Living on the Edge: the Salience of Property Taxes in the UK Housing Market

37 Pages Posted: 31 May 2019

See all articles by Francesco Nicolai

Francesco Nicolai

BI Norwegian Business School

Marco Pelosi

London School of Economics

Simona Risteska

Warwick Business School; London School of Economics & Political Science, Department of Finance, Students

Date Written: March 28, 2019

Abstract

Taxes that happen concurrently with the purchase are more salient than deferred taxes. Using a sharp geographical discontinuity between London Boroughs, we show that the incidence of property taxes deferred to the future is too small compared to the incidence of stamp duty taxes happening at the moment of buying the property. The difference in incidence implies very large discount rates that cannot be easily rationalized even after accounting for liquidity constraints. The lack of salience at the moment of purchase implies that the burden of the tax will be borne in the future to meet the budget constraint. This implies that there is an optimal tax mix, even though one of the two taxes is more distortionary than the other.

Keywords: Housing Market, Property Tax, Consumer Economics, Public Finance, Behavioral Finance

Suggested Citation

Nicolai, Francesco and Pelosi, Marco and Risteska, Simona, Living on the Edge: the Salience of Property Taxes in the UK Housing Market (March 28, 2019). Available at SSRN: https://ssrn.com/abstract=3381519 or http://dx.doi.org/10.2139/ssrn.3381519

Francesco Nicolai

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Marco Pelosi (Contact Author)

London School of Economics ( email )

UK

Simona Risteska

Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

London School of Economics & Political Science, Department of Finance, Students ( email )

London
Great Britain

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