housingmarketresponsestotransactiontaxes ... · ppp pp pp pricerange p p daterange 1dec2003 to...

Housing Market Responses to Transaction Taxes:Evidence From Notches and Stimulus in the UK

Michael Best & Henrik Kleven

London School of Economics

May 2014

Transaction Taxes

I Asset transaction taxes are widely debated, but understudiedI Poterba 2002; Matheson 2011; European Commission 2013I Recent debate motivated by the crisis in financial and housing

markets

I Different kinds of asset transaction taxesI Securities transaction tax, currency transaction tax, bank

transaction tax, house transaction tax

I Housing transaction taxes are by far the most widespreadI 38 US states, 27 OECD countries, many developing countries

Introduction Stamp Duty Land Tax Data Results Conclusions 1 / 35

Housing Transaction Taxes

I It has been argued that housing transaction taxes are lessdistortionary than financial transaction taxes

I House transactions are less frequentI House transactions are less internationalI Enforcement is relatively goodI May explain the popularity of housing transaction taxes

I Housing transaction taxes often create quasi-experimentalvariation useful for evaluating its distortionary effects

I Separates them from financial transaction taxes

I The UK version of this tax: Stamp Duty Land Tax (SDLT)


Advantages of our Setting

I Large administrative dataset:

I Universe of stamp duty tax returns in the UK from 2004-2012(about 10 million property transactions)

I Quasi-experimental variation:

I Tax schedule produces large price notches(discrete jumps in tax liability at cutoff prices)

I Anticipated tax changes create time notches(discrete jumps in tax liability at cutoff dates)

I Permanent reforms and stimulus (tax holiday)affect houses in specific price ranges


Two Broad Findings

1. Transaction taxes are extremely distortionary

I Distorts the price, volume, and timing of house transactions

I Laffer rate of 4–7% (Pareto bound)

I Marginal cost of funds is orders of magnitude larger than forconventional taxes

2. Temporary transaction tax cuts are enormously effective as fiscalstimulus

I Large boost during stimulus, smaller slump after stimulus

I Substantial GDP effects (1 dollar per dollar of tax cut) due tocomplementarities between moving house and spending

I Relevant for transaction subsidies (e.g. US homebuyer tax credit)


Literature

1. Transaction taxes

I Property transaction taxesDachis et al. 2012; Besley et al. 2013; Kopczuk & Munroe 2014

I Capital gains taxes (stock, housing)Feldstein et al. 1980; Auerbach 1988; Burman & Randolph 1994;Cunningham & Engelhardt 2008; Shan 2011

2. Fiscal stimulus

I Stimulus effects of tax rebatesShapiro & Slemrod 2003; Johnson et al. 2006; Agarwal et al. 2007

I Stimulus and reversal effects of car transaction subsidiesMian & Sufi 2012


Outline

Introduction

Stamp Duty Land Tax

Data

ResultsStatic Notches: House Price ResponsesMoving Notches: Dynamics of House Price ResponsesStimulus: Timing and Extensive ResponsesStimulus: Household Spending & GDP EffectsLong Run Revenue and Welfare Effects

Conclusions

UK Stamp Duty: NotchesI Tax on the total sale price of property; remitted by the buyer

Price

TaxLiability

£125K £250K £500K £1,000K £2,000K

0% 1% 3% 4% 5% 7%

∆T =£1, 250

∆T = £5, 000

∆T = £5, 000

∆T = £10, 000

∆T = £40, 000

0

Tax Schedule in

Tax Year 2012-2013


UK Stamp Duty: Reforms & StimulusPPPPPPPPPPPrice Range

Date Range 1 Dec 2003to

16 Mar 2005

17 Mar 2005to

22 Mar 2006

23 Mar 2006to

2 Sep 2008

3 Sep 2008to

31 Dec 2009

1 Jan 2010to

5 Apr 2011

6 Apr 2011to

21 Mar 2012

22 Mar 2012to

April 2013

0 - £60K 00

00

0 0 0£60K - £120K

1£120K - £125K

1£125K - £175K1 1 1 1

£175K - £250K 1£250K - £500K 3 3 3 3 3 3 3£500K - £1000K

4 4 4 4 44 4

£1000K - £2000K5

5£2000K - ∞ 7


UK Stamp Duty: Reforms & StimulusPPPPPPPPPPPrice Range

Date Range 1 Dec 2003to

16 Mar 2005

17 Mar 2005to

22 Mar 2006

23 Mar 2006to

2 Sep 2008

3 Sep 2008to

31 Dec 2009

1 Jan 2010to

5 Apr 2011

6 Apr 2011to

21 Mar 2012

22 Mar 2012to

Present

0 - £60K 00

00

0 0 0£60K - £120K

1£120K - £125K

1£125K - £175K1 1 1 1

£175K - £250K 1£250K - £500K 3 3 3 3 3 3 3£500K - £1000K

4 4 4 4 44 4

£1000K - £2000K5

5£2000K - ∞ 7

I Stimulus: Stamp Duty Holiday 3 Sep 2008 - 31 Dec 2009I First notch moved temporarily from £125K to £175K, eliminating

taxes in a 50K rangeI Beginning of holiday was unanticipatedI End of holiday was anticipated (time notch at New Year 2010)

Results


UK Stamp Duty: Compliance

I HMRC estimates put the stamp duty tax gap between 4-5% (lowerthan for most other taxes in the UK)

I Evasion through side payments associated with substantial risk

I Collusion between multiple players difficult to sustain (Kleven,Kreiner, and Saez 2009)

I Lag between agreeing and completing a house contract furthercomplicates evasion

I Tax base includes “everything” except freestanding “extras” →potential evasion by overvaluing such items


Outline

Introduction

Stamp Duty Land Tax

Data


Conclusions

Data

I First-time access to administrative stamp duty records from HerMajesty’s Revenue and Customs (HMRC)

I Universe of stamp duty land tax returns (≈ all transactions) in theUK from 2004-2012

I About 10 million transactions

I Rich tax return information; little information outside the return


Data Spanning the Collapse of the Housing Market

.4.6

.81

1.2

1.4

Nor

mal

ised

Num

ber

of T

rans

actio

ns (

2005

m4

= 1

)

2005m1 2006m1 2007m1 2008m1 2009m1 2010m1 2011m1 2012m1 2013m1Month

London UK


Prices Have Recovered in London, But Not the UK Overall

11.

