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Are Houses Too Big or In the Wrong Place? Tax Benefits to Housing and Inefficiencies in Location and Consumption

In: Tax Policy and the Economy, Volume 28

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  • David Albouy
  • Andrew Hanson

Abstract

Tax benefits to owner-occupied housing provide incentives to consume housing, offsetting weaker disincentives of the property tax. These benefits also help counter the penalty federal taxes impose on households who work in productive high-wage areas, but reinforce incentives to consume local amenities. We simulate the effects of these benefits in a parameterized model, and determine the consequences of various tax reforms. Reductions in housing tax benefits generally increase efficiency in consumption, but reduce efficiency in location decisions, unless they are accompanied by tax rate reductions. The most efficient policy would eliminate most tax benefits to housing and index taxes to local wage levels.
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Suggested Citation

  • David Albouy & Andrew Hanson, 2014. "Are Houses Too Big or In the Wrong Place? Tax Benefits to Housing and Inefficiencies in Location and Consumption," NBER Chapters,in: Tax Policy and the Economy, Volume 28, pages 63-96 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:13054
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    Cited by:

    1. Martin, Hal, 2018. "The Impact of the Tax Cuts and Jobs Act on Local Home Values," Working Paper 1806, Federal Reserve Bank of Cleveland.
    2. Albouy, David & Lue, Bert, 2015. "Driving to opportunity: Local rents, wages, commuting, and sub-metropolitan quality of life," Journal of Urban Economics, Elsevier, vol. 89(C), pages 74-92.
    3. Martin, Hal & Hanson, Andrew, 2016. "Metropolitan area home prices and the mortgage interest deduction: Estimates and simulations from policy change," Regional Science and Urban Economics, Elsevier, vol. 59(C), pages 12-23.
    4. Agustin Redonda, 2016. "Tax Expenditures and Sustainability. An Overview," Discussion Notes 1603, Council on Economic Policies.

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