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Housing and the Tax System: How Large Are the Distortions in the Euro Area? *
Author(s) -
Fatica Serena,
Prammer Doris
Publication year - 2018
Publication title -
fiscal studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.63
H-Index - 40
eISSN - 1475-5890
pISSN - 0143-5671
DOI - 10.1111/1475-5890.12159
Subject(s) - subsidy , economics , monetary economics , debt , consumption (sociology) , payment , equity (law) , incentive , loan , value added tax , tax credit , residence , finance , asset (computer security) , value (mathematics) , labour economics , public economics , microeconomics , demographic economics , market economy , computer security , machine learning , sociology , computer science , law , social science , political science
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.