THE DESIGN OF A TAX RULE FOR OWNER-OCCUPIED HOUSING UNDER A PERSONAL CONSUMPTION TAX

Analysts agree that designing a satisfactory tar rule for owner-occupi ed housing poses a serious challenge for the personal (cash flow) cons umption tar that recently has been introduced in Congress by several s enators. We compare tax rules for owner-occupied housing by performing numerical simulations for a person who begins as a renter then become s an owner-occupier and ends as a renter We show that the most commonl y offered tar rule-prepayment with mortgage spreading-yields a time pa th for tares over the person's life that is not fully satisfactory. We then show that this rime path can be improved if the tax rule is modi fied so that prepayment with mortgage spreading is coupled with downpa yment spreading, tax deferral, and capital gain or loss inclusion. Int erestingly, a mortgage interest deduction, together with taxation of t he nominal capital gain at sale, may represent an imperfect implementa tion of tax deferral.