UNIVERSITY OF UEH
SCHOOL OF ECONOMY, LAW AND STATE MANAGEMENT
ECONOMICS
FINAL PROJECT
DEPARTMENT OF URBAN ECONOMICS
Topic: Revisiting the effects of housing transfer taxes
Lectuer: Lê Thành Nhân
Class code : 22C1ECO50113811
Group 5’s members:
Nguyễn Anh Thư
31211025549
Nguyễn Thị Ngọc Huệ
31211026513
Nguyễn Hoàng Phúc
31211021324
Trần Thị Ngọc Bích
31211027018
Nguyễn Nhất Hoàng
31211023293
Revisiting the effects of housing transfer taxes
Housing transfer taxes are important in many countries despite evidence of
substantial welfare costs. We assume that welfare costs are larger than previously
thought because previous studies have ignored spillovers between treatment and control
groups. We analyze the effect of a transfer tax on household mobility using a quasi test
arising from a tax reform.
The housing transfer tax has an impact not only on household mobility and the
allocation of housing units to households, but also on the distribution of labor to workers.
The paper's key finding is that transfer taxes have a large detrimental influence on mobility.
A study by the team of authors Essi Eerola, Oskari Harjunen, Teemu Lyytikäinen,
Tuukka Saarimaa in 2021 examined the impact of a housing transfer tax on household
mobility, set in Finland as typical examples. According to the findings of the study, the
reform reduces the migration rate of homeowners living in apartments in the model by
7.2%. An assessment of the reform's impact would underestimate the reform's negative
impact on the mobility of homeowners living in apartments by 22%.
Impact of housing transfer tax
The author claims that even though house transfer taxes are frequently seen as an
ineffective kind of taxation, they are nonetheless crucial economically in many nations.
The introduction of that transfer tax diminishes the possibility of a transaction that benefits
both parties since it widens the gap between the price paid for the residence and the price
obtained by the seller.
Additionally, the household's relocation family is impacted by transfer taxes since
they relate to housing transactions and the distribution of employment among workers in
nations like the UK and the US where most households own a property.
Application of property transfer tax in Finland
All residential purchases in Finland, whether for brand-new homes or renovated
older ones, are subject to a housing transfer tax. The transfer tax is the buyer's
responsibility, and only after the tax authorities have received the transfer tax payment does
the buyer acquire legal ownership of the property. Under 40-year-old first-time buyers are
exempt from taxation.
Not all transactions are subject to the same tax rate in the United States, like many
other nations. The kind of housing unit determines the tax rate under the Finnish system.
The tax rates on properties, such as single-family homes, are currently 2% for units in a
housing cooperative and 4% for. This essentially reduces the tax base.
In the case of real estate, the ownership arrangement is simpler: the system and,
often, the entire plot of land beneath the structure are directly owned by one person. The
researchers refer to these housing units as homes because every property is a single-family
home.
The authors of the study took advantage of a tax adjustment that raised the transfer
tax burden on flats while leaving housing taxes constant. The transfer tax rate for homes is
4% till February 2013 and 1.6% for apartments.
The major objectives of the reform were to raise tax revenue and harmonize the tax
treatment of houses and apartments. The size of housing cooperative loans had grown
before the reform, particularly for newly constructed dwellings, according to the
government's proposed law, thus weakening the tax base.
The reform is anticipated to increase annual tax income from the 580 million euros
(0.3% of GDP) collected in 2012 to approximately 80 million euros. Increases in tax rates
and shares that result from the growth of the tax base are anticipated to account for more
than 50% of this increase. December 5, 2012, saw the official announcement of the reform.
Data and research design
The data are Statistical from Finland and cover the entire population of Finland from 2005
to 2016. The data contains registration information about households including where they reside
at the end of the year, regardless of the household. owner or tenant. Exploit the change of tax
reform (incremental). In Finland, a housing transfer tax is applied to all housing transactions, both
new construction, and resale. First-time buyers under the age of 40 are exempted. Based on 2 units
which are houses and apartments.
The measure of mobility is based on the location and characteristics of the home unit. A
household will move out if at least one of the following occurs (between the end of years t-1 and
t): postcode, type of housing unit (owned apartment, owned house rented unit), and the number of
rooms.
Table 1 reports summary statistics for the homeowner households in our data.
Table 2 we decompose the annual mobility rates according to housing type before and after the tax
reform.
Compare the mobility of households after the tax increase and vice versa in Finland, where
taxes have been increased on apartments. As taxes are increased on apartment transactions, this
results in lower mobility among homeowners living in apartments. When home taxes are not
increased, we can construct the opposite using homeowners living in homes as a control group.
The data will be convenient to use the DID method.
The parameter for the interaction term, 𝛿3 explains the term under 3 assumptions:
+
The assumption is about the general trend, i.e., without the countermeasures, the
likelihood of movement will develop similarly.
+
The second assumption is that no other reform or event coincides with the transfer
tax reform and affects the treatment and different control groups.
+
The third is that the mobility of households in the control group is not affected by
the mobility decisions of households in the treatment group. This assumption is not true if
the two segmented housing markets are interconnected.
After presenting the baseline DID results, construct a housing market model and calibrate
it to replicate the mobility rates between the housing market segments in our data and the DID
processing efficiency. There are 2 issues to be concerned about, the first is the skewness of the
estimate to zero and the reduction in mobility because households move out in January and
February (tax announced in October and taking place in March next year). The second problem is
that households planning to move out will move before the end of 2012 leading to bias. Solve these
2 problems by checking for certainty.
