Optimal housing taxation with land scarcity and maintenance: A Mirrleesian perspective

We study optimal housing taxation in a Mirrleesian framework where individuals differ in both labor productivity and land ownership. Housing services are produced by combining scarce land with structures that require maintenance, which can be performed either in-house or through market purchases. We first characterize optimal allocations under information and resource constraints. We then restrict the government to the use of proportional housing taxes. Numerical simulations show that uniform taxation of land and structures is desirable only when political constraints prevent the imposition of very high land taxes. Otherwise, the optimal policy is to tax land at a much higher rate than structures, while still imposing a positive tax on structures to mitigate distortions from income taxation. A positive marginal tax on labor income incentivizes in-house over market-purchased maintenance. To prevent an inefficiently large reliance on in-house maintenance, optimal policy should generally subsidize market-purchased maintenance services.