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Imputed Rental Income, Taxation and Income Distribution in Finland

  • Tuukka Saarimaa

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.

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Paper provided by Government Institute for Economic Research Finland (VATT) in its series Discussion Papers with number 446.

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Date of creation: 02 Jul 2008
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Handle: RePEc:fer:dpaper:446
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  1. Katz, Arnold J, 1983. "Valuing the Services of Consumer Durables," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 29(4), pages 405-27, December.
  2. Hills, John, 1991. "Distributional effects of housing subsidies in the United Kingdom," Journal of Public Economics, Elsevier, vol. 44(3), pages 321-352, April.
  3. Yates, Judith, 1994. "Imputed Rent and Income Distribution," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 40(1), pages 43-66, March.
  4. Yannis M. Ioannides & Jeffrey E. Zabel, 2000. "Neighborhood Effects and Housing Demand," Discussion Papers Series, Department of Economics, Tufts University 0012, Department of Economics, Tufts University.
  5. Frick, Joachim R. & Grabka, Markus M., 2003. "Imputed Rent and Income Inequality: A Decomposition Analysis for Great Britain, West Germany and the U.S," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 513-537.
  6. Edward L. Glaeser & Jesse M. Shapiro, 2002. "The Benefits of the Home Mortgage Interest Deduction," NBER Working Papers 9284, National Bureau of Economic Research, Inc.
  7. Philippe Thalmann, 2007. "Tenure-neutral and Equitable Housing Taxation," Urban Studies, Urban Studies Journal Limited, vol. 44(2), pages 275-296, February.
  8. Cremer, H. & Gahvari, F., 1996. "On Optimal Taxation of Housing," Papers 96.417, Toulouse - GREMAQ.
  9. Eerola, Essi & Määttänen, Niku, 2004. "On the Political Economy of Housings Tax Status," Discussion Papers 905, The Research Institute of the Finnish Economy.
  10. Dietz, Robert D. & Haurin, Donald R., 2003. "The social and private micro-level consequences of homeownership," Journal of Urban Economics, Elsevier, vol. 54(3), pages 401-450, November.
  11. Linneman, Peter, 1985. "An economic analysis of the homeownership decision," Journal of Urban Economics, Elsevier, vol. 17(2), pages 230-246, March.
  12. Harding, John P. & Rosenthal, Stuart S. & Sirmans, C.F., 2007. "Depreciation of housing capital, maintenance, and house price inflation: Estimates from a repeat sales model," Journal of Urban Economics, Elsevier, vol. 61(2), pages 193-217, March.
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