Tax Preferences and Housing Affordability: Explorations using a Life-Cycle Model

Michael Keane and Xiangling Liu

No 33809, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present a dynamic life-cycle model of demand for owner-occupied housing, investment property and liquid assets. Households face transaction costs, downpayment requirements, liquidity constraints, and tax preferences for owner-occupied housing. The model replicates key facts about home ownership, liquid assets, debt and consumption. It predicts taxing imputed rent would raise enough revenue to fund a 9.15% income tax rate cut, and increase ex ante welfare of all agents. Eliminating the mortgage interest deduction (MID) also gives a Pareto improvement. Replacing MID with a refundable 24.6% mortgage interest credit would increase the ownership rate by 5.9%. Gains are concentrated among low to middle income households and young households, as housing becomes more affordable for them.

JEL-codes: G11 G51 H20 H31 R21 (search for similar items in EconPapers)
Date: 2025-05
New Economics Papers: this item is included in nep-dge, nep-pbe, nep-pub and nep-ure
Note: AG PE
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Working Paper: Tax preferences and housing affordability: Exploration using a life-cycle model (2024)
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