Transition to the property tax in China: A dynamic general equilibrium analysis

Abstract

We use the dynamic general equilibrium approach to examine the potential impacts of the introduction of alternative tax regimes in the housing market in China. This approach models housing demand and supply based on the dynamic optimization behaviors of households and a representative housing developer. The model is able to capture key features in the Chinese housing market, and it provides predictions about policy effects through counterfactual experiments. We consider a universal property tax, a selective tax that applies to investment properties only, and a land value tax. Regarding the use of tax revenue, we examine two alternatives: (1) a “redistributive” scenario where tax revenue is redistributed in equal amounts to households, and (2) a “non-redistributive” scenario where tax revenue is spent on local public goods without affecting household decisions. Quantitatively we find that the selective and re-distributive tax is more efficient in terms of generating sustainable government revenues and reducing vacancy rates.