Tax Treatment of Owner Occupied Housing and Wealth Inequality

Abstract

In the U.S., mortgage interest deductibility provides a financial incentive for home ownership over renting as well as an incentive to 'over-consume' housing since houses are not fungible. Home-ownership is also often promoted as a safe means of wealth creation. We construct and calibrate a quantitative general equilibrium lifecycle model with home-ownership and mortgage decisions to investigate the degree to which the wealth inequality in the United States is driven by the home mortgage interest deduction and the untaxed nature of imputed rents from owner-occupied housing. As the tax treatment of housing will disproportionately create tax savings for the top deciles of the income distribution, we quantify how the tax deductibility contributes to the heavily skewed distribution of wealth in the United States using data from the Survey of Consumer Finances. Although the tax treatment of owner occupied housing alone is unlikely to produce the extreme wealth concentration at the far right tail of the distribution, we argue that it is re-enforced by a bequest motive. We find that removing mortgage interest deductibility and taxing imputed rents reduces the Gini coefficient by 0.04 points, caused by a re-allocation of wealth from the top 10 percentiles to the bottom 50 percentiles of the wealth distribution.

Keywords: Mortgage interest deductibility, housing, wealth, inequality

JEL Classification: E21