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Tax Preferences and Housing Affordability: Explorations using a Life-Cycle Model

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  • Michael P. Keane
  • Xiangling Liu

Abstract

We present a dynamic life-cycle model of demand for owner-occupied housing, investment property and liquid assets. Households face transaction costs, downpayment requirements, liquidity constraints, and tax preferences for owner-occupied housing. The model replicates key facts about home ownership, liquid assets, debt and consumption. It predicts taxing imputed rent would raise enough revenue to fund a 9.15% income tax rate cut, and increase ex ante welfare of all agents. Eliminating the mortgage interest deduction (MID) also gives a Pareto improvement. Replacing MID with a refundable 24.6% mortgage interest credit would increase the ownership rate by 5.9%. Gains are concentrated among low to middle income households and young households, as housing becomes more affordable for them.

Suggested Citation

  • Michael P. Keane & Xiangling Liu, 2025. "Tax Preferences and Housing Affordability: Explorations using a Life-Cycle Model," NBER Working Papers 33809, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33809
    Note: AG PE
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    Cited by:

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    2. Bishop, Kelly C. & Dowling, Jakob & Kuminoff, Nicolai V. & Murphy, Alvin D., 2025. "Tax policy and the heterogeneous costs of homeownership," Journal of Urban Economics, Elsevier, vol. 147(C).

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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