Tax arbitrage incentives for mortgage prepayment behavior: Evidence from Dutch micro data

Stefan Groot and Arjan Lejour

No 350, CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: This paper exploits a unique set of Dutch micro data to analyze the response in prepayment behavior to changes in incentives for prepaying. The paper shows that the effect of mortgage interest rates on the value of prepaying a mortgage (also taking taxes and returns on savings into account) is equivalent to a change in the tax rate on financial wealth. This feature is used to estimate tax elasticities (i.e. the elasticity of changes in wealth tax revenues resulting from changes in prepayment with respect to the wealth tax rate). Using a linear probability model with the Arellano-Bond estimator, the paper finds that the prepayment probability increases by 0.5% point if the prepayment value as a fraction of the mortgage increases by 1% point. The effect is about six times as high for households owning more than 200,000 euro and it is not statistically significant for households with little financial wealth.

JEL-codes: D14 G21 H26 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-pbe
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