Seminar: Tax arbitrage incentives for mortgage prepayment behavior: Evidence from Dutch micro data

NOTE: THIS SEMINAR WILL TAKE PLACE ON A WEDNESDAY

Time: 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Stefan Groot (CPB)

Discussant: Jan Rouwendal (VU)

Language: English

Registration: Please register here

Abstract subject:
This paper exploits a unique set of Dutch micro data to analyze the response in prepayment behavior to changes in incentives for prepaying. The paper shows that the effect of mortgage interest rates on the value of exercising the option to prepay a mortgage (also taking taxes and returns on savings into account) is equivalent to a change in the rate at which financial wealth is taxed. This feature is used to estimate tax elasticities (i.e. the elasticity of changes in wealth tax revenues resulting from changes in prepayment with respect to the wealth tax rate). Using an IV-Heckman selection model the paper finds that patterns in prepayment behavior are only to a limited extent explained by decisions directed to optimizing financial wealth. Parameter estimates for the option value of prepaying suggest small tax elasticities which are not always statistically significant.

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