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

  • Essi Eerola
  • Niku Määttänen

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.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Working Papers with number 3.

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Date of creation: 30 Mar 2009
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Handle: RePEc:fer:wpaper:3
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  17. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October.
  18. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  19. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1994. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc.
  20. 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.
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  24. Joel Slemrod, 1982. "Down-Payment Constraints: Tax Policy Effects in a Growing Economy With Rental and Owner-Occupied Housing," Public Finance Review, , vol. 10(2), pages 193-217, April.
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