Abstract
AbstractThe income tax systems of most countries entail a favourable treatment of homeownership, compared to rental‐occupied housing. Such ‘homeownership bias’ and its consequences for a wide range of economic outcomes have long been recognised in the economic literature. Although a removal of the homeownership bias is generally advocated on efficiency grounds, its distributional implications are often neglected, especially in a cross‐country perspective. In this paper, we aim to fill this gap by investigating the first‐order effects, in terms of distribution of income and work incentives, of removing the income tax provisions favouring homeownership. We consider six European countries – Belgium, Germany, Greece, Italy, the Netherlands and the UK – that exhibit important variation in terms of income tax treatment of homeowners. Using the multi‐country tax benefit model EUROMOD, we analyse the distributional consequences of including net imputed rent in the taxable income definition that applies in each country, together with the removal of existing special tax treatments of incomes or expenses related to the main residence; thus, we provide a measure of the homeownership bias. We implement three tax policy scenarios. In the first, imputed rent is included in the taxable income of homeowners, while at the same time existing mortgage interest tax relief schemes and taxation of cadastral incomes are abolished. In the two further revenue‐neutral scenarios, the additional tax revenue raised through the taxation of imputed rent is redistributed to taxpayers, through either a tax rate reduction or a tax exemption increase. The results show how including net imputed rent in the tax base might affect inequality in each of the countries considered. Housing taxation appears to be a promising avenue for raising additional revenues, or lightening taxation of labour, with no inequality‐increasing side effects.
Highlights
Most countries’ income tax systems treat homeownership favourably, compared to rental-occupied housing
While the more general issue concerning the appropriate taxation of housing, remains a highly contentious topic4 (Mirrlees et al, 2011), as such beyond the scope of this work, in what follows we focus on income taxation in a single-period framework, and adopt the investment perspective to housing
In a number of countries, tax reforms removing provisions favouring homeownership were implemented under similar circumstances in the past; for example after the recession of the early 1990s, when some EU countries reduced deductibility of mortgage interest expenses
Summary
Most countries’ income tax systems treat homeownership favourably, compared to rental-occupied housing. This favourable treatment stems from different types of tax provisions: first and foremost, the income tax exemption of homeowners’ implicit return on the asset value of their residence. Both homeowners and renters consume housing services; homeowners do not deplete cash resources for these services, as renters do. In this respect, homeownership yields a return on investment i.e. figurative rental income. Additional income tax provisions favouring homeownership include tax reliefs linked to the cost of home ownership, such as tax credits or deductions allowed on mortgage interest payments, and the exemption of capital gains
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