Abstract

We show that house prices in general did not respond to a substantial cut in the national property tax in Sweden. The estimates are based on rich register data covering more than 100,000 sales over a time period of two and a half years. Because the Swedish property tax is national and thus unrelated to local public goods, our setting is ideal for causal identification of the property tax on house prices. We observe price increases only in a small segment of the market containing properties with very high tax values. We discuss, but can admittedly not empirically discriminate between, several potential explanations for why we find no evidence of capitalization except for the top segment of the market.

Highlights

  • Suppose you have decided to buy a house

  • How much more would you be willing to pay for the lower taxed house? This question is at the heart of the standard capitalization theory (Oates, 1969; Yinger, 1982) where the price of a house is determined by the total stream of housing services minus the net present value of all costs of owning the house

  • Contrary to what we would expect under standard capitalization theory, we conclude that there is no substantial difference in price developments in the group that was treated with the property tax cap compared with the control group

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Summary

Introduction

Suppose you have decided to buy a house. Two houses appear to be nearly identical but one of them is slightly less expensive to own because the annual property tax burden is D 100 lower compared with the other house. A key advantage of our study is that the Swedish property tax rate is set at the national level, without concern for local house prices or quality of local public goods. Using variation stemming from a national reform has an additional advantage, namely that we can track the effects of all reform events, including policy announcements.2 In this context it is important to note that responses to local and national property tax changes need not be identical. It should be noted that while most of the earlier literature has used cross-sectional variation in property taxes and house prices, and implicitly compared long-run equilibrium outcomes, our reform evaluation approach makes it possible to study dynamic adjustment to changes in the taxes. Further studies on capitalization of property taxes are needed to confirm or reject the relevance of each of these mechanisms

The Swedish property tax and the reform
The property tax reform
From promise to implementation – when to expect responses?
Empirical strategy
Expected price responses under full capitalization
NPV calculations
Descriptive analysis
Baseline results
Evidence from different segments of the market
Dynamic responses
Could the elasticity of supply explain our findings?
Concluding remarks
The first part of the reform
The 2008 financial crisis and the housing market
Sample representativeness
Validity of the parallel trend assumption
Compositional effects
Potentially confounding policy changes
17. The introduction of the earned income tax credit
Full Text
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