This paper measures the effective taxation of housing investments in 40 OECD member and partner countries. The paper derives both Marginal Effective Tax Rates (METRs) and Average Effective Tax Rates (AETRs), which incorporate the stream of income and taxes over the life of the housing investment. The methodology is applied to owner-occupied and rented residential property for investments that are financed with debt or equity. The paper finds that the level and components of housing taxation depend greatly on the investment scenario. Effective tax rates vary substantially depending on the holding period, rate of return, tenure (owner-occupied or rented), financing scenario, and the inflation rate. Effective tax rates do not vary much with the taxpayer’s income and wealth or with the rate of return. The paper finds there is scope to reduce the tax differential between different investment scenarios and strengthen progressivity and horizontal equity. Introduction. 1. The tax treatment of housing has important implications for tax and the wider economy and is a key component of housing policy. Several macroeconomic implications arise from the tax treatment of housing, including for incentives to invest in housing, the consumption of housing relative to other forms of consumption, the financing of housing, land use, house prices, and macroeconomic stability. Investment in and access to housing may also have important equity consequences; housing wealth has traditionally been the key savings vehicle for the majority of households, but more recently young households and households with low or unstable incomes have been finding access to housing increasingly unaffordable. Rising house prices have contributed to increasing levels of regional inequalities in many developed economies. 2. This paper examines the tax treatment of housing across 40 OECD and partner economies and discusses the implications of housing taxation for efficiency and equity goals. It presents Effective Tax Rates (ETRs) on housing assets, extending the methodology developed in OECD (2018[1]). It also examines variation in these ETRs across countries, income levels, rates and forms of return, financing sources, holding periods and tenure types. In doing so, it provides new evidence on the tax treatment of housing across OECD and partner economies. 3. Previous studies have suggested that housing taxation departs from principles of neutrality in a variety of ways (OECD, 2018[2]; Fatica and Prammer, 2017[3]). Different tax treatment applies to different tenure types (owner-occupied or rental property) and different financing sources (debt or equity). This paper extends the earlier frameworks and identifies the differences in the tax treatment across tenure types, financing sources, holding periods, rates of return, and inflation and risk levels. By identifying the differences in the tax treatment, the analysis presented in this paper can be used to evaluate whether the differential treatment corresponds to a deliberate policy rationale. 4. The paper also evaluates how tax burdens vary across income levels and asset values. Higher income households tend to hold more or higher value assets, including housing, that are tax-favoured and may derive greater benefit from tax relief. In some countries, higher income households face lower effective tax rates than middle- and low-income households. Raising effective tax rates for high-income households, or lowering them for low-income and low-wealth households, can strengthen equity in the housing market. 5. In spite of the importance of housing taxation, few countries have undertaken significant reforms to improve the design of housing taxation in recent years. In many countries, recurrent taxes on immovable property remain underutilised, despite their revenue raising and efficiency properties, and transaction taxes continue to be levied on housing purchases in many countries at relatively high rates, even though they are recognised to be highly distortive taxes that may reduce housing market efficiency and hinder worker mobility ( (Institute for Fiscal Studies, 2010[4]), (Hilber and Lyytikäinen, 2017[5])). 6. Analysis of housing tax policy requires indicators that consider the full range of housing-related tax policy instruments. Taxpayers are subject to several taxes over the life of an investment in residential property, but may also benefit from multiple sources of tax relief, all of which should be considered by policymakers. To measure the effect of many aspects of the tax system on a particular housing asset, this paper presents estimates of Marginal Effective Tax Rates (METRs) and Average Effective Tax Rates (AETRs), which are comparable across housing investment scenarios and across countries. These indicators incorporate the income and asset bases upon which housing taxes apply, the deductions that apply to gross income and assets and the exemptions that are available to taxpayers, the rate of return, the form of the return (e.g., rental income or capital gains), the tax treatment of different types of finance and the effect of tax-deferred returns. ETRs also capture the effect of inflation, which is particularly important as a majority of countries tax nominal returns on housing. 7. This paper contributes to the literature on the taxation of housing and effective tax rate models. The paper builds on recent OECD work that finds that owner-occupied housing is tax-favoured (OECD, 2018[1]). By examining the key tax drivers of differential taxation of housing across housing types, including financing types, rates of return and holding periods, the paper allows policymakers to understand which tax levers are driving housing taxation overall. 8. The paper also contributes to the literature on the tax treatment of debt-financed housing investments ( (OECD, 2018[1]), (Fatica and Prammer, 2017[6])). Previous OECD work in this area assumed that the correct comparison was between a taxpayer choosing to invest their currency unit in bank deposits (the opportunity return) and obtaining debt-finance for the housing investment. This improved comparability between equity- and debt-financed scenarios, as the taxpayer invested some savings in both cases, but the assumption led housing ETRs to be a function of the tax rate on bank interest. This paper departs from this assumption and assumes that the opportunity return is consumed by the household, rather than invested in an alternative asset. The discount rate is assumed to be a fixed pre-tax rate equal to inflation plus the risk-free return. 9. This paper presents a novel extension to the tax literature by calculating AETRs on housing, which capture the tax impact on investments earning above normal returns. As AETRs can be used to analyse housing investments that earn higher returns, they are particularly important to understanding the differential impact of the tax system across households that earn different returns; for example, across regions with different house price dynamics over time. 10. The paper proceeds as follows. Section 2 outlines some key features of how countries tax housing. Section 3 presents the ETR methodology and key assumptions. Section 4 discusses the ETRs from an efficiency perspective and Section 5 discusses them from an equity perspective. Further information about how countries tax housing can be found in Annex A and the full methodology for calculating METRs and AETRs can be found in Annex B. (Bethany Millar-Powell, Bert Brys, Pierce O’Reilly, Yannic Rehm, Alastair Thomas).
Millar-Powell, B., et al. (2022), “Measuring effective taxation of housing: Building the foundations for policy reform”, OECD Taxation Working Papers, No. 56, OECD Publishing, Paris,https://doi.org/10.1787/0a7e36f2-en.
