Tax treatment of the owner-occupied housing Most countries foster homeownership in one way or another. Traditionally, homeownership policies are rather found in the manifestos of conservative parties and are particularly pronounced in Anglophone countries (Schelkle Reference Schelkle2012). In German-speaking countries, by contrast, Social Democrats in particular were rather skeptical about homeownership subsidies and either introduced it quite late in their party manifestos or did not consider it as a central objective of their housing policy (Kohl Reference Kohl2020). The political parties that propose homeownership subsidies not only for reasons of housing provision but also for reasons of fostering equality, secure wealth and stable democracies (Arundel and Ronald Reference Arundel and Ronald2021). This translated into a number of different subsidy schemes. On the one hand, homeownership can be promoted through direct subsidies. In countries with a tradition of “socialised homeownership” such as Iceland or Ireland, future homeowners have been eligible to subsidised loans or government transfers (Sveinsson Reference Sveinsson2000). In Germany, for example, these are housing construction bonuses (Wohnungsbauprämie) and family housing grants (Baukindergeld) (Kohlhase Reference Kohlhase2011). On the other hand, homeownership can be stimulated through the taxation system. In this study, we will focus on this second element of subsidy policies. In the literature, the following four types of instruments are mainly considered: taxes on imputed rent, interest relief on mortgage repayments, capital gains tax on housing, and the VAT on new dwellings (Haffner Reference Haffner1992; van Weesep and van Velzen Reference van Weesep and van Velzen1995; MacLennan et al. Reference MacLennan, Muellbauer and Stephens1998; Stephens Reference Stephens2003; Wolswijk Reference Wolswijk2009; Figari et al. Reference Figari, Paulus, Sutherland, Tsakloglou, Verbist and Zantomio2012). Below, we introduce each tax and exemptions in turn. Footnote 1 Imputed rent tax Taxes on imputed rent must be paid by the owner for the dwelling he occupies. This is justified by the fact that homeowners, unlike renters, do not pay any rent and therefore have an additional source of income. Especially, if at the same time the mortgage interest can be deducted from the income tax (see below), a bias in favour of homeowners emerges. The tax on imputed rent is aimed at restoring tax neutrality. In order to evaluate the amount of unpaid rent, fiscal authorities estimate a monetary use value of owner-occupied dwelling. The tax is expected to reduce the formation of homeownership. On the other hand, since the use value of housing can be considered as an additional income, the failure to collect such a tax would mean an unequal treatment of other types of income and, hence, a stimulation of the homeownership. The collection of this tax is often complicated, because the use value is difficult to assess correctly. Moreover, the absence of a tax on imputed rent represents a subsidy, which does not discriminate between the newly built and existing housing. Thus, everyone occupying one’s own dwelling can benefit from it. Tax deductibility of mortgage payments The possibility to deduct mortgage interests goes often hand in hand with the tax on imputed rents. It follows from the logic that the cost incurred to obtain an additional income (nonpayment of rent) must be deductible. In some countries, the possibility of mortgage interest relief exists even in the absence of an imputed rent tax. The interest deductibility makes the purchase of a home more attractive. However, this can generate the risk of speculative price bubbles. Capital gains tax This tax is imposed in cases when the owner makes profits resulting from the positive difference between the selling price of a dwelling and its purchasing price, provided that this difference cannot be entirely related to the improvements made to the dwelling. The capital gains tax tends to make the purchase of housing less attractive. One of the disadvantages of homeownership compared to renting is its reduced flexibility and mobility. Typically, it takes more time to sell an owner-occupied home than to terminate a rental contract. The absence of a capital gains tax could compensate for such a disadvantage and eventually make it more attractive for renters to become homeowners. On the other hand, it could create incentives for speculating with housing, since the absence of the capital gains tax for housing would make it more attractive than other assets (e.g., shares), which are subject to such a tax. This could stimulate the formation of speculative house price bubbles and, hence, make it more difficult for the low- and middle-income households to purchase homes. Therefore, the capital gains tax on housing is sometimes conceived as a speculation tax from which the owners, who really occupy their dwellings, are exempted. Being a speculative tax, the capital gains tax imposes as a rule a minimum holding period. It means that the real estate must be kept by the owner for a certain time period until it is exempted from the taxation. Table A5 reports different exemptions from the capital gains tax for each country. The capital gains tax is assumed to be applicable regardless of the holding period, save for the cases, where the owner-occupier is explicitly exempted from the tax. VAT on the new dwellings The VAT on newly built dwellings is added to the purchasing price of a dwelling offered for sale. As a result, housing becomes more expensive and less attractive to buy. At the same time, exactly as in the case of the imputed rent tax, the VAT for new dwellings allows treating housing similar to other goods, which are subject to VAT. Hence, the absence of the VAT on housing can be considered as a subsidy. Unlike the absence of the tax on imputed rent, the absence of the VAT stimulates the construction of new dwellings.
