Essays on Capital Gains Taxes and Housing

• Main Author: Richards, Zachary William
• Format: Others
• Published: Trace: Tennessee Research and Creative Exchange 2009
• Subjects: Economics
• Online Access: http://trace.tennessee.edu/utk_graddiss/102

This dissertation is a collection of three essays regarding the effects of federal taxation of residential capital, with a focus on owner-occupied housing. Owner-occupied housing is granted a number of tax subsidies under the federal individual income tax code. Among them are the mortgage interest and property tax deductions and the tax exclusions on imputed rental income for the homeowner and capital gains from the sale of a primary residence. In the frst essay, entitled Does the Exclusion of Capital Gains Taxes on Housing Promote Labor Mobility?", I examine the impact of the Taxpayer Relief Act of 1997 (TRA97), which dramatically reduced effective tax rates on residential capital gains, on the liklihood of a homeowner undertaking a job-related relocation. The results indicate that homeowners with large accrued gains are more likely to move for job-related reasons after the passage of TRA97 than before, implying efficiency gains from a spatial reallocation of labor. In the second essay, The Effects of EGTRRA and JGTRRA Expiration on the User Cost of Housing", I calculate last-dollar user costs for owner-occupants using an augmented model that incorporates the current tax exclusion of residential capital gains. User cost calculations are made under current and future policy to determine the effects of higher marginal income and capital gains tax rates on the costs of homeownership. The results indicate that the expiration of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) will have a regressive effect on user costs, with high-income homeowners receiving the largest percentage reductions despite higher long-term capital gains tax rates. The fnal essay, Residential Capital Gains Taxes and the Dynamics of Housing Markets", examines the macroeconomic implications of TRA97. I present evidence that a structural break occurred around the time of its implementation, affecting the relationship between aggregate mea- sures of the housing market, money growth, and output. This suggests that effective tax rates on residential capital gains play an important role in the uctuations of residential fixed investment and may alter the impacts of monetary policy.