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Welfare Effects of Housing Transaction Taxes: A Quantitative Analysis with an Assignment Model

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Niku Määttänen and Marko Terviö
ETLA and Aalto University
22 November 2018, Bank of Estonia

Published in: Economy & Finance
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Welfare Effects of Housing Transaction Taxes: A Quantitative Analysis with an Assignment Model

  1. 1. Welfare Effects of Housing Transaction Taxes: A Quantitative Analysis with an Assignment Model Niku M¨a¨att¨anen and Marko Tervi¨o ETLA and Aalto University 22 November 2018, Bank of Estonia M¨a¨att¨anen and Tervi¨o 2018-10-13 1 / 20
  2. 2. Introduction Introduction Economists tend to see transaction taxes (aka stamp duties) as very inefficient taxes. They distort the matching of diff. houses with diff. households. However, the literature does not provide a systematic quantitative evaluation of this distortion. We quantify the welfare cost of transaction taxes focusing on the distortions in the matching of houses with households. M¨a¨att¨anen and Tervi¨o 2018-10-13 2 / 20
  3. 3. Introduction Introduction Economists tend to see transaction taxes (aka stamp duties) as very inefficient taxes. They distort the matching of diff. houses with diff. households. However, the literature does not provide a systematic quantitative evaluation of this distortion. We quantify the welfare cost of transaction taxes focusing on the distortions in the matching of houses with households. Model question: How to quantify the welfare effects of this distortion? M¨a¨att¨anen and Tervi¨o 2018-10-13 2 / 20
  4. 4. Introduction Introduction Economists tend to see transaction taxes (aka stamp duties) as very inefficient taxes. They distort the matching of diff. houses with diff. households. However, the literature does not provide a systematic quantitative evaluation of this distortion. We quantify the welfare cost of transaction taxes focusing on the distortions in the matching of houses with households. Model question: How to quantify the welfare effects of this distortion? Applied questions: What is marginal and total welfare cost of transaction tax? What does the Laffer curve look like? Why do transaction taxes persist despite the efficient alternative? M¨a¨att¨anen and Tervi¨o 2018-10-13 2 / 20
  5. 5. Introduction Estimated welfare costs based on empirical studies Berard and Trannoy (2018), Besley et al. (2014), and Slemrod et al. (2017) find only weak or no long-run effects. M¨a¨att¨anen and Tervi¨o 2018-10-13 3 / 20
  6. 6. Model One-sided Assignment Model with Income Effects M¨a¨att¨anen and Tervi¨o (JET 2014): No transaction costs Fixed quality distribution of indivisible houses. Exogenous initial joint distribution of income and house quality. One-to-one matching of households and houses (before and after) Concave utility in housing quality x and composite good y: u (x, y) Budget constraint: wealth = spending wealth: θ + p(˜x), income θ, initial house ˜x spending: y + p(x), consumption y, final house x M¨a¨att¨anen and Tervi¨o 2018-10-13 4 / 20
  7. 7. Model One-sided Assignment Model with Income Effects M¨a¨att¨anen and Tervi¨o (JET 2014): No transaction costs Fixed quality distribution of indivisible houses. Exogenous initial joint distribution of income and house quality. One-to-one matching of households and houses (before and after) Concave utility in housing quality x and composite good y: u (x, y) Budget constraint: wealth = spending wealth: θ + p(˜x), income θ, initial house ˜x spending: y + p(x), consumption y, final house x Prices endogenous, except lowest quality house p0. Equilibrium: demand and supply of every house type equal, while households maximize utility Positive assortative matching (PAM) by household wealth and house quality (but wealth is endogenous!) M¨a¨att¨anen and Tervi¨o 2018-10-13 4 / 20
  8. 8. Model Model with transaction costs M¨a¨att¨anen and Tervi¨o (2018) Movers pay - proportion τ of purchase price - fixed transaction cost ζ Non-movers consume endowment Household {xi , y} problem is max j u xj , y + pi − pj − 1{i=j} [ζj + τpj ] . It is not worth paying the transaction cost for small moves → no-trade region M¨a¨att¨anen and Tervi¨o 2018-10-13 5 / 20
  9. 9. Model Equilibrium with transaction costs 0.0 0.2 0.4 0.6 0.8 1.0 0 1 2 3 4 i y M¨a¨att¨anen and Tervi¨o 2018-10-13 6 / 20
  10. 10. Calibration Calibration Cross-section data (Helsinki MA 2004) on household income, financial assets, and house value Fix the length of the (single) model period (10 years) and interest rate Translate wealth, prices and income accordingly Match the share of households that trade (about 1/3) Strategy: Assume CES-utility function at various elasticities, set real transaction costs at 4% of (initial) house prices. Estimate empirical average relation between non-housing consumption and house price Interpret it as reflecting the equilibrium of the model → implied distribution of x (up to a constant) Choose initial joint distribution of income and house quality so that resulting equilibrium is close their empirical relation and the share of traders is realistic M¨a¨att¨anen and Tervi¨o 2018-10-13 7 / 20
  11. 11. Calibration House prices: data M¨a¨att¨anen and Tervi¨o 2018-10-13 8 / 20
  12. 12. Calibration House prices: model vs. data, deviations M¨a¨att¨anen and Tervi¨o 2018-10-13 9 / 20
  13. 13. Calibration House prices and consumption: model vs data M¨a¨att¨anen and Tervi¨o 2018-10-13 10 / 20
  14. 14. Calibration House prices: calibrated income process M¨a¨att¨anen and Tervi¨o 2018-10-13 11 / 20
  15. 15. Results Share of households that trade M¨a¨att¨anen and Tervi¨o 2018-10-13 12 / 20
