DP12551 | Welfare Effects of Housing Transaction Taxes

Publication Date

12/31/2017

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Abstract

We evaluate the welfare cost of ad valorem housing transaction taxes, focusing on distortions in the suboptimal matching of houses and households as the channel of welfare effects. We present a one-sided assignment model with transaction costs and imperfectly transferable utility where households are heterogeneous by incomes, houses are heterogeneous by quality, and housing is a normal good. We calibrate the model with data from the Helsinki metropolitan region to assess the welfare impact of a counterfactual tax reform, where the transaction tax is replaced by a revenue equivalent ad valorem property tax. The aggregate welfare gain would be 13% of the tax revenue at the current 2% tax rate. The share of ex post losers from the reform is increasing in the tax rate even though the aggregate welfare cost of transaction taxation increases rapidly with the tax rate, with the Laffer curve peaking at about 10%.