Taxation and Debt Financing of Home Acquisition: Evidence from the Finnish 1993 Tax Reform

Tuukka Saarimaa

No 366, Discussion Papers from VATT Institute for Economic Research

Abstract: The 1993 Finnish tax reform reduced the incentives to use debt financing in home acquisition for high-income households. Before the reform mortgage interest was deductible according to a progressive schedule creating a so-called upside-down effect, which means that the benefit from the deduction was the greater the higher was taxpayer?s income. After the reform, the deduction is made according to a flat schedule, and thus, the size of the benefit no longer depends on taxpayer?s income. We use household level data from the Income Distribution Survey of Statistics Finland to study whether high-income households have responded to the reform. Using tobit, Heckman and two-part model on repeated cross-sectional data from 1990?2000 we find that the probability of having a mortgage debt is clearly less dependent on the income of household?s head after the tax reform. This income variable measures the tax deduction effect and we conclude that the 1993 tax reform was behind the observed behavioural change. The results for the amount of mortgage debt conditional on a positive amount are more ambiguous. It seems that the tax reform had no or very little effect on the demand for the amount of mortgage debt.

Keywords: Mortgage interest deduction, tax reform, mortgage demand, Taxation, Verotus, Policy analysis and modelling, Päätöksenteon tuki ja mallintaminen, C300 - Econometric Methods: Multiple/Simultaneous Equation Models; Multiple Variables: General, D100 - Household Behavior: General, H200 - Taxation, Subsidies, and Revenue: General, R300 - Production Analysis and Firm Location: General, (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-his, nep-pbe and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.doria.fi/handle/10024/148345

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fer:dpaper:366

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Discussion Papers from VATT Institute for Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Anita Niskanen ().