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

Citation: Kamila Sommer, Paul Sullivan (2018) Implications of US Tax Policy for House Prices, Rents, and Homeownership. American Economic Review (RSS)
DOI (original publisher): 10.1257/aer.20141751
Semantic Scholar (metadata): 10.1257/aer.20141751
Sci-Hub (fulltext): 10.1257/aer.20141751
Internet Archive Scholar (search for fulltext): Implications of US Tax Policy for House Prices, Rents, and Homeownership
Download: http://kamilasommer.net/Taxes.pdf
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Summary

Construct models of repealing mortgage interest deduction, which typically is assumed to increase cost of ownership and thereby decrease home ownership.

In authors' models prices adjust downward in response to higher cost, with further amplification and distributional consequences from presence of progressive income tax.

Statically, repeal "decreases housing consumption by the wealthy, increases aggregate homeownership, improves overall welfare, and leads to a decline in aggregate mortgage debt."

The dynamic effects of suddenly, and unexpectedly, eliminating the mortgage interest deduction cause "house prices and rents follow the rational-expectations transitional path to the new steady state" with 58% of households alive at time of reform experiencing improved welfare, with renters and non-wealthy as winners and wealthy with large debt and facing high marginal tax rates as losers.

Theoretical and Practical Relevance

Very important practical question as mortgage interest deduction is very large (7% of income tax revenue) and regressive. Authors note that political feasibility is a subject for future research, and probably challenging as households with worse outcomes under repeal are politically powerful.