Thursday, November 2, 2017

Subsidizing the American Dream

The Republican tax plan includes a provision that reduces the mortgage interest deduction. The deduction effectively subsidizes home ownership, but not other living options such as renting.

What is the effect of subsidizing the "American dream" to own a home? At least some data comes from an analysis of the experience in Denmark:
First, the mortgage deduction has a precisely estimated zero effect on homeownership. This holds even in the very long run. Second, the mortgage deduction has a sizeable impact on housing demand at the intensive margin, inducing homeowners to buy larger and more expensive houses. Third, the largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness.

This continues the theme from the previous post that finds college tuition subsidies likewise don't increase the "desired" activity, but do significantly distort the market.

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