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Capital Income Taxation with Housing

Makoto Nakajima ()

No 20-02, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper quantitatively investigates capital income taxation in the general-equilibrium overlap-ping 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. 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: Incomplete Markets; Capital Income Taxation; Heterogeneous Agents; Overlapping Generations; Housing; Life Cycle; Optimal Taxation (search for similar items in EconPapers)
JEL-codes: E21 H21 H24 R21 (search for similar items in EconPapers)
Pages: 44
Date: 2020-01-07
New Economics Papers: this item is included in nep-dge, nep-mac, nep-pbe and nep-ure
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DOI: 10.21799/frbp.wp.2020.02

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