Measuring Tax Incidence: An Application to UK Mortgage Interest Tax Relief

Michael Devereux and Gauthier Lanot

Keele Department of Economics Discussion Papers (1995-2001) from Department of Economics, Keele University

Abstract: This paper derives measures of the average and marginal incidence of a tax or subsidy in imperfect competition, in the context of the UK housing market. We argue that one form of mortgage, common in the UK but not elsewhere (the endowment mortgage), exists primarily because of the structure of taxation in the UK. We estimate the determinants of the choice of the type of mortgage, and the size of mortgage conditional on the choice, using data from the Building Societies Association on 43,000 individual mortgages taken out between 1985 and 1989. The estimated parameters are an input to the incidence measures. Results suggest that between 70% and 80% of the additional subsidy to endowment mortgages is captured by lenders, rather than borrowers.

Date: 1998, Revised 2000-05
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Published in Journal of Public Economics, August 2003, Vol 87(7-8), pages 1747-1778.

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