An OECD Working Paper published on 14 January 2022 is entitled Measuring Effective Taxation of Housing: Building the Foundations for Policy Reform.

The working paper looks at 40 countries in the OECD and its partner economies and considers the implications of housing taxation as part of a strategy for more efficiency and equity.

By measuring the effective tax rates (ETRs) on housing assets, it is possible to compare countries taking into account the income levels, rates of return on the investment and types of return (e.g. capital gains or recurrent income), financing sources, holding periods and types of tenure.

Generally the taxation of housing is not neutral because different tax treatment is used for different tenure types (owner-occupied or rental property) and differs depending on whether the housing is financed by debt or equity. The working paper takes into account tenure types, financing sources, holding periods, rates of return, and inflation and risk levels, identifying the differences in the tax treatment and evaluating whether the differential treatment is backed up by a deliberate strategy.

There is also an analysis of how the tax burdens vary across income levels and asset values. Households with higher income levels will tend to possess higher value housing, and they may receive more benefit from tax relief. In some countries, households with higher value assets are taxed at lower effective tax rates than other households. Equity could therefore be strengthened by raising the effective tax rates for high-income households, or by lowering the rates for low-income and low-wealth households.

Countries have generally not made enough use of recurrent taxes on immovable property even though these taxes are efficient in raising revenue.  Transaction taxes are imposed on housing purchases in many countries at relatively high rates, although these are often highly distortive taxes that can lead to a reduction in the efficiency of the housing market and become a barrier to the mobility of labour.

The working paper concludes that there is more scope to improve the design of housing taxes and to make them more progressive.

Mortgage interest relief has the effect of reducing the effective tax rate significantly and tends to bring a larger benefit to high-income taxpayers. Taxpayers that move house more frequently will tend to shoulder a higher tax burden than less mobile taxpayers owing to transaction taxes. Any capital gain is generally taxed at low rates, as a consequence of the deferral effect, low tax rates on long-term capital gains and exemptions for owner-occupied residences.

Countries should look at the possibility of neutral taxation of investments of different lengths or review the mortgage interest deduction. Neutrality could be improved in relation to the type of return received, because at present capital gains are normally taxed more favourably than recurrent returns. To ensure more progressivity the taxation of housing could take more account of the income and wealth of taxpayers.

Adjustments could be made to tax reliefs if they are currently providing greater benefit for the highest-income taxpayers. The various taxes could be reviewed to see how they take account of higher rates of return and the extent to which they vary in relation to the income and wealth of taxpayers. Appropriate reforms could affect wealth inequality, worker mobility and housing affordability.