FISCAL STUDIES, vol. 39, no. 2, pp. 299–342 (2018) 0143-5671
Housing and the Tax System: How Large Are
the Distortions in the Euro Area?
† and D
†European Commission – Finance & Economy Unit, Growth & Innovation Directorate,
Joint Research Centre (JRC)
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
Submitted December 2016.
The authors would like to thank Nicolas Albacete and Pirmin Fessler for help with the data and for
valuable suggestions and discussions. The paper has beneﬁted from comments from three anonymous
referees, Walpurga K
oglhofer and participants at the Fourth Luxembourg Workshop on Household
Finance and Consumption and at the European Central Bank (ECB) Household Finance and Consumption
Network (HFCN) meeting in November 2016. The views expressed are those of the authors and may not in
any circumstances be regarded as stating an ofﬁcial position of the European Commission, the OeNB or the
Keywords: taxation, owner-occupied housing, user cost.
JEL classiﬁcation numbers: H24, H31, D14.
2017 The Authors. Fiscal Studies published by John Wiley & Sons Ltd. on behalf of Institute for Fiscal Studies.
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