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A General Equilibrium Model of Housing, Taxes, and Portfolio Choice
Journal of Political Economy (1992)
  • James Berkovec, Federal Reserve Board
  • Don Fullerton, University of Texas at Austin
We describe a model in which rental and owner housing are risky assets, tenure choice is endogenous, and each household is constrained to consume the same amount of owner housing that it has in its investment portfolio. At each iteration in the search for an equilibrium, we determine the new taxable income for each of 3,578 households (from the Survey of Consumer Finances), and we use statutory schedules to find the marginal rate and tax paid. Equilibrium net rates of return are major determinants of the amount of owner housing, but a logit model indicates that demographic factors are the main determinants of ownership rates. In our simulation, taxes on owner housing would raise welfare not only by reallocating capital but also by the government's taking part of the risk from individual properties and diversifying it away. Measures to disallow property tax or mortgage interest deductions do not help share this risk. Simulations of the 1986 tax reform indicate a small shift from rental to owner housing and welfare gains from reallocating risk.
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Citation Information
James Berkovec and Don Fullerton. "A General Equilibrium Model of Housing, Taxes, and Portfolio Choice" Journal of Political Economy Vol. 100 Iss. 2 (1992)
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