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The Optimal Tax Treatment of Housing Capital in the Neoclassical Growth Model
Author(s) -
EEROLA ESSI,
MÄÄTTÄNEN NIKU
Publication year - 2013
Publication title -
journal of public economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.809
H-Index - 32
eISSN - 1467-9779
pISSN - 1097-3923
DOI - 10.1111/jpet.12041
Subject(s) - economics , capital (architecture) , labour economics , consumption (sociology) , microeconomics , monetary economics , social science , archaeology , sociology , history
Abstract Should housing capital be taxed like other forms of capital? We analyze this question within a version of the neoclassical growth model. We derive the optimal tax treatment of housing capital vis‐à‐vis business capital allowing for relatively general household preferences. In the first‐best, the tax treatment of business and housing capital should always be the same. In the second‐best, in contrast, the optimal tax treatment of housing capital depends on the elasticities of substitution between nonhousing consumption, housing, and leisure. This is because housing taxation may be used to alleviate the distorting effect of taxing labor. As a result, the optimal tax treatment of housing capital may be different from that of business capital. We complement these analytical results with a numerical analysis.