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A General Equilibrium Model of Housing, Taxes, and Portfolio Choice

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  • James Berkovec
  • Don Fullerton

Abstract

We describe a model in which rental and owner housing are risky assets, tenure choice is endogenous, and each household is constrained to consume the same amount of owner housing as it has in its investment portfolio. At each iteration in the search for an equilibrium, we determine the new taxable income for each of 3,578 households (from the Survey of Consumer Finances), and we use statutory schedules to find the marginal rate and tax paid. Equilibrium net rates of return are major determinants of the amount of owner housing, but a logit model indicates that demographic factors are the main determinants of ownership rates. A simulation of taxes on owner housing raises welfare not only by re-allocating capital, but also because government takes part of the risk from individual properties and diversifies it away. Measures to disallow property tax or mortgage interest deductions do not help share this risk. Simulations of actual tax reform indicate a small shift from rental to owner housing, and welfare gains from re-allocating risk.

Suggested Citation

  • James Berkovec & Don Fullerton, 1990. "A General Equilibrium Model of Housing, Taxes, and Portfolio Choice," NBER Working Papers 3505, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:3505 Note: PE
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    1. Poterba, James M & Summers, Lawrence H, 1984. " New Evidence that Taxes Affect the Valuation of Dividends," Journal of Finance, American Finance Association, vol. 39(5), pages 1397-1415, December.
    2. Berkovec, James & Fullerton, Don, 1989. "The General Equilibrium Effects of Inflation on Housing Consumption and Investment," American Economic Review, American Economic Association, vol. 79(2), pages 277-282, May.
    3. Gordon, Roger H & Slemrod, Joel, 1983. " A General Equilibrium Simulation Study of Subsidies to Municipal Expenditures," Journal of Finance, American Finance Association, vol. 38(2), pages 585-594, May.
    4. Joel Slemrod, 1982. "Tax Effects on the Allocation of Capital Among Sectors and Among Individuals: A Portfolio Approach," NBER Working Papers 0951, National Bureau of Economic Research, Inc.
    5. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
    6. Don Fullerton & Andrew B. Lyon, 1988. "Tax Neutrality and Intangible Capital," NBER Chapters,in: Tax Policy and the Economy: Volume 2, pages 63-88 National Bureau of Economic Research, Inc.
    7. Olsen, Edgar O., 1987. "The demand and supply of housing service: A critical survey of the empirical literature," Handbook of Regional and Urban Economics,in: E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 2, chapter 25, pages 989-1022 Elsevier.
    8. Roger H. Gordon, 1985. "Taxation of Corporate Capital Income: Tax Revenues Versus Tax Distortions," The Quarterly Journal of Economics, Oxford University Press, vol. 100(1), pages 1-27.
    9. Joel Slemrod, 1984. "A General Equilibrium Model of Taxation That Uses Micro-Unit Data: Withan Application to the Impact of Instituting a Flat-Rate Income Tax," NBER Working Papers 1461, National Bureau of Economic Research, Inc.
    10. Summers, Lawrence H, 1981. "Inflation, the Stock Market, and Owner-Occupied Housing," American Economic Review, American Economic Association, vol. 71(2), pages 429-434, May.
    11. Hendershott, Patric H & Hu, Sheng Cheng, 1983. " The Allocation of Capital between Residential and Nonresidential Uses: Taxes, Inflation and Capital Market Constraints," Journal of Finance, American Finance Association, vol. 38(3), pages 795-812, June.
    12. Don Fullerton & Marios Karayannis, 1987. "The Taxation of Income from Capital in the United States, 1980-86," NBER Working Papers 2478, National Bureau of Economic Research, Inc.
    13. Charles L. Ballard & Don Fullerton & John B. Shoven & John Whalley, 1985. "Replacing the Personal Income Tax with a Progressive Consumption Tax," NBER Chapters,in: A General Equilibrium Model for Tax Policy Evaluation, pages 171-187 National Bureau of Economic Research, Inc.
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