Housing and the Tax System: How Large Are the Distortions in the Euro Area?

35 Pages Posted: 14 Jul 2017

See all articles by Serena Fatica

Serena Fatica

European Commission - Joint Research Centre

Doris Prammer

Austrian National Bank

Date Written: July 12, 2017

Abstract

This paper presents new evidence on the impact of the preferential treatment of owner-occupied housing in Europe. We find that tax benefits to homeowners reduce the user cost of housing capital by almost 40 percent compared to the efficient level under neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 7.8 percent of the value of owner-occupied housing, or about 30 percent of financial asset holdings in household portfolios. The bulk of the subsidies stems from under-taxation of the return to home equity, while the average contribution of the tax rebate for mortgage interest payments is driven down by relatively low loanto-value ratios in the data. However, at the margin, the tax–induced incentive to use mortgage debt to finance the purchase of the main residence is sizable.

Keywords: Taxation, Owner-Occupied Housing, User Cost

JEL Classification: H24, H31, D14

Suggested Citation

Fatica, Serena and Prammer, Doris, Housing and the Tax System: How Large Are the Distortions in the Euro Area? (July 12, 2017). ECB Working Paper No. 2087, Available at SSRN: https://ssrn.com/abstract=3001652

Serena Fatica (Contact Author)

European Commission - Joint Research Centre ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Doris Prammer

Austrian National Bank ( email )

Otto-Wagner-Platz, 3
Wien, 1090
Austria

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