department, National Bank of Slovakia.
    9. Yunho Cho & Shuyun May Li & Lawrence Uren, 2024. "Investment Housing Tax Concessions And Welfare: A Quantitative Study For Australia," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(2), pages 781-816, May.

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    More about this item

    Keywords

    Housing; Life cycle; Mortgage interest deduction; Welfare;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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