The Tax Treatment of Homeowners and Landlords and the Progressivity of Income Taxation

Matthew Chambers, Carlos Garriga, and Don Schlagenhauf
Working Paper 2008-6
February 2008

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This paper analyzes the connection between the asymmetric tax treatment of homeowners and landlords and the progressivity of income taxation using a quantitative overlapping generations general equilibrium model with housing and rental markets. Our model emphasizes the determinants of tenure choice (owning versus renting) and the household decision to supply housing services to the rental market. This formulation breaks the link between the rental price and the equilibrium interest rate. Hence, the aggregate supply of rental property responds differently to the direction of rental price changes, marginal tax rate changes, and maintenance cost changes. We show that the model replicates the key factors and the distributional patterns of ownership, house size, and landlords. The degree of progressivity in the income tax code has important implications for housing tenure and housing consumption. We find that a movement toward a less progressive income tax code can generate sizable increases in homeownership and welfare that result from the equilibrium effects and a portfolio reallocation mechanism absent in economies with single assets (e.g., Conesa and Krueger 2006). We find that the removal of existing asymmetries in the tax code has effects on housing that differ from those reported in the literature. We show that housing policy can increase the ownership rate of a particular segment of the population but generate nontrivial distributional costs. The welfare increases are no larger than those found when the progressivity of the tax code is reduced.

JEL classification: E2, E6, R2

Key words: homeownership, rental markets, housing policy, tax policy

The authors thank participants at the 2006 Midwest Macro Conference, the 2006 Summer Meetings of the Econometric Society, and the Mannheim Research Institute for the Economics of Aging conference "Overlapping Generation Models and Uncertainty—Theory, Policy Applications, and Computation" at the University of Mannheim. They are grateful for the financial support of the National Science Foundation for grant no. SES-0649374. Carlos Garriga also acknowledges support from the Spanish Ministerio de Ciencia y Tecnología through grant no. SEJ2006-02879. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of St. Louis, or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Don Schlagenhauf, Department of Economics, Florida State University, 246 Bellamy Building, Tallahassee, FL 32306-2180,, 850-644-3817, and Visiting Scholar, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470; Matthew S. Chambers, Department of Economics, Towson University, 8000 York Road, Towson, MD 21252; or Carlos Garriga, Research Division, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166.

For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.