Flip or Flop? Tobin Taxes in the Real Estate Market

Abstract

Macroprudential and housing affordability concerns have led governments to consider transfer taxes targeting investors in an effort to bring down house prices. We introduce a heterogeneous investor model with rental rate and pricing risk to study how policymakers should set tax rates to deter speculative housing transactions. We calibrate the model using the universe of personal income tax returns and bunching responses around notches in a sales tax schedule imposed on investment properties in Taiwan. Applying sufficient statistics formulas or recasting the problem as a price-rent ratio targeting exercise results in a tax on property flips of between 4% and 5% — close to the flat transfer tax rates imposed in many global real estate markets. Levying higher sales taxes on second homes increases price levels and leads to large overall welfare losses, but improves welfare for renters on the margin of homeownership. 

Keywords: Tobin tax, price-rent ratio, macroprudential policy, housing investment, noise trading, optimal corrective taxation

JEL Classification: E61, G11, G12, H22, R31, R38