Housing and the Tax System: How Large Are the Distortions in the Euro Area?*

Housing and the Tax System: How Large Are the Distortions in the Euro Area?* This paper presents new evidence on the impact of the preferential treatment of owner‐occupied housing in the euro area. We find that tax benefits to homeowners reduce the user cost of housing capital by almost 40 per cent compared with the efficient level under neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 7.8 per cent of the value of owner‐occupied housing, or about 30 per cent of financial asset holdings in household portfolios. The bulk of the subsidy stems from undertaxation 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 sizeable. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Fiscal Studies Wiley

Housing and the Tax System: How Large Are the Distortions in the Euro Area?*

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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
Fiscal Studies © 2018 Institute for Fiscal Studies
ISSN
0143-5671
eISSN
1475-5890
D.O.I.
10.1111/1475-5890.12159
Publisher site
See Article on Publisher Site

Abstract

This paper presents new evidence on the impact of the preferential treatment of owner‐occupied housing in the euro area. We find that tax benefits to homeowners reduce the user cost of housing capital by almost 40 per cent compared with the efficient level under neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 7.8 per cent of the value of owner‐occupied housing, or about 30 per cent of financial asset holdings in household portfolios. The bulk of the subsidy stems from undertaxation 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 sizeable.

Journal

Fiscal StudiesWiley

Published: Jan 1, 2018

Keywords: ; ; ; ; ;

References

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