ECON 2000 Lecture Notes - Lecture 93: Inventory Investment
14 May 2018
School
Department
Course
Professor
ECON 2000
Lecture 93
Tax treatment of housing
- Tax laws affect accumulation of residential investment
- Instead of discouraging investment as corporate profit tax does,
personal income tax encourages households to invest in housing
- Homeowner as landlord with himself as a tenant but landlord with
special tax treatment
- Canadian personal income-tax system doesn’t require him to pay tax
on imputed rental income (the rent he pays himself)
- He doesn’t have to pay any capital gains tax when value of his home
increases
- Economists say that because of this subsidy, Canada invests too
much in housing compared to other forms of capital
Inventory investment
- One of the smallest component, averaging abt 1% of GDP
- In recessions, firms stop replenishing their inventory as goods are
sold and inventory investment becomes negative
- In recession, more than half the fall in spending can come from a
decline in inventory investment
Reasons for holding inventories
- One use of inventories is to smooth level of production over time
- E.g. firm that experiences temp boom will find it cheaper to produce
goods at each steady state
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Document Summary
Tax laws affect accumulation of residential investment. Instead of discouraging investment as corporate profit tax does, personal income tax encourages households to invest in housing. Homeowner as landlord with himself as a tenant but landlord with special tax treatment. Canadian personal income-tax system doesn"t require him to pay tax on imputed rental income (the rent he pays himself) He doesn"t have to pay any capital gains tax when value of his home increases. Economists say that because of this subsidy, canada invests too much in housing compared to other forms of capital. One of the smallest component, averaging abt 1% of gdp. In recessions, firms stop replenishing their inventory as goods are sold and inventory investment becomes negative. In recession, more than half the fall in spending can come from a decline in inventory investment. One use of inventories is to smooth level of production over time.
