Tax Evasion, Capital Gains Taxes, and the Housing Market

91 Pages Posted: 12 Sep 2018 Last revised: 29 May 2020

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Keyang Li

Tsinghua University - Hang Lung Center for Real Estate; Tsinghua University - Department of Construction Management

Yu Qin

National University of Singapore (NUS) - Department of Real Estate

Jing Wu

Tsinghua University - Hang Lung Center for Real Estate; Tsinghua University - Department of Construction Management

Jubo Yan

Nanyang Technological University - School of Social Sciences

Date Written: November 1, 2018

Abstract

In this study, we exploit a policy shock that differentially increased capital gains taxes for housing units with holding period less than 5 years, and document tax avoidance and tax evasion in the residential resale market in China. We show suggestive evidence that after the capital gains tax increase, resale transactions exhibit more bunching above 5 years of holding period, but the responses are small and imprecisely estimated. More importantly, using precise information of both the actual transaction price and the reported price to the tax authority, we find that tax evasion, measured by the difference between the two prices, becomes 23.3% higher. We also document that the policy has strong heterogeneous effects, whereby cash buyers are 8.4% more likely to buy a house than buyers who need financing after the policy. This is mainly because financing buyers prefer a higher reported price (and so less tax evasion) to secure higher bank loans but cash buyers do not have such concern.

Keywords: Tax Evasion, Tax Avoidance, Capital Gains Tax, Housing Market, Housing Policy

JEL Classification: H26, R21, R31

Suggested Citation

Agarwal, Sumit and Li, Keyang and Qin, Yu and Wu, Jing and Yan, Jubo, Tax Evasion, Capital Gains Taxes, and the Housing Market (November 1, 2018). Available at SSRN: https://ssrn.com/abstract=3241127 or http://dx.doi.org/10.2139/ssrn.3241127

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Keyang Li

Tsinghua University - Hang Lung Center for Real Estate ( email )

HeShanHeng Building
Beijing, 100084
China

Tsinghua University - Department of Construction Management ( email )

Heshanheng Building
Tsinghua University
Beijing, 100084
China

Yu Qin

National University of Singapore (NUS) - Department of Real Estate ( email )

4 Architecture Drive
Singapore 117566
Singapore

Jing Wu

Tsinghua University - Hang Lung Center for Real Estate ( email )

HeShanHeng Building
Beijing, 100084
China

HOME PAGE: http://thuwujing.net

Tsinghua University - Department of Construction Management ( email )

Heshanheng Building
Tsinghua University
Beijing, 100084
China

HOME PAGE: http://thuwujing.net

Jubo Yan

Nanyang Technological University - School of Social Sciences ( email )

HSS 04-68, 14 Nanyang Drive
Singapore, 639798
Singapore

HOME PAGE: http://juboyan.weebly.com

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