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Capital Income Taxation with Housing

Author

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  • Makoto Nakajima

Abstract

This paper quantitatively investigates capital income taxation in the general-equilibrium overlap-ping generations model with household heterogeneity and housing. Housing tax policy is found to affect how capital income should be taxed, due to substitution between housing and non-housing capital. Given the existing U.S. preferential tax treatment for owner-occupied housing, the optimal capital income tax rate is close to zero (1%), contrary to the high optimal capital income tax rate found with overlapping generations models without housing. A low capital income tax rate improves welfare by narrowing a tax wedge between housing and non-housing capital; the narrowed tax wedge indirectly nullifies the subsidies (taxes) for homeowners (renters) and corrects over-investment to housing. Naturally, when the preferential tax treatment for owner-occupied housing is eliminated, a high capital income tax rate improves welfare as in the model without housing.

Suggested Citation

  • Makoto Nakajima, 2020. "Capital Income Taxation with Housing," Working Papers 20-02, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:86734
    DOI: 10.21799/frbp.wp.2020.02
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Capital Income Taxation with Housing
      by Christian Zimmermann in NEP-DGE blog on 2020-01-27 04:15:30

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    Cited by:

    1. Spencer Bastani & Sebastian Koehne, 2024. "How Should Consumption Be Taxed?," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 80(3), pages 259-302.
    2. Shahar Rotberg, 2022. "The Implications Of Housing For The Design Of Wealth Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 125-159, February.
    3. Hans Fehr & Maurice Hofmann & George Kudrna, 2025. "Pensions, Income Taxes, And Homeownership: A Cross‐Country Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 66(1), pages 143-174, February.
    4. Kasper Kragh Balke & Markus Karlman & Karin Kinnerud, 2024. "Down-payment requirements: Implications for portfolio choice and consumption," Working Papers 03/2024, Centre for Household Finance and Macroeconomic Research (HOFIMAR), BI Norwegian Business School.
    5. Chibane, Messaoud & Poncet, Patrice, 2025. "Housing rare disaster events and asset prices," Economic Modelling, Elsevier, vol. 147(C).
    6. Rotberg, Shahar & Steinberg, Joseph B., 2024. "Mortgage interest deductions? Not a bad idea after all," Journal of Monetary Economics, Elsevier, vol. 144(C).
    7. Lee, Jangyoun & Suh, Hyunduk, 2025. "Long-run effects of super low fertility on housing markets," Economic Modelling, Elsevier, vol. 150(C).
    8. Yasutaka Ogawa & Jiro Yoshida, 2024. "Aging, Housing, and Macroeconomic Inefficiency," IMES Discussion Paper Series 24-E-04, Institute for Monetary and Economic Studies, Bank of Japan.
    9. Fischer, Thomas, 2023. "Spatial inequality and housing in China," Journal of Urban Economics, Elsevier, vol. 134(C).

    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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