Optimal Capital Income Taxation with Housing

43 Pages Posted: 29 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 12, 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, 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.

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

JEL Classification: E62, H21, H24, R21

Suggested Citation

Nakajima, Makoto, Optimal Capital Income Taxation with Housing (April 12, 2010). FRB of Philadelphia Working Paper No. 10-11, Available at SSRN: https://ssrn.com/abstract=1596705 or http://dx.doi.org/10.2139/ssrn.1596705

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
95
Abstract Views
705
rank
227,946
PlumX Metrics