Abstract:A number of European countries changed their tax system in the early 1990s along the lines of theUS tax reform act of 1986. After the reforms marginal tax rates were generally lower, and mortgageinterest deductions less generous. At the same time a long period of house appreciation started inmost countries. This paper considers this puzzle empirically using a rich data base of Norwegian taxrecords from 1986 to 2000. We use nonparametric, difference in difference and tobit approaches inattempt to control for a wide array of factors that may offset, or mask, response to changedincentives. Of special concern is possible credit constrains as implied by credit score modelsroutinely applied by credit institutions. We find a surprisingly static relationship between theprobability of debt across age groups, and a strikingly linear and unchanged relationship betweendebt and gross income for young households. After the reform house prices doubled and tripled. Thewealth effect may spur consumption. We find no sign of consumption smoothing by using self-ownedhousing as debt collateral, not even for older households. On the contrary, older households didreact to the reform by reducing real debt.Keywords: Tax incentives; credit rationing; mortgage market, household debt
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