Bridge over ocean
1 July 1983 Financial Analysts Journal Volume 39, Issue 4

Government Policy and the Allocation of Capital Between Residential and Industrial Uses

  1. Patric H. Hendershott

Over the past decades, tax policies have favored residential capital over industrial capital in two basic ways. First, the cash flow from household capital (the implicit rents earned) has not been taxed, whereas that generated by industrial plant and equipment has. Second, nominal capital gains realized upon the sale of a house have generally not been taxed, whereas realized gains from the sale of industrial structures have been taxed at the firm level and unrealized gains, reflected in share prices, have been taxed when the shares were sold. (Deductibility of interest expense is not as great a tax advantage to homeowners as popularly believed.)

The preferential tax treatment accorded owner-occupied housing has resulted in a shift of capital from industrial to residential use. This tendency was not dampened by the credit market constraints of the 1970s and is unlikely ever to be reversed by legislation eliminating tax advantages to homeowners. Perhaps the only solution is to tax income from industrial capital less heavily.

This is basically the approach taken by the Economic Recovery Tax Act. To the extent this Act reduces the tax bias in favor of owner-occupied housing directly, as well as indirectly via higher real interest rates, we are likely to see a more efficient allocation of capital between residential and industrial uses in the 1980s.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.