The Mortgage Interest Deduction: Revenue and Distributional Effects

Austin Drukker, Ted Gayer and Harvey Rosen
Additional contact information
Austin Drukker: Brookings Institution
Ted Gayer: Brookings Institution
Harvey Rosen: Princeton University

Working Papers from Princeton University, Department of Economics, Center for Economic Policy Studies.

Abstract: Conventional estimates of the size and distribution of the mortgage interest deduction (MID) in the personal income tax fail to account for potentially important responses in household behavior. As noted by Gervais and Pandey (2008) and Poterba and Sinai (2011), among others, were the MID to be eliminated, households would sell financial assets such as stocks and bonds to pay down their mortgage debt, and the smaller holdings of these taxable assets would offset some of the revenue gains from taxing mortgage interest. Conventional estimates therefore overstate the increase in revenues associated with eliminating the MID. Conventional estimates also overstate the progressivity of eliminating the MID, because households with higher levels of non-residential assets would respond by selling their taxable, non-residential assets. This paper builds on previous work that estimates the consequences of removing the MID using a framework that allows for the possibility of portfolio rebalancing. Unlike previous studies, we analyze data for several years — every third year from 1988 to 2012, inclusive. This reduces the likelihood that our estimates are due to the idiosyncrasies of some particular year, and allows us to investigate how and why the differences between estimates with and without a portfolio response have evolved over time. We then turn to the distributional implications of eliminating the MID, again looking at multiple years. A noteworthy feature of our distributional analyses is that we focus on both wealth and income as classifying variables. Our main findings are: (i) The revenue loss associated with the MID is smaller if one allows for rebalancing, with the ratio of the rebalancing-adjusted revenue loss to the conventionally estimated revenue loss varying from 76 percent in 1997 to 90 percent in 2009. While not dramatic, these are non-trivial effects. (ii ) During our sample period, changes in the ratio of the 2 revenue loss estimates were due primarily to changes in the relative stocks of assets to mortgage debt as opposed to changes in rates of return and the tax system, (iii) Portfolio rebalancing attenuates the increase in progressivity associated with elimination of the MID.

JEL-codes: H24 H31 (search for similar items in EconPapers)
Date: 2017-10
New Economics Papers: this item is included in nep-ban and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://gceps.princeton.edu/wp-content/uploads/2017/10/251rosen.pdf

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:pri:cepsud:251

Access Statistics for this paper

More papers in Working Papers from Princeton University, Department of Economics, Center for Economic Policy Studies. Contact information at EDIRC.
Bibliographic data for series maintained by Bobray Bordelon (bordelon@princeton.edu).