Distribution Impact of the Mortgage Interest Deduction in the Czech Republic

Robert Jahoda,Jana Godarovo

doi:10.5539/res.v6n2p110

Abstract

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.

Highlights

Tax support for owner-occupied housing is a common public policy objective
This paper focuses on the mortgage interest deduction for owner-occupied housing in the Czech Republic
Results and Discussion we indicate the basic statistics for the amount of tax exemption for housing loans

Summary

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. 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. Why should public support benefit individuals who could support themselves without assistance?

Objectives

Methods

Results

Conclusion