Investment Housing Tax Concessions and Welfare: Evidence from Australia

We build a general equilibrium OLG model with heterogeneous agents to study the welfare implications of investment housing tax concessions in the Australian economy. These concessions may encourage households to invest in socially optimal housing that would otherwise not be undertaken due to the presence of uninsurable risk in housing investment. However, we show that removing these concessions raises tax revenue and can be welfare-improving, depending on how this revenue is redistributed. If additional revenue is used to fund transfers to renters, steady state welfare increases significantly and a majority of existing households benefit over the transition. This gain arises as transfers to renters provides income insurance, relaxes credit constraints, and higher rental receipts compensate landlords for the increased tax burden. We study other methods of using additional tax revenue. If transfers are not targeted there are much smaller steady state welfare gains and the majority of existing renters suffer a small welfare loss.