HOUSING TAXATION AND PUBLIC FINANCE

Abstract

This chapter reviews how tax design affects the housing market. Housing is both a consumption good and an investment good, which makes the design of appropriate tax policies more complex. One of the goals of a well-designed tax system is tax neutrality or efficiency. As governments have moved away from direct provision of housing they have relied on the market to provide quality, affordable housing for owner-occupiers and tenants. Government intervention through the provision of tax concessions is common in order to correct market failures and ensure an adequate supply of housing. Policies that favour owner-occupiers result in housing being taxed differently from other investments, which may encourage the purchase of housing over other income-producing investments. For investors, the balance between current earnings and future capital gains may influence their choice of residential housing as an investment over other classes of assets. Governments may ensure supply by providing support to investors through the taxation system, particularly in respect of investment in social or affordable housing where the rate of return may be lower.