Distributional and revenue effects of a tax shift from labor to property

Abstract

Contrary to frequent recommendations of the public finance literature and international institutions, a persistently high tax wedge on labor is observed in Europe. Simultaneously, the scope for shifting taxes to more growth-friendly revenue sources appears underused. This motivates our simulation of a tax shift from labor to property for Germany, a country where property tax revenues are particularly low and the tax wedge on labor income is among the highest in industrialized countries. We simulate a reform where property is no longer taxed by its (often) outdated cadastral value but by its market value, using the additional revenue to reduce social insurance contributions (SIC). To make such a simulation possible, we match property-related information with the input data of the tax-benefit microsimulation model EUROMOD. We find a considerable increase in property tax revenues, allowing to reduce the implicit tax rate on labor from 37.2 to 36.5%. Distributive effects tend to be modest and depend on the design of the SIC reduction. Overall, our results suggest that more households would gain than lose from the tax shift, with gainers mostly situated in the middle of the income distribution.

Taxation of Housing: Killing Several Birds with One Stone

“…Both Figari et al . () and Paetzold and Tiefenbacher () include simulations of revenue‐neutral scenarios. In the countries analyzed in Figari et al .…”

“…(), a tax rate reduction leads to gains only in the upper quintile, while a general increase in tax exemption increases the disposable income of the lower/middle quintiles. Paetzold and Tiefenbacher () find that the largest gains from a housing‐tax reform accrue to the upper middle deciles when revenue is spent on a proportionate reduction of the social insurance contribution. When revenue is instead spent on a lump‐sum rebate on the social insurance contribution, the lower middle deciles show the largest gains.…”

“…A related paper by Paetzold and Tiefenbacher () shows that the use of market values instead of outdated cadastral values as a base in the German housing tax would lead to a sizable revenue increase, but only have moderate distributional effects. The tax revenue is used to reduce social insurance contributions, and the exact effect on distribution depends on the detailed implementation of this reduction.…”

Spatial Wage Gaps and Frictional Labor Markets

“…Finally, property taxes are relatively low in Germany, accounting for about 0.44% of GDP in 2010, significantly lower than in most of the EU (Paetzold and Tiefenbacher (2018)). There are two types of property tax, Property Tax A (for agricultural properties) and Property Tax B (for everything else).…”

Specifics of Real Estate Taxation in the Czech and Slovak Republics

“…The switch to taxation, based on the real estate value, tends to be recommended for countries having low real estate tax incomes. For example, Paetzold and Tiefenbacher (2018) performed a simulation of real estate taxation according to market value in Germany with regard to the possibility of switching from labor taxation to real estate taxation since such income is low in Germany. They found that the revised tax base would allow a significant reduction in the implicit tax rate for work.…”