Under a “level” tax system, where the service flow from housing is taxed while costs of acquiring those services are tax deductible, the after-tax user cost per dollar of housing services is simply i` τp ` δ, where i is the mortgage interest rate, τp is the property tax rate and δ is the cost of depreciation and maintenance.2 But the fact that the service flow from owner-occupied housing is not ta. [...] The consensus finding is that the price elasticity of demand for owner-occupied housing is about 0.5 to 1.0, and that elimination of tax preferences would reduce the ownership rate by about 4 points, from the roughly 64% that prevailed in the US for most of the post-war period to about 60%. [...] So the year t capital gain/loss on an investment property is the increase/decrease in value from the prior year, as indicated in equation (21).13 Selling costs are a deduction in the year the house is sold, and buying costs a deduction the year it is bought. [...] At the start of annual period t, the state space of a household can be written: X o ot ” tHtpjt´1q,Mt´1, H j k k tp t´1q,Mt´1, St, Edu, µ,Kt, Ytu (31) The first state variable is the value, at the start of period t, of the owner-occupied house of size jot´1 that the household occupied at the end of period t ´ 1. [...] The choice set may be written dt “ tjot , jkt , jrt , Ctu where the first argument is the size of the house owned, the second argument is the size of the investment property owned, the third argument is the size of house that one rents, and the fourth argument is discrete consumption.
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Table of Contents
- Introduction 2
- Literature Review 4
- The Life-Cycle Model 10
- Utility Function Parameters 10
- Housing Cost Parameters 11
- The House Price Process 12
- Financial Assets 13
- Mortgage Loans 13
- Payment to Income (PTI) Constraint 14
- Tax Policy 15
- Household income and kids processes 16
- Budget Constraint 17
- Household's optimization problem 18
- State Space 18
- Choices 19
- The Dynamic Optimization Problem 19
- Solving the Dynamic Optimization Problem 20
- Closed Form Solutions and Backsolving 22
- Calibration and Estimation 22
- Calibrated Parameters 23
- Parameters of Exogenous Processes: Prices, Income, Kids 24
- House Prices 24
- Household Income and Kids 25
- Structurally Estimated Parameters 27
- Structural Estimates 28
- Data Used in the Structural Estimation 29
- Model Fit 30
- Results 34
- Heterogeneity in Demand for Housing 34
- Income Elasticity of Demand for Housing 36
- Price Elasticity of Demand for Housing 37
- Effect of the Income Tax on Demand for Housing 39
- Policy Experiment 1: Tax Net Imputed Rental Income 40
- Impacts on Ownership Rate and Demand for Housing 40
- Welfare Impact of Taxing Net Imputed Rent 43
- Experiment 2: Eliminate Mortgage Interest Deduction 44
- Experiment 3: Convert the MID into a Refundable Credit 48
- Choice of MID or Credit 51
- Conclusions 51
- Additional Results 56
- Data 60
