Academic journal article Review of European Studies

Distribution Impact of the Mortgage Interest Deduction in the Czech Republic

Academic journal article Review of European Studies

Distribution Impact of the Mortgage Interest Deduction in the Czech Republic

Article excerpt


This paper focuses on the mortgage interest deduction for owner-occupied housing in the Czech Republic. The main research question concerns the distribution of personal income tax liability given the rather generous interest deduction for owner-occupied housing loans and changes to it when restrictions are placed on the interest deduction in 2014. We used data for the Czech Republic from the EU-SILC surveys for our analysis. We estimated the value of this tax expenditure at approximately CZK 4.1 billion in 2011, with more than half the amount spent by the highest two deciles in income distribution. Personal income tax reform is legislated to begin in 2015 one part of which will be a cap on loan interest. This reform will lead to a decrease in the yearly value of the tax expenditure but will be followed by an increase in the PIT rate. Taken together, this will generate greater tax expenditures. Our computations show that the impact will be negative on households in the highest decile, while other groups will feel some benefit.

Keywords: microsimulation, personal income tax, revenue forgone method, EU-SILC, tax expenditure

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Tax support for owner-occupied housing is a common public policy objective. It may take markedly different forms in different countries, but a common approach is to take into account interest on housing loans in calculating personal income taxes. In analysing the impact of tax exemptions for housing loans, researchers tend to speak of "mortgage interest deduction" (MID). Households permitted to take interest paid on housing loans into account in calculating their tax obligation pay lower personal income tax (PIT). This tax revenue reduction is generally called "tax expenditure" and the aim of a MID policy is to ease property acquisition for home-owners. Such a policy is rather expensive and there is increasing discussion concerning the reduction of the maximum amount of support given to individual households. This debate has gained in significance in light of problems with the sustainability of public finance and at a time when it seems there is a causal relationship between public support of homeownership, the "mortgage bubble" and an ensuing economic slump. One particular issue in relation to the budgetary cost of MID is the distributional aspect; although the costs of this policy are borne by the whole of society, the beneficiaries seem to be concentrated among the richest members of society. One may then ask what the results of such a policy are. Why should public support benefit individuals who could support themselves without assistance?

Knowing the extent of support of MID policy, its distribution among different income groups in society and what might be the impacts of a change in MID policy is important for many governments in developed countries. Austerity measures in public finance induce changes in tax policy and restriction of MID is one possible way to undertake reform. Experience from countries which have already changed their MID policy show that there are various options for MID reform and therefore diverse outcomes might be expected. Our paper examines what outcomes could be expected in the Czech Republic where a decision is being made concerning a sharp reduction in MID.

The goal of this paper is to calculate the current budget costs of MID and to discuss the distribution of support among households in the Czech Republic. Integral to this is an assessment of changes in the MID after the adoption of proposed changes to the income tax law. To achieve our goal, we precede with following sub-questions: What is known from previous research about the effect of MID and its reforms on tax revenue?

Do we have the data and is it possible to analyse them to attain the research objective? What does such an analysis prove?

In the first section, we discuss the pros and cons of different current models of MID. …

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