On Optimal Taxation of Housing

This paper studies the question of optimal taxation of housing, when the set of tax instruments at the government's disposal is not artificially restricted. There are two groups of persons, who differ in earning abilities and in tastes, and two types of housing goods (high- and low-quality). The paper characterizes the Pareto-efficient allocations that are attainable through the tax policy. It demonstrates that optimality calls for differential tax treatment of housing and that the required tax rates are nonlinear. It derives conditions under which consumption of housing by the poor must be subsidized. It also notes the circumstances under which taxation, rather than subsidization, is the required policy.