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Tax Treatment of Owner Occupied Housing and Wealth Inequality

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Author Info
Sang-Wook Stanley Cho (University of New South Wales, School of Economics)
Johanna Francis (Fordham University, Department of Economics)

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Abstract

In the U.S., mortgage interest deductibility provides a financial incentive for home ownership over renting as well as an incentive to “over-consume” housing since houses are not fungible. Home-ownership is also often promoted as a safe means of wealth creation. We construct and calibrate a quantitative general equilibrium lifecycle model with homeownership and mortgage decisions to investigate the degree to which the wealth inequality in the United States is driven by the home mortgage interest deduction and the untaxed nature of imputed rents from owner-occupied housing. As the tax treatment of housing will disproportionately create tax savings for the top deciles of the income distribution, we quantify how the tax deductibility contributes to the heavily skewed distribution of wealth in the United States using data from the Survey of Consumer Finances. Although the tax treatment of owner occupied housing alone is unlikely to produce the extreme wealth concentration at the far right tail of the distribution, we argue that it is re-enforced by a bequest motive. We find that removing mortgage interest deductibility and taxing imputed rents reduces the Gini coefficient by 0.04 points, caused by a re-allocation of wealth from the top 10 percentiles to the bottom 50 percentiles of the wealth distribution.

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Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2008-17.

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Date of creation: 2008
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Handle: RePEc:frd:wpaper:dp2008-17

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Related research
Keywords: Mortgage interest deductibility; housing; wealth; inequality;

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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  1. Martin Gervais & Manish Pandey, 2005. "Who Cares about Mortgage Interest Deductibility?," University of Western Ontario, RBC Financial Group Economic Policy Research Institute Working Papers 20059, University of Western Ontario, RBC Financial Group Economic Policy Research Institute. [Downloadable!]
  2. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December. [Downloadable!] (restricted)
  3. Matthew Chambers & Carlos Garriga, 2005. "Accounting for Changes in the Homeownership Rate," Computing in Economics and Finance 2005 304, Society for Computational Economics. [Downloadable!]
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  4. 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. [Downloadable!] (restricted)
  5. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October. [Downloadable!] (restricted)
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  6. 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. [Downloadable!]
  7. Orazio P. Attanasio & James Banks & Costas Meghir & Guglielmo Weber, 1995. "Humps and Bumps in Lifetime Consumption," NBER Working Papers 5350, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Sang-Wook Stanley Cho, 2007. "Household Wealth Accumulation and Portfolio Choices in Korea," Discussion Papers 2007-26, School of Economics, The University of New South Wales. [Downloadable!]
  9. Jappelli, Tullio & Pagano, Marco, 1994. "Saving, Growth, and Liquidity Constraints," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 83-109, February. [Downloadable!] (restricted)
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