Introducing Risky Housing and Endogenous Tenure Choice into Portfolio- Based General Equilibrium Models
Patric H. Hendershott
Portfolio-based general equilibrium models are useful for analyzing the
interaction between the structure of individual tax rates and the way
particular assets are taxed, for considering the role of differential tax rules
and risk in determining household pcrtfolio choices, and for addressing
distributional questions. Unfortunately, current versions of these models give
housing short shrift; owner housing is assumed to be riskless, rental housing
is not a separately identifiable asset, and tenure choice is of necessity
exogenously determined. This paper shows how these models can be extended to
incorporate a full housing subsector and uses an extended version of the
Galper-Lucke-Toder (GLT) model to analyze the impact of the 1986 Tax Act.
The interest rate impacts of the extended model are similar to those of
GLT: a sharp decline in the fully taxable rate (just over a percentage point),
a noticeable fall in the corporate equity rate (two-thirds of a point) and
increases in the returns on noncorporate equity and tax-exempt bonds. The
capital stock effects are different owing to endogenous tenure choice, the
riskiness of owner housing, and the smaller initial holdings of owner housing
by high income households. The owner housing stock increases by 3 percent, the
increase corning roughly 50/50 from rental housing and state and local capital.
The homeownership rate rises by one-half percentage pcint, virtually all of the
increase occurring for households with incomes under $30,000. The small
utility gains, $14 billion, are roughly comparable to those of the GLT model.
While most of the gains go to high income households, other households also
gain, unlike the results originally repcrted in GLT, which contained
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