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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?• Revenue-raising implications?
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?
Current housing taxes
Revenue (2004–05)
Council Tax £19.9bn (net)
Stamp Duty (residential property)
£3.6bn*
Capital Gains Tax £1.4bn (all sources)
Inheritance Tax £2.8bn (all sources)
VAT on repairs, etc. ?
Source: Pre-Budget Report, Inland Revenue* 2002–03
International comparison
0.0 4.0 8.0 12.0 16.0
USA
UK
Japan
France
Germany
OECD Avg.
EU Average
Percentage of total tax revenue (2001)
Narrow Broad
Source: Author’s calculations from OECD Revenue Statistics 2003
International comparison
0.0 4.0 8.0 12.0 16.0
USA
UK
Japan
France
Germany
OECD Avg.
EU Average
Percentage of total tax revenue (2001)
Narrow Broad
Source: Author’s calculations from OECD Revenue Statistics 2003
Housing vs. other investments
AssetContri-butions
Trans-actions
Int. / DivCapital Gain
Withd-rawals
Others
Housing vs. other investments
AssetContri-butions
Trans-actions
Int. / DivCapital Gain
Withd-rawals
Others
Housing (first
home)
Housing vs. other investments
AssetContri-butions
Trans-actions
Int. / DivCapital Gain
Withd-rawals
Others
Housing (first
home)Taxed
Taxed (0, 1, 3 or 4%)
Exempt Exempt ExemptCouncil
Tax
Housing vs. other investments
AssetContri-butions
Trans-actions
Int. / DivCapital Gain
Withd-rawals
Others
Housing (first
home)Taxed
Taxed (0, 1, 3 or 4%)
Exempt Exempt ExemptCouncil
Tax
Pension Fund
Housing vs. other investments
AssetContri-butions
Trans-actions
Int. / DivCapital Gain
Withd-rawals
Others
Housing (first
home)Taxed
Taxed (0, 1, 3 or 4%)
Exempt Exempt ExemptCouncil
Tax
Pension Fund
ISAs
Housing vs. other investments
AssetContri-butions
Trans-actions
Int. / DivCapital Gain
Withd-rawals
Others
Housing (first
home)Taxed
Taxed (0, 1, 3 or 4%)
Exempt Exempt ExemptCouncil
Tax
Pension Fund
Exempt from Inc.
Tax0.5% Exempt Exempt
25% tax-free sum
n/a
ISAs
Housing vs. other investments
AssetContri-butions
Trans-actions
Int. / DivCapital Gain
Withd-rawals
Others
Housing (first
home)Taxed
Taxed (0, 1, 3 or 4%)
Exempt Exempt ExemptCouncil
Tax
Pension Fund
Exempt from Inc.
Tax0.5% Exempt Exempt
25% tax-free sum
n/a
ISAs Taxed 0.5% Exempt Exempt Exempt n/a
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
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?
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?
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
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?
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?
Distributional effects
-8
-7
-6
-5
-4
-3
-2
-1
0
Poorest 2 3 4 5 6 7 8 9 Richest
Ch
an
ge
in n
et i
nco
me
, %
Source: Author’s calculations from British Household Panel Survey 2000 with incomes and house prices uprated to 2002 values
Property Tax
• Estimated revenue £16bn (2002)• Larger burden at bottom of distribution
• Low income, high housing wealth: are they “poor”?• Includes many pensioners
Distributional effects
-8
-7
-6
-5
-4
-3
-2
-1
0
Poorest 2 3 4 5 6 7 8 9 Richest
Ch
an
ge
in n
et i
nco
me
, %
pensioners pay pensioners deferSource: Author’s calculations from British Household Panel Survey 2000 with incomes and house prices uprated to 2002 values
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?
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