Tax Subsidies and Housing Affordability

Abstract

We show in a general equilibrium model that the incidence of tax subsidies intended to enhance housing affordability depends on four parameters: the elasticity of supply, the elasticity of demand, the distribution of housing ownership, and the distribution of housing consumption. We estimate these parameters with administrative data on real estate transactions and survey data on household balance sheets in Luxembourg. Using kinks in the taxes on transactions and on new constructions as a source of exogenous variation, we find that the top and bottom 10% of households by real estate wealth capture respectively 26% and 3% of the surplus from housing tax subsidies.

Keywords: Real Estate, Taxes, Housing Subsidies, Housing Affordability

JEL Classification: G51, H71, R21, R31