Optimal Capital Income Taxation with Housing

42 Pages Posted: 1 Oct 2009 Last revised: 22 Apr 2010

See all articles by Makoto Nakajima

Makoto Nakajima

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: April 19, 2010

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 (1%), contrary to the high optimal capital income tax rate implied by overlapping generations models without housing. A lower capital income tax rate improves welfare by narrowing tax wedge between housing and non-housing capital; the narrowed tax wedge indirectly nullifies the subsidies (taxes) for homeowners (renters) and corrects the over-investment to housing.

Keywords: Capital Taxation, Housing Taxation, Optimal Taxation, Heterogeneous Agents, Incomplete Markets

JEL Classification: E21, E62, H21, H24, R21

Suggested Citation

Nakajima, Makoto, Optimal Capital Income Taxation with Housing (April 19, 2010). Available at SSRN: https://ssrn.com/abstract=1480814 or http://dx.doi.org/10.2139/ssrn.1480814

Makoto Nakajima (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
57
Abstract Views
687
rank
226,772
PlumX Metrics