Working Paper: NBER ID: w1524
Authors: Patric H. Hendershott; David C. Ling
Abstract: Current tax law provides tax advantages to owner-occupied housing that increase with a household's income. This well understood fact has led to periodic proposals to substitute a tax credit equal to, say, 25 percent of housing-related expenses for their current deductibility. Because all of the tax reforms considered in this paper (Hall-Rabushka, Kemp-Kasten and Bradley-Gephardt) move toward a flat rate schedule, they all will sharply reduce the tax-advantages of owner-occupied housing to higher income households relative to lower income households. In fact, our analysis suggests that all reforms will lower the price of obtaining housing services from owner-occupied housing for these households and raise it for higher-income households. The "breakeven" income at which the price of these housing services would be unchanged is about $55,000 for Kemp-Kasten and Hall-Rabushka probably $10,000 less for Bradley-Gephardt. The price of renting housing should rise under all reforms, probably by 5 to 10 percent. In combination with the decline in the price of obtaining housing services for middle and lower income households, this should give a signficant boost to homeownership. Under Kemp-Kasten, ownership rates will rise for four-member households with AGI (as renters) of under $60,000; for higher income households ownership could decline marginally. The breakeven income level is roughly $40,000 for Bradley-Gephardt and $35,000 or Hall-Rabushka.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax reforms (Kempkasten, Bradley-Gephardt, Hall-Rabushka) (H20) | Decrease the tax advantages of owner-occupied housing for higher-income households (H31) |
| Decrease the tax advantages of owner-occupied housing for higher-income households (H31) | Decrease the price of obtaining housing services for these households (R21) |
| Tax reforms (Kempkasten, Bradley-Gephardt, Hall-Rabushka) (H20) | Increase the price of renting housing (R21) |
| Tax reforms (Kempkasten, Bradley-Gephardt, Hall-Rabushka) (H20) | Increase homeownership rates for families with AGI under $60,000 (R21) |
| Tax reforms (Kempkasten, Bradley-Gephardt, Hall-Rabushka) (H20) | Marginal declines in homeownership rates for higher-income households (R21) |
| Tax reforms (Kempkasten, Bradley-Gephardt, Hall-Rabushka) (H20) | Redistribution of wealth from higher-income households to lower-income households (H23) |