On the Taxation of Durable Goods

Abstract

This article proposes a dynamic Mirrleesian theory of commodity taxation in the presence of durable goods. A uniform taxation across all goods is suboptimal even when the consumption preferences are separable from labor. If the consumption utility function is strictly concave and durable stocks are adjustable without friction, durable investment should be taxed at a higher rate than the purchase of nondurable goods. With adjustment frictions, the wedge on durable investment depends on substitution effects between durable and nondurable consumption and can be positive or negative. An application suggests that housing investment should face higher tax rates than regular consumption.

How Should Consumption Be Taxed?

“…Given these difficulties, a comprehensive analysis of housing seems infeasible and research papers tend to focus on the durable aspect of housing consumption (e.g. Koehne, 2018) or on housing as a capital good (e.g. Eerola and Määttänen, 2013;Nakajima, 2020;Borri and Reichlin, 2021).…”

Pareto-Efficient Tax Breaks

“…7 Similarly, Koehne (2017) studies a class of incentive-neutral consumption perturbations in a case with durable and nondurable goods.…”

How Should Capital Be Taxed?

“…4646The analysis of AS is not directly applicable to housing taxation as it neglects the durable aspect of housing consumption. Köhne (2018) develops a dynamic framework of optimal commodity taxation with durable goods. In an application to housing, he finds that housing investment should be taxed at a higher rate than nondurable consumption.…”