Tax Reform and Incentives to Encourage Owner-Occupied Housing: Analysis of the President's Tax Reform Panel Recommendation to Convert the Mortgage Interest Deduction to a Tax Credit

37 Pages Posted: 9 Nov 2006

See all articles by John E. Anderson

John E. Anderson

University of Nebraska at Lincoln - Department of Economics; Lincoln Institute of Land Policy

Andrew Hanson

Marquette University- Department of Economics

Jeffrey P. Clemens

University of California, San Diego (UCSD) - Department of Economics; NBER

Date Written: September 19, 2006

Abstract

Public policy designed to encourage home ownership has operated primarily through the federal income tax system in the United States. With multiple incentives for home-ownership, the income tax system is the main tool by which the federal government encourages families to become home-owners and accumulate wealth in the form of real estate. Recent policy debate over reform of the tax system has questioned whether a mainstay of this system, the mortgage interest deduction (MID), is the best way to accomplish the stated objective. Last year the President's Advisory Panel on Federal Tax Reform recommended converting the MID into a 15% tax credit subject to regional caps related to median house prices, touching off a vigorous public debate on the importance of the MID. The purpose of this paper is to examine economic implications of that recommendation. We model how switching from the MID to a credit would affect housing finance choices between debt and equity and show how these changes would have changed the tax benefits for various households. Furthermore, we simulate the number of mortgage originations in 2004 (the most recent year which data is available) that would have been subject to the caps in the Panel's recommendation, and we identify the specific urban housing markets that would have been most severely affected. Finally, we conclude with policy discussion of the proposed credit alternative.

Keywords: mortgage interest deduction, mortgage credit, tax reform, homeownership

JEL Classification: H21, H31, R21, R38

Suggested Citation

Anderson, John E. and Hanson, Andrew and Clemens, Jeffrey P., Tax Reform and Incentives to Encourage Owner-Occupied Housing: Analysis of the President's Tax Reform Panel Recommendation to Convert the Mortgage Interest Deduction to a Tax Credit (September 19, 2006). Available at SSRN: https://ssrn.com/abstract=943062 or http://dx.doi.org/10.2139/ssrn.943062

John E. Anderson (Contact Author)

University of Nebraska at Lincoln - Department of Economics ( email )

Lincoln, NE 68588-0489
United States
402-472-1190 (Phone)
402-472-9700 (Fax)

Lincoln Institute of Land Policy ( email )

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Andrew Hanson

Marquette University- Department of Economics ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

Jeffrey P. Clemens

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States

HOME PAGE: http://econweb.ucsd.edu/~j1clemens/

NBER ( email )

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