Housing and Tax Policy

By Sami Alpanda and Sarah Zubairy

http://d.repec.org/n?u=RePEc:bca:bocawp:13-33&r=dge

In this paper, we investigate the effects of housing-related tax policy measures on macroeconomic aggregates using a dynamic general-equilibrium model. The model features borrowing and lending across heterogeneous households, financial frictions in the form of collateral constraints tied to house prices, and a rental housing market alongside owner-occupied housing. Using our model, we analyze the effects of changes in housing-related tax policy measures on the level of output, tax revenue and household debt, along with other macroeconomic aggregates. The tax policies we consider are (i) increasing property tax rates, (ii) eliminating the mortgage interest deduction, (iii) eliminating the depreciation allowance for rental income, (iv) instituting taxation of imputed rental income from owner-occupied housing and (v) eliminating the property tax deduction. We find that among these fiscal tools, eliminating the mortgage interest deduction would be the most effective in raising tax revenue, and in reducing household debt, per unit of output lost. On the other hand, eliminating the depreciation allowance for rental income would be the least effective. Our experiments also highlight the differential welfare impact of each tax policy on savers, borrowers and renters.

This is a paper I would have liked to write, had I the time. Fiscal policy leads to massive distortions on the housing and real estate markets, and it is not clear that these are needed. Once further aspect that is not considered here is that investing in your own house is very poor diversification in the light of the high correlation between the local unemployment rate and housing prices. I am a reluctant house owner…

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