Housing, Collateral Constraints, and Fiscal Policy

This paper studies the preferential tax treatment of housing that can be ob- served in many industrialized countries. It provides a rationale for it by means of an optimal taxation approach, taking into account an important feature of housing, namely its usage as collateral. In a borrower-lender framework, where private loans are assumed to be non-enforceable and have to be collat- eralized by housing, optimal fiscal policy should disburden constrained bor- rowers by subsidizing their housing.