TAXATION AND THE INCIDENCE OF HOMEOWNERSHIP ACROSS INCOME GROUPS

Abstract

THE TAX TREATMENT of homeowners has been and continues to be an emotionally and politically charged issue. This paper analyzes how alternative tax treatments of homeowners affect the incidence of homeownership across income groups and the relationship between rents and housing prices. The paper is divided into five sections. Section II introduces the conceptual framework of our study. Sections III and IV examine the incidence of homeownership across income groups and the relationship between rents and housing prices-first under the present system and then under alternative tax treatments of homeowners. The alternatives examined include: taxing imputed rent, eliminating mortgage interest deductions, limiting the size of the interest deduction allowed on all consumer loans, and substituting a tax credit or subsidy for mortgage interest and property tax deductions. The final section discusses the implications of our study. The conclusions of most previous studies concerning the choice between rental and purchased housing [Aaron, Goode, Laidler, Tinney, White] are either explicitly or implicitly based upon the comparison of the cost of shelter to two individuals in the same marginal tax bracket under two alternative regimes. In the first regime both .own their own homes, while in the second each acts as the landlord for the other. These studies conclude that under the current tax system, the tax-sheltered component of the imputed return on housing exceeds that obtainable from investing in rental units. Hence, each individual would prefer to own his home rather than paying a rent sufficiently high to induce the other individual to invest in rental units. These authors seem to imply that this highly simplified example illustrates that renters have an inequitably high tax burden relative to homeowners and that