The optimal tax treatment of housing capital in the neoclassical growth model

Essi Eerola and Niku Määttänen ()

No 3, Working Papers from Government Institute for Economic Research Finland (VATT)

Abstract: In a dynamic setting, housing capital is both an asset and a consumption good. But should it be taxed like other forms of consumption or like other forms of capital? We analyze this question by considering the taxation of housing capital in a version of the neoclassical growth model. We derive the optimal tax treatment of housing capital vis-à-vis the tax treatment of both business capital and other forms of consumption allowing for relatively general preferences. We show that for a class of utility functions that includes the standard Cobb-Douglas function, the second-best optimum can be achieved with a simple tax structure where housing construction is taxed at the same rate as non-housing consumption and the tax rate on the imputed rent equals the tax rate on the return to business capital in every period. We also show how the optimal tax structure depends on the elasticities of substitution between housing, non-housing consumption, and leisure. Our numerical analysis shows that the optimal tax burden on housing capital is indeed very sensitive to household preferences.

Keywords: Optimal taxation; dynamic Ramsey taxation; housing taxation (search for similar items in EconPapers)
JEL-codes: E21 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
Date: 2009-03-30
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Related works:
Working Paper: The optimal tax treatment of housing capital in the neoclassical growth model (2005)
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