Syracuse
University
Economics
Andrew Hanson, PhD Candidate
"The Incidence of the Mortgage Interest Deduction: Evidence from the Market for Home Purchase Loans"
Abstract:
This paper examines the incidence of the largest housing related subsidy
in the Federal budget, the mortgage interest deduction, or MID.
I identify how much of the subsidy is captured by lending
institutions through a difference-in-difference framework using the
rules for claiming the MID as exogenous factors that determine the
demand for debt financed housing. The federal tax code places a nominal
limit on the size of mortgage for which interest can be deducted based on
the tax-filing status, single or married, of the borrower.
I compare the difference in interest rates paid by single and
married tax-filers below the limit, where all interest is deductible,
and above the limit, where interest paid on the marginal dollar borrowed
is not deductible.
Using data from the Federal Financial Institutions Examination Council
on individual mortgages made in 2004, and controlling for
income, race, and geographic location of the borrower I find evidence
that lenders charge a higher interest rate on loans where the MID can be
claimed on the full loan. I
estimate that
for every $10,000 borrowed over the limit, the interest rate on the
entire loan decreases
by about .014 percent. This result
implies that the
interest rate on marginal borrowing without the MID is on average 7.8
percent lower and between 6.8 and 9 percent lower than borrowing with
the MID.
I conduct several robustness checks that support the validity of these
findings including running experiments for false MID limits and an
alternative triple difference specification using variation in state
income tax rates. My results suggest that between 20 and 36
percent of the subsidy created by the mortgage interest deduction is
captured by lenders in the form of higher interest rates.
Full
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