Transaction Taxes in an Assignment Model of Housing

Abstract:

We study the impact of an ad valorem transaction tax on the distribution of house prices and welfare. We present a one-sided assignment model with imperfectly transferable utility, where households are heterogeneous by incomes, houses are heterogeneous by quality, and housing is a normal good. We assume that the supply of housing is fixed and focus on the distortion in matching caused by transaction costs. We calibrate the model with data from the Helsinki metropolitan region to assess the welfare impact of a counterfactual tax reform, where the current 2% transaction tax is replaced by a revenue equivalent ad valorem property tax. We find that the aggregate welfare gains from the reform would be modest, and that, depending on risk aversion, many or even most owner households would be made ex ante worse off by the reform.