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Optimal capital income taxation with housing

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  • Makoto Nakajima

Abstract

This paper quantitatively investigates the optimal capital income taxation in the general equilibrium overlapping generations model, which incorporates characteristics of housing and the U.S. preferential tax treatment for owner-occupied housing. Housing tax policy is found to have a substantial effect on how capital income should be taxed. Given the U.S. preferential tax treatment for owner-occupied housing, the optimal capital income tax rate is close to zero, contrary to the high optimal capital income tax rate implied by models without housing. A lower capital income tax rate implies a narrowed tax wedge between housing and non-housing capital, which indirectly nullifies the subsidies (taxes) for homeowners (renters) and corrects the over-investment to housing.

Suggested Citation

  • Makoto Nakajima, 2010. "Optimal capital income taxation with housing," Working Papers 10-11, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:10-11
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    Cited by:

    1. Odran Bonnet & Guillaume Chapelle & Alain Trannoy & Etienne Wasmer, 2019. "Secular Trends in Wealth and Heterogeneous Capital: Land is Back... and Should Be Taxed," Sciences Po publications 2019-14, Sciences Po.
    2. Gonzalo Paz-Pardo, 2024. "Homeownership and Portfolio Choice over the Generations," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(1), pages 207-237, January.
    3. Elgin, Ceyhun & Uras, Burak R., 2014. "Homeownership, informality and the transmission of monetary policy," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 160-168.
    4. Peterman, William B., 2013. "Determining the motives for a positive optimal tax on capital," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 265-295.
    5. Anagnostopoulos, Alexis & Atesagaoglu, Orhan Erem & Carceles-Poveda, Eva, 2013. "Skill-biased technological change and homeownership," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 3012-3033.
    6. Cagri S. Kumru & John Piggott, 2017. "Optimal Capital Income Taxation with Means-tested Benefits," Scottish Journal of Political Economy, Scottish Economic Society, vol. 64(3), pages 227-262, July.
    7. Shaofeng Xu, 2013. "An Equilibrium Analysis of the Rise in House Prices and Mortgage Debt," Staff Working Papers 13-9, Bank of Canada.
    8. Schünemann, Johannes & Trimborn, Timo, 2023. "Boosting taxes for boasting about houses? Status concerns in the housing market," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 120-143.
    9. repec:hal:spmain:info:hdl:2441/1eob9f9aas9q18hfjsiqhggvi2 is not listed on IDEAS
    10. William Peterman, 2016. "The effect of endogenous human capital accumulation on optimal taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 46-71, July.
    11. Stephie Fried & Kevin Novan & William Peterman, 2018. "The Distributional Effects of a Carbon Tax on Current and Future Generations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 30-46, October.
    12. Irina Telyukova & Makoto Nakajima, 2010. "Home Equity Withdrawal in Retirement," 2010 Meeting Papers 636, Society for Economic Dynamics.
    13. Odran Bonnet & Guillaume Flamerie de La Chapelle & Alain Trannoy & Etienne Wasmer, 2019. "Secular Trends in Wealth and Heterogeneous Capital: Land is Back... and Should Be Taxed," Working Papers hal-03570837, HAL.
    14. Satyajit Chatterjee & Burcu Eyigungor, 2015. "A Quantitative Analysis of the US Housing and Mortgage Markets and the Foreclosure Crisis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 165-184, April.
    15. Odran Bonnet & Guillaume Flamerie de la Chapelle & Alain Trannoy & Etienne Wasmer, 2019. "Secular trends in Wealth and Heterogeneous Capital: Land is back...and should be taxed," SciencePo Working papers hal-03541411, HAL.
    16. Makoto Nakajima & Irina A. Telyukova, 2020. "Home Equity In Retirement," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(2), pages 573-616, May.
    17. Hans Fehr & Fabian Kindermann, 2012. "Optimal Taxation with Current and Future Cohorts," CESifo Working Paper Series 3973, CESifo.
    18. repec:hal:wpspec:info:hdl:2441/1eob9f9aas9q18hfjsiqhggvi2 is not listed on IDEAS
    19. William B. Peterman, 2012. "An extensive look at taxes: how does endogenous retirement affect optimal taxation?," Finance and Economics Discussion Series 2012-28, Board of Governors of the Federal Reserve System (U.S.).

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    Taxation; Housing;

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