Can a Transaction Tax or Capital Gains Tax Smooth House Prices?

Abstract

Motivated by the search for instruments of macroprudential policy, we examine the impact of transaction (Tobin) taxes and capital gains taxes on residential house price growth. We exploit the variation in taxation across 21 Swiss cantons, as well as within-canton changes in taxation over time. We relate these taxes to house price growth observed for 92 regions of the country during the period 1985 - 2009. Cross-section and panel results suggest that higher taxes on long-term capital gains have a substantial smoothing effect on house prices. Higher transaction (Tobin) taxes also smooth house prices. By contrast, penalty taxes on short-term capital gains seem to fuel excessive price growth when housing demand is vibrant. Our results suggest that taxes on real estate transactions and capital gains are not uniformly suitable as instruments of macroprudential policy