On Housing, Mortgages, and Taxation

Abstract: Costly reversals of bad policies: the case of the mortgage interest deduction This paper measures the welfare effects of removing the mortgage interest deduction under a variety of implementation scenarios. To this end, we build a life-cycle model with heterogeneous households calibrated to the U.S. economy, which features long-term mortgages and costly refinancing. In line with previous research, we find that most households would prefer to be born into an economy without the deductibility. However, when we incorporate transitional dynamics, less than forty percent of households are in favor of a reform and the average welfare effect is negative. This result holds under a number of removal designs.Optimal property taxation How high should residential property taxes be? In this paper, I quantify the optimal property tax rate and how it interacts with a tax on capital income. For this purpose, I employ a general equilibrium life-cycle model with overlapping generations and incomplete markets calibrated to the U.S. economy. I find that the optimal property tax for newborns in the long run is considerably higher than its current level of one percent. In the benchmark model, the optimal property tax is about five times higher than today, and the corresponding capital income tax is reduced from 36 percent to close to zero. For current generations, however, the optimal policy is to keep the tax rates close to today’s levels. They would incur substantial welfare losses on average from an implementation of the long-run optimal policy.Mortgage lending standards: implications for consumption dynamics In this paper, we investigate to what extent stricter mortgage lending standards affect households' ability to smooth consumption. Using a heterogeneous-household model with incomplete markets, we find that a permanently lower loan-to-value (LTV) or payment-to-income (PTI) requirement only marginally affects the aggregate consumption response to a negative wealth shock. We show that even the distribution of marginal propensities to consume across households is remarkably insensitive to these permanent policies. In contrast, households’ consumption responses can be reduced if a temporary stricter LTV or PTI requirement is implemented prior to a negative wealth shock. However, strong assumptions need to be made for temporary policies to be welfare improving.