Imputed Rental Income, Taxation and Income Distribution in Finland

Abstract

In most Western countries, owner-occupied housing is tax-favoured compared with other investments and housing tenure modes. This paper analyses the effects of imputed rental income and its tax treatment on income distribution in Finland. Using household data from the 2004 Wealth Survey produced by Statistics Finland, it is found that imputed rental income has a major effect on homeowners’ well-being as it constitutes on average almost 10 per cent of homeowner households’ disposable income. Furthermore, including imputed rental income in household disposable income decreased overall inequality measured by the Gini index. The tax subsidy resulting from non-taxation of imputed rental income is skewed towards high-income households. However, the effects of a new tax on imputed rental income on overall inequality would depend vitally on the way the increased government tax revenue is transferred back to the households.