Welfare Cost of the Real Estate Transfer Tax

27 Pages Posted: 28 Feb 2017

See all articles by Thiess Buettner

Thiess Buettner

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Date Written: February 09, 2017

Abstract

This paper considers the welfare implications of a tax on real estate transfers. A theoretical analysis shows how the discouragement of mutually beneficial transactions as well as tax-sheltering activities give rise to a welfare loss that can be estimated comprehensively from the empirical elasticity of the tax base. In the absence of tax planning, the elasticity of the tax base is determined by the hazard rate to deter transactions at the margin. With tax planning, the elasticity of the tax base is also driven by the “technology” of tax sheltering. Empirical evidence on the deadweight loss is obtained from the analysis of real estate transfer taxes in Germany. After a constitutional reform has granted the German states the right to set the local rate of the real estate transfer tax, over the last ten years many states have made use of this discretion and have increased the tax rate - some of them repeatedly. Based on the empirical estimate of the revenue effect of these tax increases, the paper shows that the German experience points to a substantial welfare cost of real estate transfer taxation. The preferred estimate suggests that each additional Euro of revenues raised is associated with an increase of the deadweight loss of about 67 cents.

Keywords: real estate transfer tax, marginal cost of funds, tax rate elasticity of the tax base, tax avoidance

JEL Classification: H200, H260, R380

Suggested Citation

Buettner, Thiess, Welfare Cost of the Real Estate Transfer Tax (February 09, 2017). CESifo Working Paper Series No. 6321. Available at SSRN: https://ssrn.com/abstract=2924454

Thiess Buettner (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Lange Gasse 20
Nürnberg, Bavaria 90403
Germany

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