Optimal capital income taxation with housing

Makoto Nakajima ()

No 10-11, Working Papers from Federal Reserve Bank of Philadelphia

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: Taxation; Housing (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-acc, nep-dge, nep-pub and nep-ure
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Citations: View citations in EconPapers (30)

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