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Housing and the tax system: how large are the distortions in the euro area?

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  • Fatica, Serena
  • Prammer, Doris

Abstract

This paper presents new evidence on the impact of the preferential treatment of owner-occupied housing in Europe. We find that tax benefits to homeowners reduce the user cost of housing capital by almost 40 percent compared to the efficient level under neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 7.8 percent of the value of owner-occupied housing, or about 30 percent of financial asset holdings in household portfolios. The bulk of the subsidies stems from under-taxation of the return to home equity, while the average contribution of the tax rebate for mortgage interest payments is driven down by relatively low loan-to-value ratios in the data. However, at the margin, the tax–induced incentive to use mortgage debt to finance the purchase of the main residence is sizable. JEL Classification: H24, H31, D14

Suggested Citation

  • Fatica, Serena & Prammer, Doris, 2017. "Housing and the tax system: how large are the distortions in the euro area?," Working Paper Series 2087, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20172087
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    Cited by:

    1. Martin, Carolin & Schmitt, Noemi & Westerhoff, Frank, 2021. "Heterogeneous expectations, housing bubbles and tax policy," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 555-573.
    2. Alexander Leodolter & Savina Princen & Aleksander Rutkowski, 2022. "Immovable Property Taxation for Sustainable and Inclusive Growth," European Economy - Discussion Papers 156, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    3. Antoine Paccoud & Markus Hesse & Tom Becker & Magdalena Górczyńska, 2022. "Land and the housing affordability crisis: landowner and developer strategies in Luxembourg’s facilitative planning context," Housing Studies, Taylor & Francis Journals, vol. 37(10), pages 1782-1799, October.
    4. Nicola Borri & Pietro Reichlin, 2021. "Optimal Taxation with Home Ownership and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 64-84, April.
    5. Luís Martins & Luísa Farinha & Renata Mesquita & Sónia Costa, 2021. "Household wealth in Portugal and the euro area," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    6. Doris Prammer, 2020. "Immovable property: where, why and how should it be taxed? A review of the literature and its implementation in Europe," Public Sector Economics, Institute of Public Finance, vol. 44(4), pages 483-504.
    7. Orsetta Causa & Nicolas Woloszko & David Leite, 2020. "Housing, Wealth Accumulation and Wealth Distribution: Evidence and Stylized Facts," LWS Working papers 30, LIS Cross-National Data Center in Luxembourg.
    8. Stefanie Braun, 2021. "Effects of Preferential Tax Treatment on German Homeownership," Working Papers 209, Bavarian Graduate Program in Economics (BGPE).
    9. Thomas Y. Mathä & Alessandro Porpiglia & Michael Ziegelmeyer, 2018. "Wealth differences across borders and the effect of real estate price dynamics: Evidence from two household surveys," Journal of Income Distribution, Ad libros publications inc., vol. 26(1), pages 1-35, March.
    10. Salvador Barrios & Cecile Denis & Viginta Ivaskaite-Tamosiune & Adriana Reut & Estefania Vazquez Torres, 2019. "Housing taxation: a new database for Europe," JRC Working Papers on Taxation & Structural Reforms 2019-08, Joint Research Centre.
    11. Savina Princen & Athena Kalyva & Alexander Leodolter & Cécile Denis & Adriana Reut & Andreas Thiemann & Viginta Ivaskaite-Tamosiune, 2020. "Taxation of Household Capital in EU Member States Impact on Economic Efficiency, Revenue and Redistribution," European Economy - Discussion Papers 130, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    12. repec:jid:journl:y:2018:v:26:i:3:p:15-49 is not listed on IDEAS
    13. Alexander Krenek & Margit Schratzenstaller-Altzinger, 2018. "A European Net Wealth Tax," WIFO Working Papers 561, WIFO.
    14. Marta Rodriguez-Vives & Miguel Angel Gavilan-Rubio, 2021. "An overview of the taxation of residential property: is it a good idea?," Public Sector Economics, Institute of Public Finance, vol. 45(2), pages 283-303.
    15. Nicola Borri & Pietro Reichlin, 2021. "Optimal Taxation with Home Ownership and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 64-84, April.
    16. Petr David, 2020. "Rates of CO2 registration taxes levied on passenger cars in the EU - can they cause distortion?," European Financial and Accounting Journal, Prague University of Economics and Business, vol. 2020(1), pages 07-32.

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    More about this item

    Keywords

    owner-occupied housing; taxation; user cost;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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