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The taxation of housing

The taxation of housing. Andrew Leicester Zoë Oldfield. Background. Recent housing market volatility Implications for macroeconomic stability? Miles / Barker reviews to report at Budget Is housing ‘under-taxed’? Options for reform? Could taxes stabilise the market?

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The taxation of housing

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  1. The taxation of housing Andrew Leicester Zoë Oldfield

  2. Background • Recent housing market volatility • Implications for macroeconomic stability? • Miles / Barker reviews to report at Budget • Is housing ‘under-taxed’? • Options for reform? • Could taxes stabilise the market? • Revenue-raising implications?

  3. Is housing under-taxed? “… investment in housing is relatively lightly taxed compared to other investments.” Fiscal Stabilisation and EMU (2003) • Housing has consumption and investment elements • Economic reasons for lower housing taxes? • UK versus other countries?

  4. Current housing taxes * 2002–03 Source: Pre-Budget Report, Inland Revenue

  5. International comparison Source: Author’s calculations from OECD Revenue Statistics 2003

  6. International comparison Source: Author’s calculations from OECD Revenue Statistics 2003

  7. Housing vs. other investments

  8. Housing vs. other investments

  9. Housing vs. other investments

  10. Housing vs. other investments

  11. Housing vs. other investments

  12. Housing vs. other investments

  13. Housing vs. other investments

  14. Housing vs. other consumption • Housing does not attract VAT • True for some other consumption goods • But not for large durables • Council Tax, Stamp Duty etc. make overall comparisons difficult

  15. Housing ‘under-taxed’? • Hard to argue that housing under-taxed compared to other investments • Compared to other consumption the case is stronger • Effect of Council Tax? • What are the options for reform?

  16. VAT on housing • No VAT charged on housing • Distort consumption decisions? • Speculation that VAT to be introduced on new houses: • Estimated revenue effect: £4.5bn (2003 – 04) • Implications for housing supply? • Buy non-new home instead?

  17. Stamp Duty • Some problems with stamp duty in general • Price clustering: change structure of tax? • Labour mobility • Stamp duty as stabilising tool • Legislation needed • Pre-empting  greater volatility? • Implementation lags • Spread cost over whole mortgage

  18. CGT on First Homes • CGT now applies only to non-primary housing • Extending it would raise £11.5bn (2003 – 04) • Many ways in which it could be introduced • Adds complexity to CGT system, reduces yield • Reduce labour mobility if exemptions for lengthy ownership period?

  19. Property Tax • Feature of some international systems • Council Tax has elements of property tax • Direct link between house value and tax paid • Acts in part as automatic stabiliser • Replace Council Tax? • Problems with local tax element (Balance of Funding) • Issues for design: • Would renters pay? • Associated benefit?

  20. Distributional effects Source: Author’s calculations from British Household Panel Survey 2000 with incomes and house prices uprated to 2002 values

  21. Property Tax • Estimated revenue £16bn (2002) • Larger burden at bottom of distribution • Low income, high housing wealth: are they “poor”? • Includes many pensioners

  22. Distributional effects Source: Author’s calculations from British Household Panel Survey 2000 with incomes and house prices uprated to 2002 values

  23. Property Tax • Estimated revenue £16bn (2002) • Larger burden at bottom of distribution • Low income, high housing wealth: are they “poor”? • Includes many pensioners • Slightly less regressive than council tax • Revenue similar (for modelled example) • Cost of revaluation?

  24. Conclusions • Govt. may need to raise taxes to meet fiscal rules • Housing could provide potential source of significant new revenue • Not easy to justify based on housing being ‘under-taxed’ • Stabilisation another reason for reform • Needs careful consideration and consultation • Would justify reformed rather than higher taxation

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