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Tax Policy, Housing Prices, and Housing Investment

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  • Lawrence H. Goulder
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    Abstract

    This paper employs a general equilibrium model to assess the effects of major components of the Tax Reform Act of 1986 on the performance of housing and other industries. The model considers both short-term and long-term effects on housing demands, house values, and investment in housing. Model results indicate that in the short run, the recent cuts incorporate tax rates, elimination of investment tax credits, and scaling back of depreciation deductions together have negative implications for investment in non-residential capital but positive effects on housing investment. This mainly reflects the fact that prior to the '86 tax reforms, investment tax credits and favorable depreciation rules disproportionately benefited non-housing industries; thus their removal especially affects industries other than housing and helps ?crowd in housing investment. Over the long term, however, the tax changes imply lower investment in housing as well as in other types of capital. The reduced housing investment stems from adverse effects of the reforms on aggregate output and real income.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2814.

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    Date of creation: Jan 1989
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    Publication status: published as Regional Science and Urban Economics, Vol. 19, 1989.
    Handle: RePEc:nbr:nberwo:2814

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    1. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
    2. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
    3. Jorgenson, Dale W & Yun, Kun-Young, 1986. " Tax Policy and Capital Allocation," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 88(2), pages 355-77.
    4. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 564, Cowles Foundation for Research in Economics, Yale University.
    5. N. Gregory Mankiw & David N. Weil, 1988. "The Baby Boom, The Baby Bust, and the Housing Market," NBER Working Papers 2794, National Bureau of Economic Research, Inc.
    6. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    7. Goulder, Lawrence H. & Summers, Lawrence H., 1989. "Tax policy, asset prices, and growth : A general equilibrium analysis," Journal of Public Economics, Elsevier, Elsevier, vol. 38(3), pages 265-296, April.
    8. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 75, pages 321.
    9. Hamilton, Bob & Whalley, John, 1985. "Tax treatment of housing in a dynamic sequenced general equilibrium model," Journal of Public Economics, Elsevier, Elsevier, vol. 27(2), pages 157-175, July.
    10. Poterba, James M, 1984. "Tax Subsidies to Owner-occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(4), pages 729-52, November.
    11. Don Fullerton & Andrew B. Lyon, 1988. "Tax Neutrality and Intangible Capital," NBER Chapters, in: Tax Policy and the Economy: Volume 2, pages 63-88 National Bureau of Economic Research, Inc.
    12. Rosen, Harvey S & Rosen, Kenneth T, 1980. "Federal Taxes and Homeownership: Evidence from Time Series," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 59-75, February.
    13. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    14. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, American Economic Association, vol. 73(1), pages 98-113, March.
    15. Robert E. Hall, 1985. "Real Interest and Consumption," NBER Working Papers 1694, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Lawrence H. Goulder, 1993. "Energy Taxes: Traditional Efficiency Effects and Environmental Implications," NBER Working Papers 4582, National Bureau of Economic Research, Inc.
    2. Okumura, Tsunao, 1997. "Housing Investment and Residential Land Supply in Japan: An Asset Market Approach," Journal of the Japanese and International Economies, Elsevier, vol. 11(1), pages 27-54, March.
    3. Christian Keuschnigg & S›ren Bo Nielsen, . "Housing Markets and Vacant Land," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 95-18, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    4. Charles Ka-Yui Leung, 2004. "Macroeconomics and Housing: A Review of the Literature," Departmental Working Papers, Chinese University of Hong Kong, Department of Economics _164, Chinese University of Hong Kong, Department of Economics.
    5. Andrea J. Heuson & Gary Painter, 2011. "The Impact of the Taxpayer Relief Act of 1997 on Housing Turnover in the U.S. Single Family Residential Market," Working Paper, USC Lusk Center for Real Estate 8509, USC Lusk Center for Real Estate.
    6. Jonathan Skinner, 1990. "The Dynamic Efficiency Cost of Not taxing Housing," NBER Working Papers 3454, National Bureau of Economic Research, Inc.
    7. Zhicheng Zhou & Prapatchon Jariyapan, 2013. "The impact of macroeconomic policies to real estate market in People's Republic of China," The Empirical Econometrics and Quantitative Economics Letters, Faculty of Economics, Chiang Mai University, Faculty of Economics, Chiang Mai University, vol. 2(3), pages 75 - 92, September.
    8. Anderson, John E. & Roy, Atrayee Ghosh, 2001. "Eliminating Housing Tax Preferences: A Distributional Analysis," Journal of Housing Economics, Elsevier, Elsevier, vol. 10(1), pages 41-58, March.

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