Imputed Rental Income, Taxation and Income Distribution in Finland

This paper analyses the effects of imputed rental income from owner-occupied housing and its taxation on income distribution in Finland. Using micro-data from the 2004 Wealth Survey produced by Statistics Finland we find that owner-occupied housing has a significant impact on the well-being of many households. In 2004 imputed rental income constituted on average about 10 percent of homeowner households' disposable income. Furthermore, including imputed rental income to household disposable income decreased overall inequality measured by the Gini index. The estimated tax revenue forgone in 2004 was 1.9 billion euros amounting to almost 15 percent of the total government income and wealth tax revenue collected that year. On the other hand, the tax subsidy resulting from non-taxation of imputed rental income is skewed toward high-income households who are more likely to be homeowners and also more likely to own outright. The paper also made a comparison of the current tax system where imputed rental income is untaxed to two alternative tenure neutral tax systems where imputed rental income is taxed. The results indicate that the effects on overall inequality depend vitally on the way the increased tax revenue is transferred back to the households. The calculations in this paper ignore any behavioural responses by the households. JEL Codes: H23, H24, R21.