Degree GrantorUniversity of Canterbury
Degree NameDoctor of Philosophy
In a number of Western countries, imputed rental income on owner-occupied housing is not taxed. In some countries, tax treatment is even more/favourable, with mortgage interest payments and/or local property taxes being deductible against the owner-occupier's other income. These policies provide a tax subsidy to owner-occupied housing. The subsidy creates economic distortions; in particular, it encourages an inefficient allocation of productive resources, producing economic waste. In addition, it places an excess tax burden on capital employed in other activity, and on labour. The distortions created by the favourable tax treatment of owner-occupied housing suggest issues of theoretical and empirical interest. A generalized user cost of capital methodology permits straight-forward investigation of the subsidy to owner-occupied housing in several Western countries. The distortions created by the subsidy are revealed by the development of, and empirical application of, a static three-sector general equilibrium model of tax incidence. The three sectors are owner-occupied housing, rented housing, and other industry. The economic distortions are of different degrees in different countries, but are invariably quantitatively significant. Western governments are apparently persuaded by the dubious social arguments for owner-occupied housing. They are unlikely to be attracted by the "first-best" tax policy which advocates an equal tax on capital in all uses. The three-sector general equilibrium model permits the derivation of second-best tax rates, which minimize economic waste subject to the requirement that owner-occupied housing be subsidized relative to rented housing. The favourable tax treatment of owner-occupied housing has important dynamic implications. Removal of the subsidy would stimulate intermediate-run growth, assoc with improvements in resource allocation. In the context of long-run balanced growth it is pos to identify the (undiscounted) long-run utility maximizing subsidy to housing. These dynamic issues warrant further research.