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Tax Policy, Housing Prices, and Housing Investment

  • Lawrence H. Goulder
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    This paper employs a general equilibrium model to assess the effects of major components of the Tax Reform Act of 1986 on the performance of housing and other industries. The model considers both short-term and long-term effects on housing demands, house values, and investment in housing. Model results indicate that in the short run, the recent cuts incorporate tax rates, elimination of investment tax credits, and scaling back of depreciation deductions together have negative implications for investment in non-residential capital but positive effects on housing investment. This mainly reflects the fact that prior to the '86 tax reforms, investment tax credits and favorable depreciation rules disproportionately benefited non-housing industries; thus their removal especially affects industries other than housing and helps ?crowd in housing investment. Over the long term, however, the tax changes imply lower investment in housing as well as in other types of capital. The reduced housing investment stems from adverse effects of the reforms on aggregate output and real income.

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    File URL: http://www.nber.org/papers/w2814.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2814.

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    Date of creation: Jan 1989
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    Publication status: published as Regional Science and Urban Economics, Vol. 19, 1989.
    Handle: RePEc:nbr:nberwo:2814
    Note: PE
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    1. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
    2. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May.
    3. Jorgenson, Dale W & Yun, Kun-Young, 1986. " Tax Policy and Capital Allocation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(2), pages 355-77.
    4. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
    5. Don Fullerton & Andrew B. Lyon, 1987. "Tax Neutrality and Intangible Capital," NBER Working Papers 2430, National Bureau of Economic Research, Inc.
    6. Lawrence H. Goulder & Lawrence H. Summers, 1987. "Tax Policy, Asset Prices, and Growth: A General Equilibrium Analysis," NBER Working Papers 2128, National Bureau of Economic Research, Inc.
    7. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321.
    8. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    9. Hamilton, Bob & Whalley, John, 1985. "Tax treatment of housing in a dynamic sequenced general equilibrium model," Journal of Public Economics, Elsevier, vol. 27(2), pages 157-175, July.
    10. Robert E. Hall, 1985. "Real Interest and Consumption," NBER Working Papers 1694, National Bureau of Economic Research, Inc.
    11. Henderson, J Vernon & Ioannides, Yannis M, 1983. "A Model of Housing Tenure Choice," American Economic Review, American Economic Association, vol. 73(1), pages 98-113, March.
    12. Alan J. Auerbach, 1983. "Corporate Taxation in the United States," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 451-514.
    13. James M. Poterba, 1983. "Tax Subsidies to Owner-occupied Housing: An Asset Market Approach," Working papers 339, Massachusetts Institute of Technology (MIT), Department of Economics.
    14. Lawrence H. Summers, 1981. "Taxation and Corporate Investment: A q-Theory Approach," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 67-140.
    15. Rosen, Harvey S & Rosen, Kenneth T, 1980. "Federal Taxes and Homeownership: Evidence from Time Series," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 59-75, February.
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