Quantification of taxation attractiveness and tenure neutrality In order to assess the impact of these forms of housing taxation, they have to be measured in numeric terms. The coding of regulations is a difficult task, since it has to strike a balance between capturing the essence of legal acts and producing interpretable and objective indices. Surely, the regulations are very complex and trying to mimic them in a detailed way would make their quantification infeasible. Therefore, certain simplifying assumptions must be made in order to render the task tractable. We therefore only account for the existence of taxes not for their rates or application sphere. Leximetric approach to taxation policies Here, we apply the methodology, which is known as leximetrics, used since at least the early 1990s to measure the intensity of governmental regulations. Leximetrics is employed in a large variety of areas of economics, such as labour markets, finance, shareholder protection, and housing. Footnote 2 There are already several studies examining homeownership taxation (e.g. Wolswijk Reference Wolswijk2009; Figari et al. Reference Figari, Paulus, Sutherland, Tsakloglou, Verbist and Zantomio2012). However, none of them intends to quantify the regulations. The first researcher to quantify the housing ownership policies was Atterhög (Reference Atterhög2005). Based on expert surveys conducted in 18 countries, he built six indices (direct grants for buying, other subsidies, mortgage deduction, grant tax deduction, low property tax, and homeownership allowances) covering the period between 1970 and 2000 at decade frequency. His indices vary between 0 (no support) and 5 (very generous support). Thus, our databases partly overlap (countries, periods, and policies). However, our data have annual frequency, are based on regulation and not expert opinion, and cover a much longer period. In addition, our database and that of Atterhög share only one common policy index – the mortgage deduction. Barrios et al. (Reference Barrios, Denis, Ivaskaite-Tamosiune, Reut and Vazquez Torres2019), on the other hand, consider five homeownership policy indicators (transfer taxes, recurrent property taxes, capital gains taxes, imputed rent taxation, and mortgage interest deduction) to show the distortions for households decisions by computing the cost of owner-occupied housing. Their policy indicators are similar to the ones that we use in this study, except for their additional implicit recurrent property taxes. Another difference is that they measure transfer and capital gains taxation in absolute terms rather than as a dummy variable. Their sample comprises 28 EU countries between 1995 and 2017. While these approaches examine the existence or magnitude of housing taxation policies, Seelkopf et al. (Reference Seelkopf, Bubek, Eihmanis, Ganderson, Limberg, Mnaili, Zuluaga and Genschel2021) take another dimension of taxation policies into account, which is the year of introduction of the corresponding tax. They achieve this by constructing a new data set containing the year and mode of introduction of six key modern taxes (personal income tax, corporate income tax, social security contributions, inheritance tax, general sales tax, and VAT) in 220 countries between 1750 and 2018. While this is a useful database for the introduction of general tax codes, it is not specific enough for the subdomain of housing and homeownership. Our approach In this study, we follow the approach suggested by Kholodilin (Reference Kholodilin2020), who measures the intensity of rental market regulations worldwide over a long period. First, we conduct an overview of the relevant legislation pieces in order to extract information concerning the tax treatment of owner-occupied dwellings. Footnote 3 Second, for each of the four taxation types discussed above, a binary index is constructed that equals one, if regulation is more favourable with respect to homeowners, and zero, otherwise: (1) $${I_{jt}} = \left\{ {\matrix{ {1,\quad {\rm{if}}\;{\rm{taxation}}\;{\rm{of}}\;{\rm{type}}\;j\;{\rm{is}}\;{\rm{favorable}}\;{\rm{to}}\;{\rm{homeowners}}\;{\rm{in}}\;{\rm{period}}{\mkern 1mu} {\mkern 1mu} t} \hfill \\ {0,\quad {\rm{otherwise}}} \hfill } } \right.$$ Thus, the binary indices for the imputed rent tax, capital gains tax, and VAT are equal to 1, when homeowners are not subject to these taxes, while the binary index for interest deductibility is equal to 1, when such an option is provided to homeowners. When a regulation exists (such as capital gains taxation), but subject to major exemptions (e.g. tax exemptions for certain holding periods), we consider the regulation to not be in place (cf. Table A5 in Supplementary material for a detailed list of exemptions). The resulting binary indices are plotted in Figures 1, 2, 3, and 4 as shaded areas. Each horizontal bar corresponds to an individual country. The darker shades of grey correspond to regulations that are more beneficial for homeowners. Yellow colour denotes missing observations. In addition and to reduce descriptive complexity, we compute a composite homeowneship taxation attractiveness index as a simple average of binary variables: (2) $$HOT{A_t} = {1 \over J}\sum\limits_{j = 1}^J {{I_{jt}}} $$ where $J = 4$ is the number of individual binary taxation indices. Hence, the index can vary between 0 and 1. The higher its values, the more favourable the housing taxation for homeowners. The indices of homeownership tax attractiveness cover 37 countries in total which reflects our attempt to cover the economically most important OECD and a dozen of non-OECD countries, where data were available and accessible. Figure 5 shows their geographical distribution in 2020. Again, the shades of grey depict the degree of attractiveness of taxation, while yellow denotes countries for which no such information is available. The composite indices for individual countries are displayed in Figure 6. Finally, we also compute the degree of neutrality of homeownership taxation with respect to the housing tenure. If the tax treatment is more favourable towards homeowners, then ceteris paribus it can create an additional incentive for people to choose owning over renting. The taxation neutrality is defined through the following two cases: either the imputed rent tax is absent and mortgage payments are not deductible or the imputed rent tax is levied and mortgage deductions are allowed. (3) $$TN{I_t} = {{I\,_t^{\rm imputed\ rent\ tax} + I\, _t^{\rm mortgage\ deductibility} - 1} \over 2}$$ Thus, the value of this index corresponding to the taxation neutrality will be equal 0. When it is below zero, taxation is biased towards renters, while when it is positive, it is biased towards homeowners.