Implications of Fiscal Policy for Housing Tenure Decisions

53 Pages Posted: 18 Apr 2016 Last revised: 23 Oct 2019

See all articles by Anastasia Girshina

Anastasia Girshina

Swedish House of Finance at Stockholm School of Economics

Date Written: April 11, 2016

Abstract

Many of the world's wealthy countries provide fiscal incentives to homeowners. Yet, the impact of such tax breaks on housing tenure decision is unclear. Using difference-in-differences approach, this study estimates the effect of mortgage interest deduction on home ownership in the United States. The identification relies on the large changes in income tax rates and standard deduction. The largest of these changes increased income tax rate by as much as 23,9% and decreased standard deduction by 7,2% between 2002 and 2004. The baseline estimates suggest that increase in income tax rate in a state that allows mortgage interest deduction is associated to 3 percentage points increase in home ownership relative to states that didn't change their fiscal policy and to 5 percentage points - relative to states that do not allow mortgage interest deduction but had a comparable increase in tax rates. The results are robust to a range of alternative specifications.

Keywords: fiscal policy, tenure choice, mortgage interest deduction, income tax, homeownership

JEL Classification: E62, G11, H24, H31, K34

Suggested Citation

Girshina, Anastasia, Implications of Fiscal Policy for Housing Tenure Decisions (April 11, 2016). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 11. Available at SSRN: https://ssrn.com/abstract=2766171 or http://dx.doi.org/10.2139/ssrn.2766171

Anastasia Girshina (Contact Author)

Swedish House of Finance at Stockholm School of Economics ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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