Transaction Tax and Market Illiquidity
56 Pages Posted: 17 Jun 2019 Last revised: 22 Feb 2021
Date Written: February 3, 2021
Abstract
We identify four interrelated behavioral propositions after the implementation of a seller’s stamp duty (SSD) (a transaction tax on sellers who sell their properties within the SSD lock-in period) in the Singapore private housing market. First, SSD lock-in home sellers may sell their properties at a higher price than ordinary home sellers to cover the SSD tax (the price effect). Second, the SSD lowers the probability that a transaction takes place, prolonging SSD lock-in home sellers’ property holding period (the lock-in effect). The magnitude of this effect is determined by the strength of the SSD tax. Third, the lock-in effect drives some affected home sellers to become SSD lock-in landlords who lease out their properties at a lower rent (the rent effect). SSD lock-in landlords are forced to hold and rent out their properties, and thus, they may have lower search and bargaining power than ordinary landlords do, giving rise to a hidden tax benefit to tenants. Last, the price effect provokes ordinary home sellers to raise their reservation price (the contagion effect). This lowers their probability of finding a home buyer, which amplifies the lock-in effect on market-level illiquidity. Logical coherence and empirical identification of the intertwined behavioral outcomes after implementing an SSD are novel contributions to the literature. The findings have implications for policymakers in designing transaction taxes.
Keywords: Tax Policy, Seller's Behavior, Housing, Illiquidity
JEL Classification: H71, R31, E3, G12
Suggested Citation: Suggested Citation