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Optimal Consumption and Taxation of Housing - A Life Cycle Approach

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  • Ulrich van Suntum

Abstract

A simple OLG-model is developed, where housing is the only consumption good and saving is either in terms of financial assets or in terms of owner-occupied or rented dwellings. It is shown that, while without taxes optimal consumption plans and maximum utility are the same for both the tenant and the owner-occupier, conventional income taxes cause a bias in favour of the latter. It is argued that the consumption good approach is always advantageous for the owner-occupier in comparison with the investment approach, even with high interest rates and a high share of borrowing. However, even the investment approach does not entirely remove the taxation bias on the expense of the tenant, unless the latter is allowed to deduct total interest payments from his income. An alternative could be cash-flow taxation. It is also shown that the conventional investment approach is equivalent to - and therefore could be replaced by - a much simpler version, where instead of imputed rent imputed interest on net capital is taxed.

Suggested Citation

  • Ulrich van Suntum, "undated". "Optimal Consumption and Taxation of Housing - A Life Cycle Approach," Working Papers 200125, Institute of Spatial and Housing Economics, Munster Universitary.
    • Handle: RePEc:muc:wpaper:200125
    as

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    References listed on IDEAS

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    1. Juan Carlos Conesa & Sagiri Kitao & Dirk Krueger, 2009. "Taxing Capital? Not a Bad Idea after All!," American Economic Review, American Economic Association, vol. 99(1), pages 25-48, March.
    2. Hoyt, William H & Rosenthal, Stuart S, 1990. "Capital Gains Taxation and the Demand for Owner-Occupied Housing," The Review of Economics and Statistics, MIT Press, vol. 72(1), pages 45-54, February.
    3. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66(6), pages 467-467.
    4. van der Hoek, M. Peter & Radloff, Sarah. E., 2007. "Taxing owner-occupied housing: comparing the Netherlands to other European Union countries," MPRA Paper 5876, University Library of Munich, Germany.
    5. Aaron, Henry, 1970. "Income Taxes and Housing," American Economic Review, American Economic Association, vol. 60(5), pages 789-806, December.
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