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Tax treatment of owner occupied housing and wealth inequality

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  • Cho, Sang-Wook (Stanley)
  • Francis, Johanna L.

Abstract

We construct a quantitative general equilibrium lifecycle model with housing tenure decisions to investigate the degree to which wealth inequality in the United States is affected by the preferential tax treatment of home-ownership. Favorable tax treatment of owner occupied housing in the form of home mortgage interest and property tax deductibility, and the untaxed nature of imputed rents, provides a financial incentive for home-ownership over renting as well as an incentive to "over-consume" housing since houses are not fungible. Since the favorable tax treatment of housing disproportionately creates tax savings for the upper quantiles of the income distribution, we quantify how it contributes to the heavily right skewed distribution of wealth in the United States using data from the Survey of Consumer Finances. We consider a revenue-neutral government response to the counter factual experiments of removing the current tax structure on housing. Our quantitative analysis shows that, in terms of distributional effects, removing all of the preferential tax treatments results in an aggregate increase in welfare. However, we do not find any reduction in inequality. We also find that while some re-allocation toward financial assets occurs, households primarily increase their consumption when imputed housing rents are taxed and the property tax deduction is removed. Thus housing tax policy may be effective at encouraging more overall saving through housing assets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 33 (2011)
Issue (Month): 1 (March)
Pages: 42-60

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Handle: RePEc:eee:jmacro:v:33:y:2011:i:1:p:42-60

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Web page: http://www.elsevier.com/locate/inca/622617

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Keywords: Mortgage interest deductibility Housing taxation Wealth Inequality;

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References

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  1. Matthew Chambers & Carlos Garriga, 2005. "Accounting for Changes in the Homeownership Rate," Computing in Economics and Finance 2005 304, Society for Computational Economics.
  2. Campbell, John & Cocco, Joao, 2003. "Household Risk Management and Optimal Mortgage Choice," Scholarly Articles 3157876, Harvard University Department of Economics.
  3. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  4. Cho, Sang-Wook (Stanley), 2010. "Household wealth accumulation and portfolio choices in Korea," Journal of Housing Economics, Elsevier, vol. 19(1), pages 13-25, March.
  5. Poterba, James M, 1992. "Taxation and Housing: Old Questions, New Answers," American Economic Review, American Economic Association, vol. 82(2), pages 237-42, May.
  6. Martin Gervais & Manish Pandey, 2008. "Who Cares About Mortgage Interest Deductibility?," Canadian Public Policy, University of Toronto Press, vol. 34(1), pages 1-24, March.
  7. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers 9807, University of Western Ontario, Department of Economics.
  8. Karsten Jeske, 2005. "Macroeconomic models with heterogeneous agents and housing," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 39-56.
  9. Silos Pedro, 2007. "Housing Tenure and Wealth Distribution in Life Cycle Economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-24, August.
  10. Carlos Garriga & William T. Gavin & Don Schlagenhauf, 2006. "Recent trends in homeownership," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 397-412.
  11. Orazio Attanasio & James Banks & Costas Meghir & Guglielmo Weber, 1995. "Humps and bumps in lifetime consumption," IFS Working Papers W95/14, Institute for Fiscal Studies.
  12. Nobuhiro Kiyotaki & Alexander Michaelides & Kalin Nikolov, 2011. "Winners and Losers in Housing Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 255-296, 03.
  13. Fullerton, Don, 1987. "The indexation of interest, depreciation, and capital gains and tax reform in the United States," Journal of Public Economics, Elsevier, vol. 32(1), pages 25-51, February.
  14. James M. Poterba & Todd M. Sinai, 2008. "Income Tax Provisions Affecting Owner-Occupied Housing: Revenue Costs and Incentive Effects," NBER Working Papers 14253, National Bureau of Economic Research, Inc.
  15. Jappelli, Tullio & Pagano, Marco, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 83-109, February.
  16. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
  17. James Banks & Richard Blundell & James P. Smith, 2000. "Wealth inequality in the United States and Great Britain," IFS Working Papers W00/20, Institute for Fiscal Studies.
  18. Chambers, Matthew & Garriga, Carlos & Schlagenhauf, Don E., 2009. "Housing policy and the progressivity of income taxation," Journal of Monetary Economics, Elsevier, vol. 56(8), pages 1116-1134, November.
  19. Fran�ois Ortalo-Magné & Sven Rady, 2006. "Housing Market Dynamics: On the Contribution of Income Shocks and Credit Constraints ," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 459-485.
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Cited by:
  1. Zodrow, George R., 2014. "Intrajurisdictional capitalization and the incidence of the property tax," Regional Science and Urban Economics, Elsevier, vol. 45(C), pages 57-66.

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