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Does Favorable Tax-Treatment of Housing Reduce Equipment Investment?

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  • Ben Broadbent
  • Michael Kremer

Abstract

It is often argued that low tax rates on owner-occupied housing divert investment from equipment. This paper demonstrates that if people are heterogeneous in their propensity to save, and if there are constraints on borrowing, favorable tax treatment of owner-occupied housing up to a certain value increases equipment investment. This is because low housing taxes encourage renters to become owner-occupiers, and this leads existing owner-occupiers to shift their portfolio of other assets from rental housing to equipment.

Suggested Citation

  • Ben Broadbent & Michael Kremer, 1997. "Does Favorable Tax-Treatment of Housing Reduce Equipment Investment?," NBER Working Papers 6161, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:6161
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    1. Martin Feldstein, 1987. "The Effects of Taxation on Capital Accumulation," NBER Books, National Bureau of Economic Research, Inc, number feld87-1, december.
    2. Aiyagari, S Rao, 1995. "Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1158-1175, December.
    3. Martin Feldstein, 1987. "Introduction to "The Effects of Taxation on Capital Accumulation"," NBER Chapters, in: The Effects of Taxation on Capital Accumulation, pages 1-6, National Bureau of Economic Research, Inc.
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