How Do Stamp Duties Affect the Housing Market?

Research, Preprint OPEN
Davidoff, Ian ; Leigh, Andrew (2013)
  • Publisher: Bonn: Institute for the Study of Labor (IZA)
  • Subject: tax incidence, land sales taxation, residential mobility | H71 | tax incidence | H22 | residential mobility | H24 | R21 | land sales taxation | R23 | R28
    • jel: jel:H71 | jel:H22 | jel:R23 | jel:R21 | jel:R28 | jel:H24
      ddc: ddc:330

Land transfer taxes are a substantial portion of the cost of moving house in many developed countries. Since stamp duties are endogenous with respect to the house price, we create an instrumental variable that is the stamp duty on a property, given that postcode's starting house price and the national house price trend. In a specification with postcode and year fixed effects, this instrument effectively captures policy changes and nonlinearities in the stamp duty schedule. We find that the impact of an increase in the tax rate is to lower house prices, suggesting that the economic incidence of the tax falls on the seller. We also observe impacts of stamp duty on housing turnover. A 10 per cent increase in stamp duty lowers turnover by 3 per cent in the first year, and by 6 per cent if sustained over a 3 year period.
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