Boosting taxes for boasting about houses? Status concerns in the housing market

TY - JOUR

T1 - Boosting taxes for boasting about houses? Status concerns in the housing market

AU - Schünemann, Johannes

AU - Trimborn, Timo

PY - 2023/1

Y1 - 2023/1

N2 - In this paper we investigate the implications for housing taxation when households have status concerns for residential housing. For this purpose we introduce a residential housing sector and status concerns for housing into a neoclassical model with heterogeneous agents. First, finding that status concerns exert a negative externality, we calculate a progressive Pigovian tax schedule that corrects for the externality. Implementing the tax schedule is associated with a moderate aggregate welfare gain, but has a sizable and diverse impact on household groups’ welfare. Second, we find that when the utilitarian social planner is constrained to housing taxes, Pigovian taxation is not constraint efficient. We show that the welfare maximizing tax of the constrained optimum is always higher than the Pigovian tax, and we analyze the mechanism behind this finding. Our results have strong implications for the optimal taxation of residential housing.

AB - In this paper we investigate the implications for housing taxation when households have status concerns for residential housing. For this purpose we introduce a residential housing sector and status concerns for housing into a neoclassical model with heterogeneous agents. First, finding that status concerns exert a negative externality, we calculate a progressive Pigovian tax schedule that corrects for the externality. Implementing the tax schedule is associated with a moderate aggregate welfare gain, but has a sizable and diverse impact on household groups’ welfare. Second, we find that when the utilitarian social planner is constrained to housing taxes, Pigovian taxation is not constraint efficient. We show that the welfare maximizing tax of the constrained optimum is always higher than the Pigovian tax, and we analyze the mechanism behind this finding. Our results have strong implications for the optimal taxation of residential housing.

KW - Constrained efficiency

KW - Pigovian tax

KW - Residential housing

KW - Status concerns

UR - http://www.scopus.com/inward/record.url?scp=85142190157&partnerID=8YFLogxK

U2 - 10.1016/j.jebo.2022.10.037

DO - 10.1016/j.jebo.2022.10.037

M3 - Journal article

AN - SCOPUS:85142190157

SN - 0167-2681

VL - 205

SP - 120

EP - 143

JO - Journal of Economic Behavior and Organization

JF - Journal of Economic Behavior and Organization

ER -