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The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 1 Discusses elasticity of housing supply & elasticity of substitution of housing supply between.

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Presentation on theme: "The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 1 Discusses elasticity of housing supply & elasticity of substitution of housing supply between."— Presentation transcript:

1 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 1 Discusses elasticity of housing supply & elasticity of substitution of housing supply between owning and renting Answers titel graphically Answers titel mathematically Gives empirical estimations of the benefits Compares assumptions and results with previous research by Michelle J. White & Lawrence J. White published in the Journal of Public Economics, Vol.3, 1977 Discusses elasticity of housing supply & elasticity of substitution of housing supply between owning and renting Answers titel graphically Answers titel mathematically Gives empirical estimations of the benefits Compares assumptions and results with previous research „violates the conventional wisdom!“ Bjørn Baltzer and who doesn‘t!

2 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 2 The Subsidy Owner-occupiers are subsidized by the US federal income tax: mortage interests and locally paid property taxes can be deducted from taxable income Renters are not subsidized: you cannot deduct rent from taxable income BUT: formal incidence vs. effective incidence

3 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 3 That‘s where we will end …

4 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 4 The Demand for Housing Q P 0 DRDR DODO DTDT The Demand for Housing & the Supply for Housing Perfectly elastic? S Perfectly inelastic? S S Somewhere in between!

5 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 5 The Subsidy Comes into Play Q P 0 DRDR DODO DTDT S P QRQR QOQO QTQT DO,DO, DT,DT, P,P, QO,QO, QT,QT, QR,QR, PO,PO, Let‘s not forget …

6 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 6 DO,DO, DT,DT, P P, PO,PO, QRQR QOQO QTQT Q P 0 DRDR DODO DTDT S QO,QO, QT,QT, QR,QR, The Traditional Deadweight Loss

7 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 7 Loss to renters DO,DO, DT,DT, P P, PO,PO, QRQR QOQO QTQT Q P 0 DRDR DODO DTDT S QO,QO, QT,QT, QR,QR, L R 1 L R 2

8 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 8 DO,DO, DT,DT, P P, PO,PO, QRQR QOQO QTQT Q P 0 DRDR DODO DTDT S QO,QO, QT,QT, QR,QR, Gains to Owner-Occupiers G O 1 G O 2 G O 3

9 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 9 More Gains: DO,DO, DT,DT, P P, PO,PO, QRQR QOQO QTQT Q P 0 DRDR DODO DTDT S QO,QO, QT,QT, QR,QR, Gain to producers G P Gains to landlords G L 1 = L R 1 GL2GL2

10 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 10 DO,DO, DT,DT, P P, PO,PO, QRQR QOQO QTQT Q P 0 DRDR DODO DTDT S QO,QO, QT,QT, QR,QR, Total annual cost of the subsidy program

11 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 11 The Generalized Deadweight Loss … compared to the traditional deadweight loss

12 The Tax Subsidy to Owner-Occupied Housing: Who Benefits? p. 12 Conclusions The Traditional Deadweight Loss underestimates the (true) Generalized Deadweight Loss Reason: a large part of the deadweight loss is generated by the transfer of ressources among different demander groups Consequence: whenever a tax or subsidy program applies differentially to participants in a market (here owner-occupiers vs. renters), then one has to take substitution into account when measuring the societal deadweight loss Authors‘ claim: renters are disadvantaged against owner-occupiers, they should be treated more equally taxwise


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