TAXES, TENURE CHOICE AND THE HOUSING STOCK
Abstract
This study develops and employs a general equilibrium model of the U.S. economy to measure the long-run impacts of the recent major tax changes on the allocation of a fixed capital stock among owner-occupied housing, rental housing, and nonresidential capital. The scope of this research can best be interpreted as examining the allocation of wealth among alternative assets while abstracting from macroeconomic impacts and growth effects. The tax changes analyzed include: the reduction in the tax service lives of nonresidential capital, the change in the tax service lives of residential capital, and the reduction in the maximum tax rate on unearned income. The simulation results suggest that the long-run impacts of the Economic Recovery Act of 1981 will shift the composition of real capital from residential formation to nonresidential. More specifically, the stock of nonresidential capital increases by 6 percent, while the stock of owner-occupied housing decreases by 11 percent and the stock of rental housing decreases by one percent. The increased financing needs for nonresidential capital increases the yield on taxable debt instruments by nearly 2 percentage points. Business taxes fall by 41 percent; earnings after taxes rise by 38 percent; and retained earnings rise by 23 percent. Household taxes remain essentially unchanged. Welfare implications suggest an increase in productivity gain as the existing subsidies provided by the U.S. federal income tax code to homeowners are reduced by the Act.
Degree
Ph.D.
Subject Area
Finance
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