The taxation of housing

Andrew Leicester

Zoë Oldfield

Background

• Recent housing market volatility• Implications for macroeconomic stability?• Miles / Barker reviews to report at Budget

• Is housing ‘under-taxed’?• Options for reform?

• Could taxes stabilise the market?• Revenue-raising implications?

Is housing under-taxed?

“… investment in housing is relatively lightly taxed compared to other investments.”Fiscal Stabilisation and EMU (2003)

• Housing has consumption and investment elements

• Economic reasons for lower housing taxes?

• UK versus other countries?

Current housing taxes

Revenue (2004–05)

Council Tax £19.9bn (net)

Stamp Duty (residential property)

£3.6bn*

Capital Gains Tax £1.4bn (all sources)

Inheritance Tax £2.8bn (all sources)

VAT on repairs, etc. ?

Source: Pre-Budget Report, Inland Revenue* 2002–03

International comparison

0.0 4.0 8.0 12.0 16.0

USA

UK

Japan

France

Germany

OECD Avg.

EU Average

Percentage of total tax revenue (2001)

Narrow Broad

Source: Author’s calculations from OECD Revenue Statistics 2003

International comparison

0.0 4.0 8.0 12.0 16.0

USA

UK

Japan

France

Germany

OECD Avg.

EU Average

Percentage of total tax revenue (2001)

Narrow Broad

Source: Author’s calculations from OECD Revenue Statistics 2003

Housing vs. other investments

AssetContri-butions

Trans-actions

Int. / DivCapital Gain

Withd-rawals

Others

Housing vs. other investments

AssetContri-butions

Trans-actions

Int. / DivCapital Gain

Withd-rawals

Others

Housing (first

home)

Housing vs. other investments

AssetContri-butions

Trans-actions

Int. / DivCapital Gain

Withd-rawals

Others

Housing (first

home)Taxed

Taxed (0, 1, 3 or 4%)

Exempt Exempt ExemptCouncil

Tax

Housing vs. other investments

AssetContri-butions

Trans-actions

Int. / DivCapital Gain

Withd-rawals

Others

Housing (first

home)Taxed

Taxed (0, 1, 3 or 4%)

Exempt Exempt ExemptCouncil

Tax

Pension Fund

Housing vs. other investments

AssetContri-butions

Trans-actions

Int. / DivCapital Gain

Withd-rawals

Others

Housing (first

home)Taxed

Taxed (0, 1, 3 or 4%)

Exempt Exempt ExemptCouncil

Tax

Pension Fund

ISAs

Housing vs. other investments

AssetContri-butions

Trans-actions

Int. / DivCapital Gain

Withd-rawals

Others

Housing (first

home)Taxed

Taxed (0, 1, 3 or 4%)

Exempt Exempt ExemptCouncil

Tax

Pension Fund

Exempt from Inc.

Tax0.5% Exempt Exempt

25% tax-free sum

n/a

ISAs

Housing vs. other investments

AssetContri-butions

Trans-actions

Int. / DivCapital Gain

Withd-rawals

Others

Housing (first

home)Taxed

Taxed (0, 1, 3 or 4%)

Exempt Exempt ExemptCouncil

Tax

Pension Fund

Exempt from Inc.

Tax0.5% Exempt Exempt

25% tax-free sum

n/a

ISAs Taxed 0.5% Exempt Exempt Exempt n/a

Housing vs. other consumption

• Housing does not attract VAT• True for some other consumption goods• But not for large durables• Council Tax, Stamp Duty etc. make overall

comparisons difficult

Housing ‘under-taxed’?

• Hard to argue that housing under-taxed compared to other investments

• Compared to other consumption the case is stronger• Effect of Council Tax?

• What are the options for reform?

VAT on housing

• No VAT charged on housing• Distort consumption decisions?• Speculation that VAT to be introduced on new

houses:• Estimated revenue effect: £4.5bn (2003 –

04)• Implications for housing supply?• Buy non-new home instead?

Stamp Duty

• Some problems with stamp duty in general• Price clustering: change structure of tax?• Labour mobility

• Stamp duty as stabilising tool• Legislation needed• Pre-empting greater volatility?• Implementation lags• Spread cost over whole mortgage

CGT on First Homes

• CGT now applies only to non-primary housing • Extending it would raise £11.5bn (2003 – 04)• Many ways in which it could be introduced

• Adds complexity to CGT system, reduces yield

• Reduce labour mobility if exemptions for lengthy ownership period?

Property Tax

• Feature of some international systems• Council Tax has elements of property tax• Direct link between house value and tax paid• Acts in part as automatic stabiliser• Replace Council Tax?

• Problems with local tax element (Balance of Funding)

• Issues for design:• Would renters pay?• Associated benefit?

Distributional effects

-8

-7

-6

-5

-4

-3

-2

-1

0

Poorest 2 3 4 5 6 7 8 9 Richest

Ch

an

ge

in n

et i

nco

me

, %

Source: Author’s calculations from British Household Panel Survey 2000 with incomes and house prices uprated to 2002 values

Property Tax

• Estimated revenue £16bn (2002)• Larger burden at bottom of distribution

• Low income, high housing wealth: are they “poor”?• Includes many pensioners

Distributional effects

-8

-7

-6

-5

-4

-3

-2

-1

0

Poorest 2 3 4 5 6 7 8 9 Richest

Ch

an

ge

in n

et i

nco

me

, %

pensioners pay pensioners deferSource: Author’s calculations from British Household Panel Survey 2000 with incomes and house prices uprated to 2002 values

Property Tax

• Estimated revenue £16bn (2002)• Larger burden at bottom of distribution

• Low income, high housing wealth: are they “poor”?• Includes many pensioners

• Slightly less regressive than council tax

– Revenue similar (for modelled example)

• Cost of revaluation?

Conclusions

• Govt. may need to raise taxes to meet fiscal rules

• Housing could provide potential source of significant new revenue

• Not easy to justify based on housing being ‘under-taxed’

• Stabilisation another reason for reform• Needs careful consideration and consultation• Would justify reformed rather than higher

taxation