Results
Their key conclusion is that the transfer tax seriously hampers mobility. They
discover that a 0.5 percentage point increase in the transfer tax rate results in a 7.2%
reduction in treatment group mobility by combining quasi-experimental analysis with a
model-based analysis. A 22% downward bias in the estimate is indicated by their DID
estimate of the effect, which is approximately 5.6%. Because mobility falls by 1.6% in the
control group as well, there is a bias. Taking into account the spillover impact, our estimate
for the reform's cost in terms of public monies is 2.3, whereas the estimate based solely on
the DID estimate would be 1.3. The welfare costs of the transfer tax would be significantly
underestimated if the spillover effect were to be ignored. Moreover, their findings imply
that the negative effects of transfer taxes may be significantly underestimated by using
conventional quasi-experimental empirical methodologies.
Their extensive registration data, which includes specifics on the characteristics of
households and their housing units, enables them to get a more thorough picture of the
consequences of the tax change on the labor and housing markets in addition to the general
effects. As examples, see Munch et al. (2006), Battu et al. (2008), and Yang 2019 for
analyses of outcomes pertaining to the labor markets. However, they also discover negative
effects on long-distance moves (more than 50 km), indicating that the transfer tax also has
an impact on the labor market. They find that the transfer tax has a stronger impact on
short-distance moves (less than 50 km). In contrast to this finding, Hilber and Lyytikäinen
(2017) paper, the only one to examine mobility rather than transactions, indicates that the
transfer tax has no significant impact on mobility.
The literature on housing consumption over the life cycle (e.g., Ortalo-Magné and
Rady, 2006; Flavin and Nakagawa, 2008; Attanasio et al., 2012; and Li et al., 2016) has
identified a number of margins of housing consumption changes. In their second
investigation, they look into these margins. The tax increase had the greatest impact on
moves involving minor changes in dwelling unit size, as one might anticipate. Downsizing
had little impact while upsizing became less common due to the asymmetrical nature of
these impacts. This asymmetry is consistent with a life-cycle model where creditconstrained households gradually climb the housing ladder by making small upgrades in
unit size with numerous moves and downsizing, possibly only once towards the life-end.
cycle's See, for example, Ortalo-Magné and Rady (2006) and Attanasio et al. (2012). All
of these findings point to the fact that
Consequences of the policy and its application
Property transfer taxes are important in many countries despite evidence of
substantial welfare costs.We analyze the effect of the transfer tax on household mobility
using a quasi test arising from tax reform.
The housing transfer tax has an impact not only on household mobility and the
allocation of housing units to households, but also on the distribution of labor among
workers. The important finding of the paper is that the transfer tax has a large detrimental
effect on mobility. According to the results of the study, the reform reduced the migration
rate of homeowners living in the model apartments by 7.2%. The type of housing unit
determines the tax rate according to the Finnish system. Tax rates on properties, such as
single-family homes, are currently 2% for units in a housing cooperative and 4% for assets.
The transfer tax rate for houses is 4% until June 2013 and 1.6% for apartments.
The main goals of the reform were to increase tax revenue and harmonize tax
treatment for houses and apartments. The size of housing cooperative loans had increased
before the reform, especially for newly built housing, under the government's proposed
law, thus weakening the tax base.
The reform is expected to increase annual tax income from 580 million euros (0.3%
of GDP) collected in 2012 to around 80 million euros. In the Finnish system, the tax rate
depends on the type of housing unit. On March 1, 2013, the transfer tax rate for apartments
was raised from 1.6% to 2% and the tax base was expanded to include loans from housing
cooperatives associated with apartments. household.
For example, for an apartment with a transaction price of 200,000 euros and an
outstanding loan from the housing cooperative of 20,000 euros, the transfer tax liability is
3200 euros (1.6% × 200,000) before the reform.After the reform, the tax liability increased
to 4400 euros (2% × (200,000 + 20,000)). First, the migration rate was clearly higher in
the treatment group than in the control group over the time period.
In our data, the weights are of no practical importance because the standard errors
are almost identical. The time series nature of the data raises the additional problem of
sequential correlation of error terms (Bertrand et al., 2004), but this is a minor concern in
our context later. when controlling for the overall effects of the year.
Finally, by increasing moving costs for people living in apartments, tax reform may
have made it less likely for households to move into apartments.
Housing transfer taxes are important in many countries despite evidence of
substantial welfare costs. An assessment of the reform's impact would underestimate the
mobility of homeowners living in apartments by 22%.
All residential purchases in Finland are subject to a housing transfer tax.
In Finland, a housing transfer tax is applied to all housing transactions, both new
construction, and resale. As taxes are increased on apartment transactions, this results in
lower mobility among homeowners living in apartments. We compare the mobility of
households before and after the tax reform in Finland.
After presenting the baseline results, construct a housing market model and calibrate
it to replicate the mobility rates between the housing market segments in our data. There
are 2 issues to be concerned about, the skewness of the estimate to zero and the reduction
in mobility because households move out in January and February. For four years prior to
the financial crisis, mobility rates are higher in the treatment group than in the control
group.
After the tax rate on apartments is raised from 1.5% to 2%, mobility rates for owners
of apartments fall by 7.2%. Tax reform in Finland reduced the migration rate of
homeowners living in model apartments by 7.2%.
This summary is based on a research paper by EssiEerola, OskariHarjunen, TeemuLyy
&TuukkaSaarimaa ( Volume 124, July 2021, 103367). Revisiting the effects of housing
transfer taxes.
https://www.sciencedirect.com/science/article/pii/S0094119021000498?via%3Dihub