Tax-exempted intergenerational transfers: do they reduce household indebtedness?

We study the effect of the extension of a tax benefit to intergenerational transfers that was into play in the aftermath of the credit crisis and aimed to reduced indebtedness, specifically for underwater mortgages. Using newly collected administrative micro data with high frequency, we are able to identify voluntary repayments on mortgage loans. We find that during the period of the introduction of the tax benefit, voluntary repayments have increased, but not only for the treated group. Also, when the tax incentive has motivated debt reduction, this did not happen for the group of highly indebted households specifically. This suggests that stimulating intergenerational transfers can be an effective tool to shorten household balances, but more targeting is needed if one wants to reduce high indebtedness of for instance underwater mortgage loans.