Advanced Search
MyIDEAS: Login

Inflation, Income Taxes, and Owner-Occupied Housing

Contents:

Author Info

  • James M. Poterba

Abstract

Owner-occupied housing receives favorable treatment under current tax law for several reasons. A homeowner's imputed rent is not taxed, and mortgage interest payments are tax deductible. Many past studies have analyzed the effects of these provisions. Inflation's importance in determining the implicit subsidy to owner-occupied housing has received less attention. Since home- owners can deduct their nominal mortgage payments, they do not bear the full cost of higher interest rates. They also receive essentially untaxed capital gains on their homes during periods of high inflation. The after-tax capital gains outweigh the higher after-tax interest payments, so inflation reduces the effective cost of homeownership. This paper develops a simple model to estimate the effect of higher expected inflation rates on the real price of houses and the equilibrium housing stock. Simulation results suggest that the inflation-tax interactions can have a substantial impact on the housing market. The increases in expected inflation during the 1970s could have accounted for as much as a thirty percent increase in real house prices. Over time, builders should respond to higher home prices and increase the amount of new construction. The persistence of current inflation rates could lead ultimately to a twenty percent increase in the housing stock.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w0553.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0553.

as in new window
Length:
Date of creation: Sep 1980
Date of revision:
Publication status: published as Poterba, James M. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach." Quarterly Journal of Economics, Vol. 99, No. 4, (November 1984), pp. 729-752.
Handle: RePEc:nbr:nberwo:0553

Note: PE
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Polinsky, A Mitchell & Ellwood, David T, 1979. "An Empirical Reconciliation of Micro and Grouped Estimates of the Demand for Housing," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 199-205, May.
  2. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  3. Martin Feldstein & Lawrence Summers, 1978. "Inflation, Tax Rules, and the Long Term-Interest Rate," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 61-110.
  4. David Lipton & James M. Poterba & Jeffrey Sachs & Lawrence H. Summers, 1983. "Multiple Shooting in Rational Expectations Models," NBER Technical Working Papers 0003, National Bureau of Economic Research, Inc.
  5. de Leeuw, Frank, 1971. "The Demand for Housing: A Review of Cross-Section Evidence," The Review of Economics and Statistics, MIT Press, vol. 53(1), pages 1-10, February.
  6. James G. Witte & Jr., 1963. "The Microfoundations of the Social Investment Function," Journal of Political Economy, University of Chicago Press, vol. 71, pages 441.
  7. Meltzer, Allan H, 1974. "Credit Availability and Economic Decisions: Some Evidence from the Mortgage and Housing Markets," Journal of Finance, American Finance Association, vol. 29(3), pages 763-77, June.
  8. Patric H. Hendershott & Sheng Cheng Hu, 1979. "Inflation and the Benefits from Owner-Occupied Housing," NBER Working Papers 0383, National Bureau of Economic Research, Inc.
  9. Kearl, J R & Mishkin, Frederic S, 1977. "Illiquidity, the Demand for Residential Housing, and Monetary Policy," Journal of Finance, American Finance Association, vol. 32(5), pages 1571-86, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Martin Feldstein, 1982. "The Fiscal Framework of Monetary Policy," NBER Working Papers 0966, National Bureau of Economic Research, Inc.
  2. Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, vol. 38(3), pages 265-296, April.
  3. Olivier J. Blanchard & Mark W. Watson, 1982. "Bubbles, Rational Expectations and Financial Markets," NBER Working Papers 0945, National Bureau of Economic Research, Inc.
  4. Patric H. Hendershott & David C. Ling, 1985. "Prospective Changes in Tax Law and the Value of Depreciable Real Estate," NBER Working Papers 1352, National Bureau of Economic Research, Inc.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0553. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.