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Paper eres2016_6:
Implications of Fiscal Policy for Housing Tenure Decisions

id eres2016_6
authors Girshina, Anastasia
year 2016
title Implications of Fiscal Policy for Housing Tenure Decisions
source 23rd Annual European Real Estate Society Conference in Regensburg, Germany
summary Many of the world's wealthy countries provide fiscal incentives to homeowners. However, the impact of such tax breaks on housing tenure decisions is unclear. Many existing policies, aimed at promoting house purchases and widely used among taxpayers, have proved to be both expensive and not targeted, thus creating controversy about their overall effect. This paper aims to shed light on the effectiveness of such fiscal incentives by providing empirical evidence on their impact on housing tenure decisions. Specifically, this work focuses on the effect of mortgage interest deduction (MID) on home-ownership in the United States. To answer this question, the panel survey data from PSID for the period 2001 to 2011 is used. To identify the effect of MID on home-ownership, this paper analyses two channels through which MID affects user cost of housing: first, changes in personal state income tax rates; second, changes in the standard deduction allowed at the state level. Variation in these fiscal policy parameters allows for the identification of the causal effect of MID on home ownership for several reasons. Firstly, in presence of MID, higher marginal tax rates lead to higher tax savings from housing, other things been equal. On the other hand, lower standard deduction increases a fraction of households that qualify for this program. Moreover, both state-level standard deductions and state personal income tax rates are set independently by each state and were revised several times during the analyzed period. This fact creates a quasi-experimental set up which allows for exploiting the difference-in-differences estimation strategy. The identification of the effect of MID on home-ownership proposed in this paper relies on large changes in fiscal policy. The largest of these changes led to an increase in income tax rate by as much as 23,9% and to a decrease in the standard deduction by 7,2% between 2002 and 2004. The estimates suggest that increases in income tax rates in a state that allows mortgage interest deduction is associated to a 2 percentage point increase in home-ownership relative to states that didn't change their fiscal policy. Furthermore, in states where more households were able to qualify for MID because of the lower standard deduction, home-ownership increased by 4,8 percentage points relative to control states. Thus, this study suggests that MID has a positive effect on home-ownership decisions. The results are robust to a range of alternative specifications and have wide ranging policy implications.
series ERES:conference
type paper session
discussion No discussions. Post discussion ...
ratings
session Housing Economics & Housing Policy
last changed 2017/11/18 16:16
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