Optimal Capital Income Taxation with Housing
42 Pages Posted: 1 Oct 2009 Last revised: 22 Apr 2010
There are 2 versions of this paper
Optimal Capital Income Taxation with Housing
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: Suggested Citation
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