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The optimal tax treatment of housing capital in the neoclassical growth model

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  • Essi Eerola
  • Niku Määttänen

Abstract

In a dynamic setting, housing capital is both an asset and a consumption good. But should it be taxed like other forms of consumption or like other forms of capital? We analyze this question by considering the taxation of housing capital in a version of the neoclassical growth model. We derive the optimal tax treatment of housing capital vis-à-vis the tax treatment of both business capital and other forms of consumption allowing for relatively general preferences. We show that for a class of utility functions that includes the standard Cobb-Douglas function, the second-best optimum can be achieved with a simple tax structure where housing construction is taxed at the same rate as non-housing consumption and the tax rate on the imputed rent equals the tax rate on the return to business capital in every period. We also show how the optimal tax structure depends on the elasticities of substitution between housing, non-housing consumption, and leisure. Our numerical analysis shows that the optimal tax burden on housing capital is indeed very sensitive to household preferences.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Working Papers with number 3.

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Date of creation: 30 Mar 2009
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Handle: RePEc:fer:wpaper:3

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Keywords: Optimal taxation; dynamic Ramsey taxation; housing taxation;

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  1. Firouz Gahvari, 1985. "Taxation of Housing, Capital Accumulation, and Welfare: a Study in Dynamic Tax Reform," Public Finance Review, , vol. 13(2), pages 132-160, April.
  2. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 485-517, June.
  3. James Berkovec & Don Fullerton, 1993. "A General Equilibrium Model of Housing, Taxes, and Portfolio Choice," NBER Working Papers 3505, National Bureau of Economic Research, Inc.
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  8. Gahvari, Firouz, 1984. "Incidence and efficiency aspects of differential taxation of residential and industrial capital in a growing economy," Journal of Public Economics, Elsevier, vol. 25(1-2), pages 211-233, November.
  9. Jonathan Skinner, 1990. "The Dynamic Efficiency Cost of Not taxing Housing," NBER Working Papers 3454, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Ossi Korkeamäki, 2011. "The Finnish payroll tax cut experiment revisited," Working Papers 22, Government Institute for Economic Research Finland (VATT).
  2. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
  3. Hamza Polattimur, 2013. "Housing, Collateral Constraints, and Fiscal Policy," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(2), pages 53-82, May.
  4. Holger Strulik & Timo Trimborn, 2014. "Natural disasters and macroeconomic performance: The role of residential investment," Center for European, Governance and Economic Development Research Discussion Papers 194, University of Goettingen, Department of Economics.

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