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Taxing and Subsidizing Housing Investment: The Rise and Fall of Housing's Favored Status

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  • Patric H. Hendershott
  • Michael White

Abstract

This paper surveys and interprets a wide body of literature on the taxation and subsidization of investment in owner-occupied and rental housing. Where available, the study considers experiences outside of the United States. Issues addressed include what nonneutral taxation is, how taxation/subsidization has varied relative to this standard over the last thirty years, the impact of subsidies on house prices, housing consumption and tenure, and rationales for preferring one tenure choice over another. We find a broad increase in housing's favored status during the 1970s, a reversal during the 1980s, and a further decline in this status during the 1990s. There are two broad components to these shifts. First, there is an endogenous component caused by variations in the inflation rate. Because housing is the tax-favored asset, the higher are nominal returns, the greater is the tax advantage. This is reinforced by tax bracket creep; again, being the tax-favored asset, the higher are tax rates, the greater is the tax advantage. Second, there is an exogenous component, largely reflected in the cutting of tax rates even below what they were in 1970 and the weakening of the mortgage interest deduction in many countries. We attribute this component to the aging of the baby-boomers, which first provided a constituency for more generous treatment of owner-occupied housing, but now is working in the opposite direction.

Suggested Citation

  • Patric H. Hendershott & Michael White, 2000. "Taxing and Subsidizing Housing Investment: The Rise and Fall of Housing's Favored Status," NBER Working Papers 7928, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:7928
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    References listed on IDEAS

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    1. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
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    Cited by:

    1. Essi Eerola & Niku Määttänen, 2013. "The Optimal Tax Treatment of Housing Capital in the Neoclassical Growth Model," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(6), pages 912-938, December.
    2. Nuria Badenes-Plá & Julio López-Laborda, "undated". "Taxing on Housing: A Welfare Evaluation of the Spanish Personal Income Tax," Studies on the Spanish Economy 143, FEDEA.
    3. repec:zbw:bofrdp:2005_010 is not listed on IDEAS
    4. Peter Englund, 2003. "Taxing Residential Housing Capital," Urban Studies, Urban Studies Journal Limited, vol. 40(5-6), pages 937-952, May.
    5. Serena Trucchi, 2011. "How credit markets affect homeownership: an explanation based on differences between Italian regions," CeRP Working Papers 122, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    6. Casper Ewijk & Bas Jacobs & Ruud Mooij, 2007. "Welfare Effects of Fiscal Subsidies on Home Ownership in the Netherlands," De Economist, Springer, vol. 155(3), pages 323-336, September.
    7. Yoshida, Jiro, 2017. "Stock Prices, Regional Housing Prices, and Aggregate Technology Shocks," HIT-REFINED Working Paper Series 72, Institute of Economic Research, Hitotsubashi University.
    8. Essi Eerola & Niku Määttänen, 2013. "The Optimal Tax Treatment of Housing Capital in the Neoclassical Growth Model," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 15(6), pages 912-938, December.
    9. Eerola Essi & Määttänen Niku, 2006. "On the Political Economy of Housing's Tax Status," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(2), pages 1-32, September.
    10. Kilgarriff, Paul & Charlton, Martin & Foley, Ronan & O'Donoghue, Cathal, 2019. "The impact of housing consumption value on the spatial distribution of welfare," Journal of Housing Economics, Elsevier, vol. 43(C), pages 118-130.
    11. Erling Røed Larsen, 2009. "From data to levy design. The five stages of implementing housing taxes," Discussion Papers 596, Statistics Norway, Research Department.
    12. Luci Ellis, 2005. "Disinflation and the dynamics of mortgage debt," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 5-20, Bank for International Settlements.
    13. Kai Duttle, 2016. "Cognitive Skills And Confidence: Interrelations With Overestimation, Overplacement And Overprecision," Bulletin of Economic Research, Wiley Blackwell, vol. 68(S1), pages 42-55, December.

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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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