A Normative Analysis of Housing-Related Tax Policy in a General Equilibrium Model of Housing Quality and Prices

Shin-Kun Peng and Ping Wang

Journal of Public Economic Theory, 2009, vol. 11, issue 5, pages 667-696

Abstract: We evaluate an array of housing-related tax policies in a general equilibrium model with endogenous housing quality and prices. The local government facilitates the provision of local public amenities, financed by an array of housing-related taxes, including a developer gross revenue tax, a property tax, a land tax, and a development license fee. In a competitive spatial equilibrium, all households optimize and reach the same utility, all monopolistically competitive developers optimize and receive zero profit, and both housing and land markets clear. We examine the effects of various tax policies on housing quality, housing prices, land rent, as well as the population and housing density. By evaluating quantitatively the welfare of the local economy, we establish a globally optimal tax scheme in the housing market: complete elimination of the property tax and imposition of a lower gross revenue tax (possibly fully eliminated) than both development and land taxes. Copyright © 2009 Wiley Periodicals, Inc..

Date: 2009

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