Flip or Flop? Tobin Taxes in the Real Estate Market

Abstract

We develop a structural framework featuring heterogeneous investor beliefs and rental rate and pricing risk to study the question of how policymakers should set tax rates to deter speculative housing transactions. We calibrate the model using the universe of personal income tax returns and responses to a sales tax on investment properties in Taiwan. The optimal tax on property flips is 4% — close to the flat transfer tax rates imposed in global real estate markets. The model predicts levying higher sales taxes on second homes increases price levels but entails large welfare gains for renters on the margin of homeownership.

Keywords: Tobin tax, housing affordability, noise trading, holding period returns, macroprudential policy, bunching, optimal taxation, redistribution

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