Taxation of Housing, Capital Accumulation, and Welfare: a Study in Dynamic Tax Reform

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Abstract
The U. S. tax structure implicitly subsidizes housing in a number of ways. This Abstract article employs a dynamic general equilibrium model of housing, consumption and economic growth to examine the long-run effects of eliminating these implicit subsidies on capital accumulation and welfare. It also investigates the relationship between optimal tax rates on residential and nonresidential capital. It is shown that the elimination of housing subsidies in full may increase nonresidential capital by as much as 46%. while the stock of housing is reduced by over 15%. In the meantime, per capita consumption goes up by 7%. In welfare terms, these changes are equivalent to an increase of over 6% in a representative individual's lifetime income under the present tax rules. Second, it is found that optimality, from the standpoint of steady state welfare maximization, implies unequal tax treatment of residential and nonresidential capital. Far from subsidizing housing, taxation of housing is called for.

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