Down-payment requirements: Implications for portfolio choice and consumption

Kasper Kragh Balke, Markus Karlman and Karin Kinnerud ()

No 03/2024, Working Papers from Centre for Household Finance and Macroeconomic Research (HOFIMAR), BI Norwegian Business School

Abstract: This paper considers optimal taxation of housing capital. To this end, we employ a life-cycle model calibrated to the U.S. economy, where asset holdings and labor productivity vary across households, and tax reforms lead to changes in house and rental prices, wages, and interest rates. We find that the optimal property tax in the long run is considerably higher than today. A higher property tax leads to a reallocation from housing to business capital, which in turn increases wages and reduces interest rates. These equilibrium effects allow for an improved consumption smoothing over the life cycle, due to progressive earnings taxes and lower borrowing costs. However, most current households would incur substantial welfare losses from an implementation of a higher property tax, since house prices fall, and a majority own their home. Hence, when accounting for transitional dynamics, it is not clear that a higher property tax is feasible or preferred.

Keywords: Housing; Property tax; Life cycle; general equilibrium (search for similar items in EconPapers)
Pages: 62 pages
Date: 2024
New Economics Papers: this item is included in nep-dge, nep-pbe and nep-ure
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