Objections to Taxing Resale of Residential Property under a VAT

13 Pages Posted: 23 Apr 2012 Last revised: 31 Dec 2012

See all articles by Wei Cui

Wei Cui

University of British Columbia (UBC), Faculty of Law

Date Written: May 22, 2012


The “pre-collection” of tax on imputed consumption generated by owner-occupied housing plays a crucial role in both consumption tax theory and real-world tax regimes. However, even under current VAT systems with the widest tax bases, the taxation of imputed housing consumption is incomplete because pre-existing housing stock is typically not taxed when the VAT is introduced, and because housing value may appreciate after initial sale. In response, some have recommended taxing residential re-sale to capture previously untaxed consumption value. This paper argues that because the incidence of any properly-designed tax on resale will fall only on economic rent and existing assets, taxing housing resale in itself cannot produce efficiency gains. Moreover, to avoid causing distortions and be consistent with consumption tax theory, a tax on resale must be refined to ensure non-taxation of investment returns other than economic rent. The refinements are alien to normal VAT mechanisms and can no longer be viewed as embodying the “pre-collection” method. Finally, the paper highlights the difference between traditional efficiency concerns about the under-taxation of imputed income/consumption and the equity concerns that likely motivate the proponents of taxing resale. Indeed, in countries where the modern VAT is in place, the aggregate tax burden on housing consumption may be rather high, and under-taxation may not be an issue.

Keywords: VAT, consumption tax, imputed consumption, housing

JEL Classification: H21, H22, K34

Suggested Citation

Cui, Wei, Objections to Taxing Resale of Residential Property under a VAT (May 22, 2012). Tax Notes, Vol. 137, No. 7, 2012, Available at SSRN: https://ssrn.com/abstract=2043754 or http://dx.doi.org/10.2139/ssrn.2043754

Wei Cui (Contact Author)

University of British Columbia (UBC), Faculty of Law ( email )

1822 East Mall
Vancouver, BC V6T1Z1

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