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Housing Market Responses to Transaction Taxes: Evidence From Notches and Stimulus in the U.K

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  • Michael Carlos Best
  • Henrik Jacobsen Kleven

Abstract

We investigate housing market responses to transaction taxes using administrative data on all property transactions in the U.K. from 2004 to 2012 combined with quasi-experimental variation from tax notches and tax stimulus. We present two main findings. First, transaction taxes are highly distortionary across a range of margins, causing large distortions to the price, volume, and timing of property transactions. Secondly, temporary transaction tax cuts are an enormously effective form of fiscal stimulus. A temporary elimination of a 1% transaction tax increased housing market activity by 20% in the short run (due to both timing and extensive responses) and less than half of the stimulus effect was reversed after the tax was reintroduced (due to re-timing). Because of the complementarities between moving house and consumer spending, these stimulus effects translate into extra spending per dollar of tax cut equal to about 1. We interpret our empirical findings in the context of a housing model with downpayment constraints in which leverage amplifies the effects of transaction taxes.

Suggested Citation

  • Michael Carlos Best & Henrik Jacobsen Kleven, 2018. "Housing Market Responses to Transaction Taxes: Evidence From Notches and Stimulus in the U.K," Review of Economic Studies, Oxford University Press, vol. 85(1), pages 157-193.
  • Handle: RePEc:oup:restud:v:85:y:2018:i:1:p:157-193.
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    File URL: http://hdl.handle.net/10.1093/restud/rdx032
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    More about this item

    Keywords

    Transaction taxes; Property taxes; Fiscal stimulus;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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