Analysis of the Impact of Capital-Specific Policies or Legislation: Application to Reforms of the Tax-Exempt Market

Abstract

NUMEROUS GOVERNMENTAL STATUTES AND POLICIES influence the allocation of nonfinancial capital by creating differences in borrowing rates and specifying that income from alternative types of capital be taxed at different rates. For example, borrowing rates paid by states and municipalities are lower than those paid by households and businesses because of the exemption of the interest payments of the former from taxation, and the imputed rent from owner-occupied housing is not taxed at all, while income from corporate capital is taxed at both the corporate and personal levels. The case for favoring particular types of capital is that greater quantities of the favored capital goods (or the lower interest rates for the preferred borrowers) are calculated to provide benefits that outweigh the costs of the favored treatment. Unfortunately, this case is often based on an exaggerated measure of the benefits and an understatement of the costs. The primary source of the miscalculations is the assumption, usually implicit, of unlimited available resources. As a result, more housing or state and local construction or business investment can be obtained without driving up interest rates and crowding out other outlays; in fact, multiplier