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The optimal tax treatment of housing capital in the neoclassical growth model

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  • Eerola, Essi
  • Määttänen, Niku

Abstract

In a dynamic setting, housing capital is both an asset and a consumption good. But should it be taxed like other forms of consumption or like other forms of capital? We analyze this question by considering the taxation of housing capital in a version of the neoclassical growth model. We derive the optimal tax treatment of housing capital vis-à-vis the tax treatment of both business capital and other forms of consumption allowing for relatively general preferences. We show that for a class of utility functions that includes the standard Cobb-Douglas function, the second-best optimum can be achieved with a simple tax structure where housing construction is taxed at the same rate as non-housing consumption and the tax rate on the imputed rent equals the tax rate on the return to business capital in every period. We also show how the optimal tax structure depends on the elasticities of substitution between housing, non-housing consumption, and leisure. Our numerical analysis shows that the optimal tax burden on housing capital is indeed very sensitive to household preferences.

Suggested Citation

  • Eerola, Essi & Määttänen, Niku, 2009. "The optimal tax treatment of housing capital in the neoclassical growth model," Working Papers 3, VATT Institute for Economic Research.
  • Handle: RePEc:fer:wpaper:3
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    1. Greenwood, Jeremy & Hercowitz, Zvi, 1991. "The Allocation of Capital and Time over the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1188-1214, December.
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    Citations

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    Cited by:

    1. 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.
    2. Hamza Polattimur, 2013. "Housing, Collateral Constraints, and Fiscal Policy," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(2), pages 53-82, May.
    3. Korkeamäki, Ossi, 2011. "The Finnish payroll tax cut experiment revisited," Working Papers 22, VATT Institute for Economic Research.
    4. Schünemann, Johannes & Trimborn, Timo, 2017. "Boosting taxes for boasting about houses: Status concerns in the housing market," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 05/2017, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).
    5. Strulik, Holger & Trimborn, Timo, 2014. "Natural disasters and macroeconomic performance: The role of residential investment," Center for European, Governance and Economic Development Research Discussion Papers 194 [rev.], University of Goettingen, Department of Economics.
    6. Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
    7. Ben-Gad, M., 2015. "The Optimal Taxation of Asset Income when Government Consumption is Endogenous: Theory, Estimation and Welfare," Working Papers 15/10, Department of Economics, City University London.
    8. Strulik, Holger & Trimborn, Timo, 2016. "Natural disasters and macroeconomic performance," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 07/2016, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).
    9. repec:bla:ecinqu:v:55:y:2017:i:4:p:1689-1711 is not listed on IDEAS

    More about this item

    Keywords

    Optimal taxation; dynamic Ramsey taxation; housing taxation; optimiveroteoria; dynaaminen Ramsey-verotus; asuntovarallisuuden verotus; Taxation; Verotus; Taxation and Social Transfers; Julkisen talouden rahoitus ja tulonsiirrot; E210 - Macroeconomics: Consumption; Saving; H210 - Taxation and Subsidies: Efficiency; Optimal Taxation;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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