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From data to levy design. The five stages of implementing housing taxes

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  • Erling Røed Larsen

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    (Statistics Norway)

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    Abstract

    Taxes on housing consumption have attractive features. They can enhance overall efficiency, function as automatic stabilizers, and work progressively. Implementation, however, requires a careful balance between economic ambition and political reality. This article suggests a 5-stage procedure: identification; estimation; data acquisition and combination; empirical investigation; and tax function construction. It illustrates how to implement by employing the rental-equivalence principle to estimate recent values of owner-occupied housing consumption in a cross-section of Norwegian households by imputing rent for owners based on observed rents in rental markets. It analyzes the distribution of imputed rent over the income range, and demonstrates that imputed rent is a necessary good. A simple tax scheme on real households in a dataset from 2006, shows how a housing tax can be structured with attractive features. Such a tax scheme would, in contrast to the current interest payment subsidy, work counter-cyclically and could, if used as a substitute for income taxes, reduce deadweight losses from labor income taxes. In its suggested form, it would generate approximately 12 billion NOK in revenue for Norway.

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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 596.

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    Date of creation: Oct 2009
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    Handle: RePEc:ssb:dispap:596

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    Keywords: automatic stabilization; deadweight loss; distribution; efficiency; housing taxation; imputed rent; progressive levy; rental equivalence;

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    1. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October.
    2. Charles Ka Yui Leung, 2004. "Macroeconomics and Housing: A Review of the Literature," Discussion Papers 00004, Chinese University of Hong Kong, Department of Economics.
    3. Slemrod, Joel & Kopczuk, Wojciech, 2002. "The optimal elasticity of taxable income," Journal of Public Economics, Elsevier, vol. 84(1), pages 91-112, April.
    4. Patric H. Hendershott & Michael White, 2000. "Taxing and Subsidizing Housing Investment: The Rise and Fall of Housing's Favored Status," NBER Working Papers 7928, National Bureau of Economic Research, Inc.
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    8. Christiansen, Vidar, 1984. "Which commodity taxes should supplement the income tax?," Journal of Public Economics, Elsevier, vol. 24(2), pages 195-220, July.
    9. Edward E. Leamer, 2007. "Housing IS the Business Cycle," NBER Working Papers 13428, National Bureau of Economic Research, Inc.
    10. Nakagami, Yasuhiro & Pereira, Alfredo M., 1996. "Budgetary and Efficiency Effects of Housing Taxation in the United States," Journal of Urban Economics, Elsevier, vol. 39(1), pages 68-86, January.
    11. Cremer, Helmuth & Gahvari, Firouz, 1998. "On Optimal Taxation of Housing," Journal of Urban Economics, Elsevier, vol. 43(3), pages 315-335, May.
    12. Bye, Brita & Avitsland, Turid, 2003. "The welfare effects of housing taxation in a distorted economy: a general equilibrium analysis," Economic Modelling, Elsevier, vol. 20(5), pages 895-921, September.
    13. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
    14. Arthur Lewbel, 1998. "Semiparametric Latent Variable Model Estimation with Endogenous or Mismeasured Regressors," Econometrica, Econometric Society, vol. 66(1), pages 105-122, January.
    15. Poterba, James M, 1992. "Taxation and Housing: Old Questions, New Answers," American Economic Review, American Economic Association, vol. 82(2), pages 237-42, May.
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