Housing, Taxes and Endogenous Fertility in a Growing Economy

Abstract

Housing capital has tax advantages over other types of capitals in the United States. This paper studies the long run effects of eliminating the favorable tax treatment of owner-occupied housing in a two-period OLG model with exogenous and endogenous fertility choice respectively. Numerical results show that taxing the imputed rents fully increases nonresidential capital stock but lowers the housing stock in either exogenous or endogenous fertility model. In the meantime, general goods consumption increases but housing services decreases in both periods. Fertility declines when first period housing services is at the minimum requirement level. Furthermore, welfare declines in the exogenous fertility model, but it improves in the endogenous fertility model when housing services in both periods is at the lowest level. The revenue equivalent welfare analysis also shows that equal tax rates on two types of capital are not optimal. Taxing residential capital income more heavily than nonresidential capital income would encourage welfare.