  16. 16. Results Laffer curve M¨a¨att¨anen and Tervi¨o 2018-10-13 13 / 20
  17. 17. Results Measuring welfare effects Replace a given transaction tax with revenue equivalent property tax Welfare measure: Compensating variation (CV) for the tax reform In some cases CV would depend on x0, so we can only evaluate - ex post welfare (households anticipate their shocks) - ex ante only under log-utility Impact on “always-traders” included M¨a¨att¨anen and Tervi¨o 2018-10-13 14 / 20
  18. 18. Results Marginal cost of public funds 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 τ 2 4 6 8 10 12 MC ε 2 3 1 4 3 M¨a¨att¨anen and Tervi¨o 2018-10-13 15 / 20
  19. 19. Results Comparison with the empirical literature M¨a¨att¨anen and Tervi¨o 2018-10-13 16 / 20
  20. 20. Results Welfare gain: property tax vs. tr. tax M¨a¨att¨anen and Tervi¨o 2018-10-13 17 / 20
  21. 21. Results Proportion of winners: property tax vs. tr. tax M¨a¨att¨anen and Tervi¨o 2018-10-13 18 / 20
  22. 22. Results On the difficulty of transaction tax reform If most households anticipate their potential gains from trade in the near/medium term... Despite aggregate gains, many/most would be worse off ex post Share of losers increasing in the initial transaction tax rate Never-movers obviously worse off, they just pay more taxes. Many marginal induced movers worse off: small gain from trade vs discrete increase in tax burden Increase in tax burden increasing in initial transaction tax rate Higher real transaction cost → fewer sure winners from the reform M¨a¨att¨anen and Tervi¨o 2018-10-13 19 / 20
  23. 23. Summary: housing transaction tax and welfare New framework for welfare analysis in one-sided matching markets. Focus on matching of houses and owner households within MA. Calibration: Helsinki MA - Average welfare cost of a small transaction tax is not large - MCPF increases rapidly with the tax rate - Laffer curve peaks around 10 % Despite aggregate gains, many households would be ex post worse off under revenue equivalent property tax - Sticky tax! Reform may be harder the higher the transaction tax rate M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20
  24. 24. Extra Spare slides . . . if time permits M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20
  25. 25. Extra Inference of house type distribution Observe joint distribution of income y and house prices p – Need E[y + p|p] increasing in p x and u not observed Assuming u, distribution of x can be inferred from cross-section: Which distribution of x results in the empirical relation of income and house prices as the equilibrium of the model Use inferred x’s and u with counterfactual tax regime to generate counterfactual allocation. Scale of x is not defined (x0 can not be inferred) – ask only questions where answers don’t depend on x0 M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20
  26. 26. Extra Alternative: Property tax Everyone pays - property tax at rate t of house they consume Movers pay - fixed transaction cost ζ Household {xi , y} problem is max j u xj , y + pi − (1 + t)pj − 1{i=j}ζj . Smaller transaction cost → smaller no-trade region M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20
  27. 27. Extra Calibration details One model period 10 years. Transform income and all housing costs accordingly with 5 % interest rate. CES utility, vary assumed elasticity {2/3, 1, 4/3}. Discretize to 100 house types. Start with 2 % transaction tax and 4 % (other) transaction cost. M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20
  28. 28. Extra Calibration details One model period 10 years. Transform income and all housing costs accordingly with 5 % interest rate. CES utility, vary assumed elasticity {2/3, 1, 4/3}. Discretize to 100 house types. Start with 2 % transaction tax and 4 % (other) transaction cost. Trade caused by income shocks yi = ¯yi (1 + δi )(exp(ε)/s), where ε is distributed N(0, σε) “Mean reversion” δk = a0 + a1k + a2k2 + a3k3 Search for ah and σε to minimize MSE between ¯yk and ˜yk, such that share of households trading equal to 33% M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20
  29. 29. Extra Average house price M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20
  30. 30. Extra Sensitivity: Revenue, Volume, Prices Tax revenue Trade share Avg. price €/hh % €1000s τ 0.02 0.08 0.02 0.08 0.02 0.08 Elasticity Low 198.9 408.8 32.8 17.4 238.7 229.2 High 235.8 486.8 33.5 17.4 246.4 232.6 Fixed cost Low 199.9 304.8 32.6 12.7 236.4 225.7 High 231.2 549.0 33.6 20.4 245.2 232.0 Interest rate Low 222.4 471.8 33.1 17.8 241.2 219.3 High 219.6 447.9 33.0 17.2 239.3 230.8 Calibrated 220.5 452.4 33.4 17.5 244.9 232.7 M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20
  31. 31. Extra Sensitivity: Welfare Welfare gain Winners E Welfare gain E Winners €/hh % €/hh % τ 0.02 0.08 0.02 0.08 0.02 0.08 0.02 0.08 Elasticity Low 25.7 222.6 38.5 34.8 High 28.6 259.0 39.1 35.0 Fixed cost Low 41.4 294.5 41.8 38.8 30.8 257.5 96 100 High 20.4 205.4 37.6 33.7 -4.5 119.9 33 69 Interest rate Low 25.1 219.1 38.3 34.2 8.1 154.8 18 58 High 28.2 251.2 38.7 35.1 9.8 191.9 62 100 Calibrated 27.7 244.6 39.0 35.2 9.3 182.1 57 100 M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20
  32. 32. Extra Distributional effects of tax reform: low tax, median i 20 000 40 000 60 000 80 000 100 000 y -500 0 500 1000 1500 2000 2500 3000 M(y|h) τ = 0.02 M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20
  33. 33. Extra Distributional effects of tax reform: high tax, median i 20 000 40 000 60 000 80 000 100 000 y -500 0 500 1000 1500 2000 2500 3000 M(y|h) τ = 0.08 M¨a¨att¨anen and Tervi¨o 2018-10-13 20 / 20

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