How Taxes Affect Economic Behavior

By Henry J. Aaron; Joseph A. Pechman | Go to book overview

FRANK DE LEEUW and LARRY OZANNE


Housing

A SERIES of past studies have established a strong case that the federal income tax favors investment in housing over investment in many other financial and real assets.1. In the case of owner-occupied housing, the reason is that the housing services an owner provides for himself are not counted as income, although certain of the expenses of providing these services--namely, property tax payments and mortgage interest payments--are deductible in calculating taxable income. Capital gains on owner-occupied housing, furthermore, largely escape taxation. In the case of rental housing, the main factors are depreciation allowances for tax purposes far in excess of economic depreciation, rapid write-off of con-

____________________
The authors are grateful for financial support from the Office of Tax Analysis and for many helpful comments by readers too numerous to mention. A version of this study appeared in the Survey of Current Business, vol. 59 ( December 1979), pp. 50-61.
1.
Henry J. Aaron, Shelter and Subsidies: Who Benefits from Federal Housing Policies? ( Brookings Institution, 1972), pp. 53-73; George S. Tolley and Douglas B. Diamond , "Homeownership, Rental Housing, and Tax Incentives," in Federal Tax Policy and Urban Development, Hearings before the Subcommittee on the City of the House Banking, Finance, and Urban Affairs Committee ( Government Printing Office, 1977), pp. 114-95; Richard Goode, The Individual Income Tax ( Brookings Institution, 1964), pp. 120-29; David Laidler, "Income Tax Incentives for Owner- Occupied Housing," in Arnold C. Harberger and Martin J. Bailey, eds., The Taxation of Income from Capital ( Brookings Institution, 1969); Harvey S. Rosen, "Housing Decisions and the U.S. Income Tax: An Econometric Analysis," Journal of Public Economics, vol. 11 ( February 1979), pp. 1-23; Emil Sunley, "Tax Advantages of Homeownership Versus Renting: A Cause of Suburban Migration?" in National Tax Association-Tax Institute of America, Proceedings of the Sixty-third Annual Conference on Taxation ( Columbus, Ohio: NTA-TIA, 1971), pp. 377-92; and Paul Taubman and Robert Rasche, "The Income Tax and Real Estate Investment," in Tax Incentives ( Lexington Books, 1971), pp. 113-42.

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