Optimal Taxation Theory And The Taxation Of Housing In The Usa And The Uk

In the last few years a number of papers have been published applying the principles of optimal taxation to the housing market, primarily with regard to the United States. The conclusions reached are that investment in housing is under taxed, resulting in overinvestment in housing and in underinvestment in business assets. In this paper we survey these contributions, but argue that the researchersí conclusions are reached by ignoring the Property Tax. The grounds for ignoring it seem to be that it is a local tax which pays for local services. This may be true but in most other countries the same services, such as education, are largely paid for through other forms of taxation and residential property is lightly taxed. Moreover while the provision and quality of these services may vary between local governments in the US, the provision and consumption of these services is largely unaffected by the amount of housing that any household purchases, so that house buyers presumably take the property tax into account in deciding the size of their investment in housing in any area. The implication is that when the property tax is taken into account the bias in favour of over investment in housing in the US is much less than has been suggested, if it exists at all. In the UK a bias exists and is also low, but for largely different reasons. Firstly, tax relief on mortgage interest has been phased out; secondly, investment in business assets through pension schemes is given tax relief; thirdly, the planning system, through its constraints on the availability of land, imposes an implicit tax on housing. But the UK system, while in its investment towards housing, is regressive in that it favours the better off and the old because its property tax, the Council Tax, is a higher percentage of the capital value of smaller homes than it is of larger homes. A bias which does exist in the UK, however, occurs because industrial and commercial real estate is taxed, through the rates, at a much higher level than is residential real estate. This discourages the use of the limited available land for industrial and commercial use, and encourages its redevelopment, as a brown field site, for housing.