Housing and the Tax System: How Large Are the Distortions in the Euro Area?^*

Abstract

This paper presents new evidence on the impact of the preferential treatment of owner-occupied housing in the euro area. We find that tax benefits to homeowners reduce the user cost of housing capital by almost 40 per cent compared with the efficient level under neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 7.8 per cent of the value of owner-occupied housing, or about 30 per cent of financial asset holdings in household portfolios. The bulk of the subsidy stems from undertaxation of the return to home equity, while the average contribution of the tax rebate for mortgage interest payments is driven down by relatively low loan-to-value ratios in the data. However, at the margin, the tax-induced *

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