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Capital income taxation with housing

Makoto Nakajima ()

Journal of Economic Dynamics and Control, 2020, vol. 115, issue C

Abstract: This paper quantitatively investigates capital income taxation in the general-equilibrium overlapping generations model with household heterogeneity and housing. Housing tax policy is found to affect how capital income should be taxed, due to substitution between housing and non-housing capital. Given the existing U.S. preferential tax treatment for owner-occupied housing, the optimal capital income tax rate is close to zero (1%), contrary to the high optimal capital income tax rate found with overlapping generations models without housing (31%). A low capital income tax rate improves welfare by narrowing a tax wedge between housing and non-housing capital; the narrowed tax wedge indirectly nullifies the subsidies (taxes) for homeowners (renters) and corrects over-investment to housing. Naturally, when the preferential tax treatment for owner-occupied housing is eliminated, a high capital income tax rate improves welfare as in the model without housing.

Keywords: Housing; Optimal taxation; Capital income taxation; Heterogeneous agents; Life cycle; Overlapping generations; Incomplete markets (search for similar items in EconPapers)
JEL-codes: E21 H21 H24 R21 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:115:y:2020:i:c:s016518892030052x

DOI: 10.1016/j.jedc.2020.103883

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