Reduce tax on residential mobility

UvA-DARE (Digital Academic Repository) Reduce tax on residential mobility van Ewijk, C.; van Leuvensteijn, M. Publication date 2010 Document Version Final published version Published in VOX : Research-based Policy Analysis and Commentary from leading Economists Link to publication Citation for published version (APA): van Ewijk, C., & van Leuvensteijn, M. (2010). Reduce tax on residential mobility. VOX : Research-based Policy Analysis and Commentary from leading Economists. http://voxeu.org/index.php?q=node/4817 General rights It is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), other than for strictly personal, individual use, unless the work is under an open content license (like Creative Commons). Disclaimer/Complaints regulations If you believe that digital publication of certain material infringes any of your rights or (privacy) interests, please let the Library know, stating your reasons. In case of a legitimate complaint, the Library will make the material inaccessible and/or remove it from the website. Please Ask the Library: https://uba.uva.nl/en/contact, or a letter to: Library of the University of Amsterdam, Secretariat, Singel 425, 1012 WP Amsterdam, The Netherlands. You will be contacted as soon as possible. UvA-DARE is a service provided by the library of the University of Amsterdam (https://dare.uva.nl) Download date:11 Dec 2021 Why the EU should abolish transfer taxes on residential property | vox -... http://voxeu.org/index.php?q=node/4817 Research-based policy analysis and commentary from leading economists Casper van Ewijk Michiel van Leuvensteijn 30 March 2010 How can Europe increase structural growth? This column argues that labour market flexibili a major barrier to labour movement is rigidity in the housing market, abolishing transfer tax residential property could result in gains of up to 0.4% of GDP. The first EU council president Herman Van Rompuy has recently announced plans for a fol Lisbon Agenda. The next European summit will be focused on how to increase structu growth in Europe. Increasing labour market flexibility should be at the top of the agenda. A new and challenging idea proposed by Andrew Oswald (1999) suggests that a lack of m labour market may arise from rigidities in the housing market. Oswald proposes that ho may be a hindrance to smoothly operating labour markets and may increase unemplo transaction costs may limit residential mobility and reduce the willingness of homeowners offers outside their own region. Following from this idea, we argue that an abolishment of transfer taxes on residences in with a reduction in the general subsidy of owned residences, would increase residential m welfare and increase labour market flexibility. Transfer taxes are substantial Transfer taxes are a major part of the transaction costs of residential mobility. Figure transaction costs of moving residence are quite substantial for homeowners in mo Remarkably, governments impose additional burdens in the form of transfer taxes, on top o high transaction costs due to costs and commissions. These taxes range from 0.6% in Den in Greece and Portugal, and even 12.5% in Belgium. Rather than promoting mobility a expect, governments thus directly add to rigidity in the housing market and cause subst losses. Figu r e 1 . Transaction costs in the housing market in Europe 1 of 5 7-2-2012 10:09 Why the EU should abolish transfer taxes on residential property | vox -... http://voxeu.org/index.php?q=node/4817 Source: Belot and Ederveen (2005) Welfare gains of abolishing transfer taxes Simply abolishing these transfer taxes would result in welfare gains. Table 1 provides a ro for the welfare gains of abolishing transfer taxes by calculating the deadweight loss associ transfer tax (Van Ewijk et al. (2007). The deadweight loss can be expressed as ½ ε t, where t stands for the tax rate and elasticity of the tax base for the tax rate. A reasonable approximation for ε is eight as rep Ommeren and Van Leuvensteijn (2005). Table 1 reports for each European country a ran effects that follow from the observed tax rate and the size of the tax base as percentage range reflects differences in interpretation as to whether the notary costs and commissio interpreted as a real social cost or as an indirect tax due to regulation. Ta ble 1 . Welfare gains from the abolishment of transfer taxes on residential property in 20 2 of 5 Cou n t r ie s W e lfa r e e ffe ct in billion s of e u r os ( 2 0 0 6 ) W e lfa r e e ffe ct a s pe r ce n t a Austria 0.08-0.30 0.03-0.11% Belgium 1.27-2.40 0.40-0.76% Denmark 0.00-0.03 0.00-0.02% Finland 0.02-0.11 0.01-0.06% France 1.44-7.41 0.08-0.41% 7-2-2012 10:09 Why the EU should abolish transfer taxes on residential property | vox -... 