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Taxation of Housing, Capital Accumulation, and Welfare: a Study in Dynamic Tax Reform

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  • Firouz Gahvari

    (Virginia Polytechnic Institute and State University)

Abstract

The U. S. tax structure implicitly subsidizes housing in a number of ways. This Abstract article employs a dynamic general equilibrium model of housing, consumption and economic growth to examine the long-run effects of eliminating these implicit subsidies on capital accumulation and welfare. It also investigates the relationship between optimal tax rates on residential and nonresidential capital. It is shown that the elimination of housing subsidies in full may increase nonresidential capital by as much as 46%. while the stock of housing is reduced by over 15%. In the meantime, per capita consumption goes up by 7%. In welfare terms, these changes are equivalent to an increase of over 6% in a representative individual's lifetime income under the present tax rules. Second, it is found that optimality, from the standpoint of steady state welfare maximization, implies unequal tax treatment of residential and nonresidential capital. Far from subsidizing housing, taxation of housing is called for.

Suggested Citation

  • Firouz Gahvari, 1985. "Taxation of Housing, Capital Accumulation, and Welfare: a Study in Dynamic Tax Reform," Public Finance Review, , vol. 13(2), pages 132-160, April.
  • Handle: RePEc:sae:pubfin:v:13:y:1985:i:2:p:132-160
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    References listed on IDEAS

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    1. Zodrow, George R., 2001. "The Property Tax as a Capital Tax: A Room With Three Views," National Tax Journal, National Tax Association, vol. 54(1), pages 139-156, March.
    2. James Alm & Mikhail I. Melnik, 2012. "Cross-border Shopping and State Use Tax Liabilities: Evidence from eBay Transactions," Working Papers 1205, Tulane University, Department of Economics.
    3. Zodrow, George R., 2001. "The Property Tax as a Capital Tax: A Room with Three Views," National Tax Journal, National Tax Association, vol. 54(n. 1), pages 139-56, March.
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    Cited by:

    1. Cremer, Helmuth & Gahvari, Firouz, 1998. "On Optimal Taxation of Housing," Journal of Urban Economics, Elsevier, vol. 43(3), pages 315-335, May.
    2. Keuschnigg, Christian & Nielsen, Soren Bo, 1996. "Housing markets and vacant land," Journal of Economic Dynamics and Control, Elsevier, vol. 20(9-10), pages 1731-1762.

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