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
£3.6bn*
(residential property)
Capital Gains Tax
£1.4bn (all sources)
Inheritance Tax
£2.8bn (all sources)
VAT on repairs, etc.
?
* 2002–03
Source: Pre-Budget Report, Inland Revenue
International comparison
EU Average
OECD Avg.
Germany
France
Japan
UK
USA
0.0
4.0
8.0
12.0
Percentage of total tax revenue (2001)
Narrow
Broad
Source: Author’s calculations from OECD Revenue Statistics 2003
16.0
International comparison
EU Average
OECD Avg.
Germany
France
Japan
UK
USA
0.0
4.0
8.0
12.0
Percentage of total tax revenue (2001)
Narrow
Broad
Source: Author’s calculations from OECD Revenue Statistics 2003
16.0
Housing vs. other investments
Asset
Contributions
Transactions
Int. / Div
Capital
Gain
Withdrawals
Others
Housing vs. other investments
Asset
Housing
(first
home)
Contributions
Transactions
Int. / Div
Capital
Gain
Withdrawals
Others
Housing vs. other investments
Asset
Housing
(first
home)
Contributions
Transactions
Int. / Div
Capital
Gain
Withdrawals
Others
Taxed
Taxed
(0, 1, 3
or 4%)
Exempt
Exempt
Exempt
Council
Tax
Housing vs. other investments
Asset
Housing
(first
home)
Pension
Fund
Contributions
Transactions
Int. / Div
Capital
Gain
Withdrawals
Others
Taxed
Taxed
(0, 1, 3
or 4%)
Exempt
Exempt
Exempt
Council
Tax
Housing vs. other investments
Asset
Housing
(first
home)
Pension
Fund
ISAs
Contributions
Transactions
Int. / Div
Capital
Gain
Withdrawals
Others
Taxed
Taxed
(0, 1, 3
or 4%)
Exempt
Exempt
Exempt
Council
Tax
Housing vs. other investments
Asset
Housing
(first
home)
Contributions
Transactions
Int. / Div
Capital
Gain
Withdrawals
Others
Taxed
Taxed
(0, 1, 3
or 4%)
Exempt
Exempt
Exempt
Council
Tax
0.5%
Exempt
Exempt
25% taxfree sum
n/a
Exempt
Pension
from Inc.
Fund
Tax
ISAs
Housing vs. other investments
Asset
Housing
(first
home)
Contributions
Transactions
Int. / Div
Capital
Gain
Withdrawals
Others
Taxed
Taxed
(0, 1, 3
or 4%)
Exempt
Exempt
Exempt
Council
Tax
0.5%
Exempt
Exempt
25% taxfree sum
n/a
0.5%
Exempt
Exempt
Exempt
n/a
Exempt
Pension
from Inc.
Fund
Tax
ISAs
Taxed
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
Poorest 2
3
4
5
6
7
8
9 Richest
Change in net income, %
0
-1
-2
-3
-4
-5
-6
-7
-8
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
Poorest 2
3
4
5
6
7
8
9 Richest
Change in net income, %
0
-1
-2
-3
-4
-5
-6
-7
-8
pensioners pay
pensioners defer
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
• 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