Do People Respond to the Mortgage Interest Deduction? Quasi-Experimental Evidence from Denmark

Using a major reform that scaled back the mortgage interest deduction for middle- and high-income households in Denmark, we study how tax subsidies affect housing decisions. We present four main findings. First, the mortgage deduction has a precisely estimated zero effect on homeownership for high- and middle-income households. Second, the mortgage deduction has a clear effect on housing demand at the intensive margin, inducing homeowners to buy larger and more expensive houses. Third, the deduction has sizeable effects on household financial decisions, inducing them to increase indebtedness. Finally, the reduction of the tax subsidy lowered equilibrium house prices. (JEL G21, G51, H24, K34, R21, R31)

The Mortgage Interest Deduction: Causes of Fluctuations in a Procyclical Tax Expenditure

The mortgage interest deduction (MID) is the largest source of US federal homeowner support. I estimate that this tax expenditure fluctuated between 0.2 and 0.9 percent of gross domestic product (GDP) over the past five decades. About half of these fluctuations were caused by changes in tax policy, rather than changes in the housing market. Fluctuations in the MID tax expenditure do not tend to move with homeownership rates; instead, they are procyclical, meaning the MID may exacerbate business cycles.

Costly, Regressive and Ineffective: How Sensitive Is Public Support for the Mortgage Interest Deduction?

This paper investigates whether public support for the mortgage interest deduction issensitive to critiques of the policy as regressive, costly or ineffective. The deduction is a popularsocial policy that lowers the cost of owning a home for some homeowners by enabling them to deduct their mortgage interest payments from their federal tax liability. Although the deduction enjoys broad public support, critics argue that it disproportionately benefits wealthy households, fails to expand homeownership opportunities to households on the margins and costs the federalgovernment an extraordinary amount of money in foregone tax revenue. Drawing on datacollected through an on-line experiment, this analysis tests the sensitivity of public support tothese critiques. The findings reveal that support for the mortgage interest deduction declineswhen respondents are presented with information about the cost, effectiveness or distribution of benefits associated with the deduction. Disaggregating support by political party and homeownership status reveals that support among renters is more sensitive to framing effects than that of homeowners. Republicans are less sensitive to framing effects than Democrats when the deduction is framed as distributing benefits unequally, but more sensitive to these effects when the issues is framed as costly. However, all groups register their lowest level of support when told that the mortgage interest deduction is not an effective tool for expanding ownership opportunities.