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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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7928.

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Date of creation: Oct 2000
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Handle: RePEc:nbr:nberwo:7928

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Cited by:
  1. Erling Røed Larsen, 2009. "From data to levy design. The five stages of implementing housing taxes," Discussion Papers 596, Research Department of Statistics Norway.
  2. Eerola , Essi & Määttänen , Niku, 2005. "The optimal tax treatment of housing capital in the neoclassical growth model," Research Discussion Papers 10/2005, Bank of Finland.
  3. Nuria Badenes-Plá & Julio López-Laborda, . "Taxing on Housing: A Welfare Evaluation of the Spanish Personal Income Tax," Studies on the Spanish Economy 143, FEDEA.
  4. 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.

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