Housing and optimal taxation in life-cycle economies

The issue of capital income taxation is one that has been widely studied in economics. Two problems that have received relatively less attention are the differential tax treatment of housing relative to business capital and intergenerational redistributional considerations in optimal taxation problems. My dissertation addresses these issues within a dynamic general equilibrium framework. The first essay argues that misallocations due to differential capital taxation are large, perhaps larger than misallocations due to an inappropriate average tax rate. The second essay challenges the main results from the optimal taxation literature by showing that the path of optimal taxes is considerably altered when life-cycle and intergenerational redistributional issues are considered.; The object of the first essay is to assess quantitatively the impact of the preferential tax treatment of housing on the composition and size of the aggregate-stock of capital and to estimate the resulting welfare and distributional consequences. The analysis focuses on the two most important housing tax advantages currently in place in the United States: the lack of taxation of the service income provided by owner-occupied housing (generally referred to as imputed rents) and the allowance to deduct mortgage interest payments from taxable income. The model also accounts for the fact that the purchase of a house typically entails a sizable downpayment which constrains some individuals from becoming homeowners and induces them to rent housing services instead.; This study emphasizes two channels through which housing tax provisions distort individual behavior. One is that the tax code provides an incentive for individuals to own rather than rent. The other is that, should they own, individuals have an incentive to own larger houses. In both cases, these distortions are due to the fact that the tax code makes the return on housing capital larger than that on business capital. The wedge between the two rates of return emanates from the failure to tax imputed rents and is amplified by the presence of mortgage interest deductibility. A calibrated version of the model is used to compare alternative fiscal policy arrangements. Simulations show that either taxing imputed rents or eliminating mortgage interest deductibility increases welfare substantially. Moreover, welfare gains accrue to individuals at every income level and distributional effects are much smaller than conventionally believed.; The second essay studies optimal taxation in life-cycle economies. This essay characterizes the optimal path of fiscal policy, both in the long-run and in the transition to the steady state. The implications of this study are in sharp contrast with the prescription offered by infinitely-lived agent models. First, the government's desire to tax initial holdings of capital at confiscatory rates is endogenously curtailed by intergenerational redistributional considerations. Second, because of life-cycle elements, capital income taxes are in general non-zero even in the steady state. The conditions for zero taxation of capital income in life-cycle economies are closely related to the uniform commodity taxation results in the Public Finance literature. More precisely, the tax rate on capital income should only be zero if it is optimal to tax consumption goods uniformly over the lifetime of individuals. The conditions for uniform taxation of consumption depend, in turn, on preferences, the age-profile of labor productivity, and the set of tax instruments available to the government.