Implications of US Tax Policy for House Prices, Rents, and Homeownership | Zendy

Kamila Sommer | Zendy; Paul Sullivan | Zendy

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Implications of US Tax Policy for House Prices, Rents, and Homeownership

Author(s) -

Kamila Sommer,

Paul Sullivan

Publication year - 2018

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.20141751

Subject(s) - economic rent , economics , tax credit , welfare , tax deduction , monetary economics , tax reform , debt , deductible , labour economics , ad valorem tax , payment , state income tax , public economics , gross income , macroeconomics , finance , microeconomics , market economy , actuarial science

This paper studies the impact of the mortgage interest tax deduction on equilibrium house prices, rents, homeownership, and welfare. We build a dynamic model of the housing market that features a realistic progressive tax system in which owner-occupied housing services are tax-exempt and mortgage interest payments are tax-deductible. We simulate the effect of tax reform on the housing market. Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare. Our findings challenge the widely held view that repealing the preferential tax treatment of mortgages would depress homeownership.

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