Taxation of housing

Housing is the most important consumption good for most households, yet our understanding of how housing should be taxed is quite limited. There is a vast literature, both theoretical and empirical, that considers various economic aspects of the housing market. However, the literature on how taxes on housing should be designed is quite limited. Most existing studies restrict the attention to efficiency considerations and neglect distributional concerns. This is unfortunate since such concerns are central in assessing the appropriate role of housing taxation in relation to other taxes in the tax system.

In this basic research project, we analyse how housing should be taxed in the presence of a heterogenous population of taxpayers, thereby taking both efficiency and distributional aspects into account. In our model economy, individuals differ in terms of their skills and their initial endowments of land. Workers decide how much land and buildings they would like to consume in relation to other goods and allocate their time between labour supply and household maintenance, the latter which can also be purchased in the market.  A key aspect is that the price of land (and thus the price of housing) is affected by the design of the tax system through capitalisation effects.

In addition to the theoretical analysis, the model is illustrated with numerical calculations. We examine several key issues, including whether buildings and land should be taxed at different rates. Furthermore, we analyse how the taxation of housing, labour income, and tax subsidies for renovation and maintenance of buildings interact and how these together affect individuals’ labour supply.