Niku Määttänen

The Optimal Tax Treatment of Housing Capital in the Neoclassical Growth Model

In a dynamic setting, housing is both an asset and a consumption good. But should it be taxed like other forms of consumption or like other forms of saving? We consider the optimal taxation of the imputed rent from owner housing within a version of the neoclassical growth model. We find that the optimal tax rate on the imputed rent is quite sensitive to the constraints imposed on the other available tax rates. In general, it is not optimal to tax the imputed rent at the same rate as the business capital income.

Citizens Should Vote on Secession

Abstract The draft treaty establishing a constitution for the European Union states that each member state may withdraw from the European Union following its own constitutional requirements. We argue that such a rule could lead into an increased use of threat of withdrawal to extract concessions in intergovernmental negotiations. This problem would be exacerbated by national electorates facing an incentive to elect more confrontational politicians. We also suggest a remedy: EU constitution should require that withdrawal from EU membership must be approved by the voters of the withdrawing member state in a referendum.

On the Importance of Borrowing Constraints for House Price Dynamics

We study how a household borrowing constraint the the form of a down payment requirement affects house price dynamics in an OLG model with standard preferences. We find that in certain situations the borrowing constraint shapes house price dynamics substantially. The importance of the constraint depends very much on whether house price changes are driven by interest rate or aggregate income shocks. Moreover, because of the borrowing constraint, house price dynamics display substantial asymmetries between large positive and large negative income shocks. These results are related to the fact that the share of borrowing-constrained households is different following different shocks. Keywords: house prices, dynamics, borrowing constraints, down payment constraint JEL classification numbers: E21, R21

Income distribution and housing prices: An assignment model approach

We present a framework for studying the relation between the distributions of income and house prices that is based on an assignment model where households are heterogeneous by incomes and houses by quality. Each household owns one house and wishes to live in one house; thus everyone is potentially both a buyer and a seller. In equilibrium, the distribution of prices depends on both distributions in a tractable but nontrivial manner. We show how the impact of increased income inequality on house prices depends on the shapes of the distributions, and can be inferred from data. In our empirical application we find that increased income inequality between 1998 and 2007 had a negative impact on average house prices in six US metropolitan areas.

On the Political Economy of Housing's Tax Status

Most households have most of their wealth in the form of housing. We analyze how this distributional feature shapes the political economy of housing taxation. We build a simple dynamic general equilibrium model where households vote over the tax treatment of housing and business capital. The model is calibrated so as to match the joint distribution of financial wealth and housing wealth among US households. The median voter has a large share of his wealth in the form of housing and most of his income is wage earnings. The key trade-off he faces is that lowering the tax burden on business capital while increasing the tax burden on housing leads to higher wages but also increases his own share of the overall tax burden.

Borrowing constraints and house price dynamics: the case of large shocks

Abstract We study how household borrowing constraints shape house price dynamics. We consider the fully non-linear dynamics following large aggregate shocks in a calibrated OLG model with standard preferences. We find that the main effect of a down payment constraint is to make house price dynamics asymmetric between large positive and large negative income shocks: prices increase rapidly following the impact effect of a large adverse income shock but decline slowly following the impact effect of a positive income shock. This asymmetry stems from the fact that the share of borrowing constrained households changes over time. However, the down payment constraint does not substantially magnify the impact effect of adverse income or interest rate shocks.

Housing Equity Release, Old-Age Income, and Public Finances

Many elderly people could markedly increase they standard of living by releasing housing equity. Purchase of a life annuity would increase the benefits of this release. Focusing on the Finnish case, we analyze the fiscal implications of different forms of housing equity release. We take into account the fact that most households have most of their wealth in the form of owner housing and that housing enjoys a tax-favoured status relative to most other forms of consumption and savings. We find that even tax free life annuities may well increase aggregate tax revenue relative to a situation where private annuities are not available. This is because the possibility to annuitize financial savings increases the opportunity cost of housing wealth inducing households to increase non-housing consumption relative to (tax-favoured) housing consumption. Reverse mortgages, in contrast, are likely to decrease tax revenue. This is because they make housing consumption all the more attractive.

Analysis of the Standardized Pan European Personal Pension (PEPP) Product and its Impact in Four European Countries: The Netherlands, Estonia, Finland and Hungary

EIOPA has recently proposed to introduce standardized pan European personal pension products (PEPPs) that would be available in the accumulation phase, jointly with national personal pension plans. This paper analyzes the PEPPs from the perspective of the academic literature and proposes to use the PPR concept of Bovenberg and Nijman (2015) to categorize product characteristics, both in the accumulation phase as in the decumulation phase. The PPR concept can also be used to incorporate design features of the decumulation phase in the PEPP itself. A first important lesson to be learned from the academic literature is that the aim of stable income provision requires a framework where future asset returns are hedged rather than the asset only approach underlying the PEPPs. Whereas EIOPA proposes to allow switching between PEPPs only infrequently, the literature suggests that liquidity concerns are not a very convincing reason to restrict switching. Switching costs could be linked to the degree of liquidity of the portfolio. A better motivation for restriction on switching seems to be that investors might well put too much focus on recent investment performance as a predictor of future performance. As far as information disclosure is concerned more attention is recommended to the impact of biometric risks. More attention is also recommended for tax issues, because current tax provisions for national PPPs seem to be rooted in characteristics of the decumulation phase that can be avoided in the second regime. The paper concludes with a discussion of the potential impact of the PEPP proposal on PPP provision in four European countries.