DP3903 Incentives to Borrow and the Demand for Mortgage Debt: An Analysis of Tax Reforms

Author(s): Tullio Jappelli, Luigi Pistaferri
Publication Date: May 2004
Keyword(s): borrowing, mortgage debt, tax incentives
JEL(s): D91, H20
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3903

Before 1992 mortgage interest in Italy was fully tax deductible up to 3,500 euro (7,000 for two cosigners). Between 1992-94 the government implemented a series of tax reforms whose ultimate effect was to cancel the relation between the after-tax mortgage rate and the marginal tax rate. Using data from the 1987-2000 Survey of Household Income and Wealth we test if the cancellation of incentives has reduced the propensity to borrow of high-income taxpayers relative to the other population groups. Difference-in-differences estimates and regression analysis indicate that tax considerations have not affected the demand for mortgage debt, either at the extensive or intensive margin.