TAXES, HOUSING, AND CAPITAL ACCUMULATION IN A 2-SECTOR GROWING ECONOMY

It is sometimes argued that the favorable tax treatment afforded to housing may lead to an oversupply of housing at the expense of capital. This issue is examined in the context of a growing two-sector economy. In the basic model where the rate of time preference is constant and labor is instantaneously sectorally mobile, the long-run response of the capital stock to a tax on housing depends upon the relative capital intensities of the two sectors, while the long-run relative asset price of housing remains unchanged. The robustness of these propositions to changes in the model are considered. Taxes on capital are also analyzed.