| Author/Presenter |
Makoto Nakajima (University of Illinois at Urbana-Champaign) |
| Title |
Optimal Capital Income Taxation with Housing |
| Abstract |
I quantitatively study the optimal capital income taxation in the general equilibrium overlapping generations model with uninsurable idiosyncratic income shocks and with housing and financial assets. Key characteristics of housing are explicitly modeled: (i) housing is held for the dual purpose of consumption and savings, (ii) housing can be either owned or rented, (iii) if owned, housing can be used as a collateral for mortgage loans, and (iv) there is a preferential tax treatment for owner-occupied housing through tax-exemption of imputed rents and mortgage interest payment deduction. Using the calibrated version of the model, I investigate whether and how the optimal capital income tax rate differs between the model with both housing and financial assets and the standard model without housing. I find that the optimal capital income tax changes significantly depending on how housing is taxed. This is because capital income tax affects both the portfolio choice decision between housing and financial assets, and the tenure decision. In particular, I find that, when owner-occupied housing is tax-exempt like in the current U.S. economy, there is a large welfare gain by lowering the capital income tax rate and thus narrowing the tax wedge between renting and owning, and between housing and financial assets. On the other hand, I also find that if owner-occupied housing is taxed at the same rate as financial assets, it becomes optimal to tax both assets heavily, like in the one-asset life-cycle model. Indeed, the optimal tax rate for capital income and housing is higher than in the one-asset model. |
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