DP14144 Optimal Taxation with Homeownership and Wealth Inequality

Author(s): Nicola Borri, Pietro Reichlin
Publication Date: November 2019
Keyword(s): Housing, taxation, Wealth
JEL(s): E21, E62, G1, H2, H21
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14144

We consider optimal taxation in a model with wealth-poor and wealth-rich households, where wealth derives from business capital and homeownership, and investigate the consequences on these tax rates of a rising wealth inequality at steady state. The optimal tax structure includes some taxation of labor, zero taxation of financial and business capital, a housing wealth tax on the wealth-rich households and a housing subsidy on the wealth-poor households. When wealth inequality increases, the optimal balance between labor and housing wealth taxes depends on the source of the increasing wealth.