The normative and positive aspects of the taxation of imputed rent on owner-occupied housing

Abstract

Received July 1983, revised version received March 1984 1. Introduction This paper is concerned with two basic issues associated with the special income tax treatment of owner-occupied housing. The first is the effect of this policy on resource allocation and, in particular, on the rate of productive capital accumulation (i.e. capital accumulation which contributes to the increase of the marginal and average product of labor), the rate of total capital accumulation (productive and residential capital), and consequently on the interest rate and the wage rate. The second is whether this policy can or cannot be consistent with some notions of optimality. The income tax treatment of owner-occupied housing is considered in the existing literature to be discriminatory in favoring this type of capital accumulation versus rental housing and productive capital. Such a discrimin- ation is believed to attract resources from the rental-housing and productive capital to owner-occupied housing and thus to distort resource allocation. However, the literature is mainly concerned with the impact of the preferen- tial treatment of owner-occupied housing on income distribution, the total loss of welfare and the owner-occupied versus the rental market shares [see, for example, Laidler (1969), Shelton (1970), Aaron (1970), White and White (1977), Weiss (1978), Rosen (1979), and Henderson and Ioannides (1983)]. The long-run impact of this policy on the allocation of resources between housing and productive capital and on the total supply of capital are only casually analyzed. For example, although Aaron (1970) recognizes the possibility that the tax benefits to homeowners may affect the total supply of savings, in his main analysis he assumes that this supply is unaffected by this *Financial assistance from the Foerder Institute for Economic Research is gratafully acknowledged.