3 of 5 http://voxeu.org/index.php?q=node/4817 Germany 0.40-1.88 0.02-0.08% Greece 1.60-3.19 0.75-1.49% Ireland 0.60-1.21 0.35-0.69% Italy 3.75-14.04 0.25-0.95% Luxembourg 0.03-0.11 0.09-0.33% Netherlands 0.71-1.42 0.13-0.27% Portugal 1.20-2.52 0.77-1.62% Spain 3.24-9.17 0.33-0.94% Sweden 0.02-0.16 0.01-0.05% Switzerland 0.07-0.32 0.02-0.10% UK 0.09-0.62 0.00-0.03% Total 14.52-41.70 0.13-0.38% Source: Van Ewijk and Van Leuvensteijn (2009) We estimate that abolishment of transfer taxes on residential property would result in an o somewhere between 0.15% and 0.40% of GDP in the 16 European countries presente above. Welfare gains would be especially large in absolute terms in France, Italy and Sp countries, transaction costs are relatively high compared to the average. In Italy, the max loss is relatively high because the overall transaction costs on the housing market in Italy 19% (see Figure 1). Increase labour market flexibility In addition to these welfare effects, these measures would improve labour market flexi microeconomic perspective, the housing status of an individual agent can interfere at diffe labour market dynamics. Transaction costs associated with distant moves typically hamper The way in which transaction costs influence unemployment is more complex though. Une the steady state depends on the inflow into, and outflow out of unemployment. Transact affect both inflow and outflow rates. At a first sight, one might expect that transaction cost inflow into unemployment while reducing the outflow – in which case unemplo unambiguously in the steady state. This is in line with Oswald’s finding of a positive associa the fraction of homeownership and aggregate unemployment. Fiscal prudence: Reduce subsidies to homeowners If governments combined a reduction in transfer taxes with a reduction in subsidies for hom then fiscal prudence in the long run would become a key element of this fiscal measure. T transfer tax is paid instantly when the home is bought while the subsidy is a flow of mont to the homeowner thereafter. This means that the fiscal stimulus of the reform will gradually over the years. In fact, homeowners do not have to pay the transfer taxes demand additional finance from banks that are currently reluctant to provide mortgag exceed the value of the home due to falling house prices. This measure could ther confidence in the housing market. If governments abolish taxes and remove subsidies th be good for governments and people alike. 7-2-2012 10:09 Why the EU should abolish transfer taxes on residential property | vox -... http://voxeu.org/index.php?q=node/4817 In many European countries, promoting homeownership is an official objective of gover usually supported by favourable tax regimes. A traditional argument for promoting hom that homeownership creates positive externalities (i.e. homeowners take more care for the neighbourhood). Although these externalities are found to exist, their size is probably warrant policy interventions (Glaeser and Shapiro 2002). In the end, the arguments promoting homeownership are weak. There is therefore a general tendency to reduce the (implicit) subsidisation of homeowner subsidy is still considerable in many countries (Hendershott and White, 2000). Conclusion Governments have the option to kill at least two birds with one stone. Abolishing transfe stimulate the economy in the short run and improve the flexibility of the economy structur transfer taxes provides additional labour market flexibility, because it enables homeown jobs outside their own region reducing the inflow in unemployment and increasing Combined with a reduction in subsidies in the housing market, this measure would also res fiscal policy in the long run. References Belot, Michèle and Sjef Ederveen (2005), “Indicators of cultural and institutional barr countries”, CPB Memorandum, The Hague. Glaeser, Edward L and Jesse M Shapiro (2002), “The benefits of the home mortgage intere NBER working paper 9284. Hendershott, Patric H and Michael White (2000), “The Rise and Fall of housing favore status", Journal of Housing Research, 11(2):257- 275. Oswald, Andrew J (1999), “The housing market and Europe's unemployment: a non-tec Warwick University. Van Ewijk, Casper, Bas Jacobs and Ruud De Mooij (2007), “Welfare Effects of Fiscal Subsi Ownership in the Netherlands”, De Economist, 155(3):323-362. Van Ewijk, Casper and Michiel van Leuvensteijn (2009), “Introduction and policy implicatio van Ewijk and Michiel van Leuvensteijn (eds.), Homeownership and the labour market in E University Press. Van Ommeren, Jos and Michiel van Leuvensteijn (2005), “New Evidence of the Effect o Costs on Residential Mobility”, Journal of Regional Science, 45(4):681-702. This article may be reproduced with appropriate attribution. See Copyright (below). Topics: Europe's nations and regions, Labour markets Ta gs: 4 of 5 7-2-2012 10:09