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

44 Pages Posted: 25 Jul 2017 Last revised: 4 Aug 2017

See all articles by Jonathan Gruber

Jonathan Gruber

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Amalie Sofie Jensen

University of Copenhagen, Department of Economics, Students

Henrik Kleven

Princeton University - Woodrow Wilson School of Public and International Affairs

Date Written: July 2017

Abstract

Using linked housing and tax records from Denmark combined with a major reform of the mortgage interest deduction in the late 1980s, we carry out the first comprehensive long-term study of how tax subsidies affect housing decisions. The reform introduced a large and sharp reduction in the mortgage deduction for top-rate taxpayers, while reducing it much less or not at all for lower-rate taxpayers. We present three main findings. First, the mortgage deduction has a precisely estimated zero effect on homeownership. This holds even in the very long run. Second, the mortgage deduction has a sizeable impact on housing demand at the intensive margin, inducing homeowners to buy larger and more expensive houses. Third, the largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness. These findings suggest that the mortgage interest deduction distorts the behavior of homeowners at the intensive margin, but is ineffective at promoting homeownership at the extensive margin and any externalities that may be associated with it.

Suggested Citation

Gruber, Jonathan and Jensen, Amalie Sofie and Kleven, Henrik, Do People Respond to the Mortage Interest Deduction? Quasi-Experimental Evidence from Denmark (July 2017). NBER Working Paper No. w23600. Available at SSRN: https://ssrn.com/abstract=3007470

Jonathan Gruber (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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HOME PAGE: http://web.mit.edu/gruberj/www/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amalie Sofie Jensen

University of Copenhagen, Department of Economics, Students ( email )

KĂžbenhavn
Denmark

Henrik Kleven

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

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