This paper generalizes the standard model of the optimal linear income tax to include housing deduction. Unlike previous literature, we start from a dynamic equilibrium model and examine the steady state equilibrium. We then analyze first order conditions for our linear tax structure. The discussion suggest that as the economy we introduce in our model is more complex than in the standard model, new efficiency effects from increasing the marginal tax rate or the housing deduction appear that we should take in account. Obviously the importance of all those efficiency effects depend on their compensated elasticity but we should not a priori discard them.
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