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The tax treatment of housing: its effects on bounded and unbounded communities

  • Richard Voith
  • Joseph Gyourko

This paper examines the potential impact of the federal tax treatment of housing, which provides tax advantages that increase with income and house value, on the pattern of development in U.S. metropolitan areas. The authors argue that the tax treatment of housing is likely to have impacts on older, developed communities with fixed boundaries, such as central cities, that differ from those on suburban areas, where there is an elastic supply of land. Using simple analytic models, the authors show that the tax treatment of housing not only increases the incentives for lower density development, but it also provides incentives for increased sorting of high- and low-income households into separate communities. Given the very large magnitude of the annual subsidies to housing ($65 billion) and the fact that these subsidies accrue to a relatively small share of home owners, the authors believe that the impact of these subsidies on the pattern of metropolitan development is potentially very important.

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File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/1998/wp98-23.pdf
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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 98-23.

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Date of creation: 1998
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Handle: RePEc:fip:fedpwp:98-23
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  1. Follain, James R. & Ling, David C., 1991. "The Federal Tax Subsidy to Housing and the Reduced Value of the Mortgage Interest Deduction," National Tax Journal, National Tax Association, vol. 44(2), pages 147-68, June.
  2. Edwin S. Mills, 1987. "Dividing up the investment pie: have we overinvested in housing?," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 13-23.
  3. Peter Mieszkowski & Edwin S. Mills, 1993. "The Causes of Metropolitan Suburbanization," Journal of Economic Perspectives, American Economic Association, vol. 7(3), pages 135-147, Summer.
  4. Richare Voith, 1999. "Does the tax treatment of housing create an incentive for exclusionary zoning and increased decentralization?," Working Papers 99-22, Federal Reserve Bank of Philadelphia.
  5. Joseph Gyourko & Richard Voith, . "The Price Elasticity of the Demand for Residential Land," Zell/Lurie Center Working Papers 329, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
  6. Benabou, Roland, 1993. "Workings of a City: Location, Education, and Production," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 619-52, August.
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