Working Paper: CEPR ID: DP10774
Authors: Robert J. Garybobo; Jamil Nur
Abstract: We study the allocation of housing capital in an overlapping generations economy with competitive property and housing rental markets. In this economy, consumers inherit property from their parents when they retire. Agents have paternalistic bequest motives. All agents are identical and there is no redistribution problem. The stationary competitive equilibrium of such a model is inefficient, since old agents consume too much perishable goods and too much housing. We then show that the golden rule stationary optimum can be achieved by means of a simple system of proportional taxes. The optimal allocation is characterized by the fact that the young agents rent their homes and that the old agents own the entire stock of housing capital. An optimal tax system has the following features: the young agents' rents must be subsidized. Housing capital and rents are both taxed. But bequests must be subsidized. Bequest and rent subsidies are financed by labor income tax and property tax revenues. Rent subsidies are financed by the tax on rents. The government's budget is balanced. The negative tax on bequests can be interpreted as a pension benefit, paid out of a public pension fund, based on the market value of the housing-capital stock.
Keywords: bequests; capital taxation; housing; overlapping generation; real estate; rents
JEL Codes: H2; H3; H6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Proportional taxes (H29) | housing capital allocation (R31) |
| Negative tax on bequests (H24) | welfare of old agents (I39) |
| Rent subsidies (H53) | housing consumption of young agents (R21) |
| Property taxes (H71) | housing decisions of old agents (R21) |
| Stationary competitive equilibrium (D50) | inefficiencies in housing consumption by old and young agents (R21) |