Mortgage Tax Reforms in Sweden: Scope for a Double Dividend?
Since the inception of the macroeconomic imbalance procedure in 2011, Sweden has been identified as having an imbalance related to increasing house prices and private indebtedness. Tax incentives for property ownership and mortgage debt are widely seen as important structural drivers behind household debt growth and overvalued house prices. Against this backdrop, the Council of the EU has asked Sweden to limit mortgage interest deductibility (MID). At the same time, despite a strong labour market with the highest employment rate in the EU, not all groups have benefited from job opportunities to the same extent. In particular, low-skilled workers have lower participation and employment rates, while their unemployment rate was, with 18.5% in 2017, well above the overall unemployment rate of 6.7%. Against this background, this economic brief considers shifting taxes from labour to property as a way to tackle macroeconomic vulnerabilities in the housing sector and labour market challenges in Sweden. We use the EUROMOD tax-benefit microsimulation model and the European Commission QUEST model to show that eliminating the MID, and using the additional tax revenues (around 0.3% of GDP) created to reduce, in a targeted way, labour taxes for vulnerable groups, could support their employment, while removing a structural driver of household debt growth.