251.

51.

752

2.25

Ave

rage

Pric

e (2

005m

4 =

1)

2005m1 2006m1 2007m1 2008m1 2009m1 2010m1 2011m1 2012m1 2013m1Month

London UK


Outline

Introduction

Stamp Duty Land Tax

Data


Conclusions

House Price Responses to NotchesConceptual Framework

I Notches create bunching and holes in the house price distribution

I House price = price per unit × units of quality-adjusted housing

I What drives observed house price bunching?I House qualityI Price bargaining (but not standard price incidence)I Timing of transaction (thresholds are nominal)I Evasion

I House price elasticity is similar to taxable income elasticityI sufficient statistic for revenue; not necessarily for deadweight loss

Conceptual Density


House Price Responses to £250K Notch, 2004-2012

010

0,00

020

0,00

030

0,00

0N

umbe

r of

Pro

pert

y T

rans

actio

ns

200,000 225,000 250,000 275,000 300,000 325,000House Price

Method

Conceptual

Mansions



010

0,00

020

0,00

030

0,00

0N

umbe

r of

Pro

pert

y T

rans

actio

ns

200,000 225,000 250,000 275,000 300,000 325,000House Price

Actual Distribution Counterfactual Distribution

Method

Conceptual

Mansions



b = 1.85 (0.340) m = 2.21 (0.365) m-b = 0.36 (0.694)

Dhv = £10,000 (1,997.0)

DTax = £5,000

010

0000

2000

0030

0000

Num

ber

of P

rope

rty

Tra

nsac

tions

200,000 225,000 250,000 275,000 300,000 325,000House Price


Method

Conceptual

Mansions



b = 0.86 (0.144) m = 0.96 (0.186) m-b = 0.10 (0.320)

Dhv = £5,000 (534.0)

DTax = £1,250

050

000

1000

0015

0000

Num

ber

of P

rope

rty

Tra

nsac

tions

75,000 100,000 125,000 150,000 175,000 200,000House Price

Actual Distribution Counterfactual DistributionMethod

Other Periods


House Price ResponsesSummary

I Bunching and holes:

I Large and sharp bunching just below notchesI Large holes above notchesI Holes are larger than bunching, consistent with the presence of

extensive responses

I House price responses:

I Average house price response = 2-5 × tax jumpI Largest house price response (end of hole) ≥ 5 × tax jumpI Liquidity constraints are likely to play an important role


Outline

Introduction

Stamp Duty Land Tax

Data


Conclusions

Dynamics of House Price ResponsesNotch moving from £120,000 to £125,000


Dynamics of House Price ResponsesNotch moving from £125,000 to £175,000 and back again


Dynamics of House Price ResponsesMonthly Bunching Estimates Over Time

0.2

5.5

.75

11.

25B

unch

ing

Est

imat

es

2007m1 2008m1 2008m9 2010m1 2011m1Month

b(125) b(175)


Dynamics of House Price ResponsesSummary

I Build-up of bunching when notches are introducedI Holiday start (unanticipated): bunching at £175K builds up in 3

monthsI Holiday end (anticipated): bunching at £125K builds up in 1-2

months

I Disappearance of bunching when notches are removedI Holiday start (unanticipated): bunching at £125K disappears in 4

monthsI Holiday end (anticipated): bunching at £175K disappears

immediately

I Little indication of optimization frictionsI With anticipation, almost zero inertiaI Without anticipation, small inertia ≈ contract completion lag


Outline

Introduction

Stamp Duty Land Tax

Data


Conclusions

Stimulus: Timing and Extensive ResponsesConceptual Framework

I The stamp duty holiday was an unanticipated stimulus programwith a pre-announced end date

I Such stimulus has two conceptual effects on house purchases:I Timing response: intertemporal substitution by those who would

have purchased a house anyway

I Extensive response: house purchases that would not have takenplace otherwise

I Key questions:I What is the total stimulus effect?I How much of it is driven by timing?I How quick is reversal?

Reform


Stimulus: Timing and Extensive ResponsesEmpirical Approach

I Difference-in-differences approach

I Naive baseline:

I Compare treated range 125K-175K to nearby control range

I Treatment is endogenous to price responses to notches

I Dealing with endogeneity:

I Widen treated range to include responding ranges on each side(intent-to-treat)

I Adjust for price responses to notches using bunching estimates


Stimulus: Timing and Extensive ResponsesRaw Time Series

-1.2

5-1

-.75

-.5

-.25

0.2

5.5

Nor

mal

ised

Log

Num

ber

of T

rans

actio

ns

2007m1 2008m12008m9 2010m1 2011m1 2012m1Month

£125K - £175KShort Term Timing


Stimulus: Timing and Extensive ResponsesNaive Diff-in-Diff

-1.2

5-1

-.75

-.5

-.25

0.2

5.5

Nor

mal

ised

Log

Num

ber

of T

rans

actio

ns

2007m1 2008m12008m9 2010m1 2011m1 2012m1Month

£125K - £175K £175K - £225KShort Term Timing


Stimulus: Timing and Extensive ResponsesDiff-in-Diff Adjusting for Bunching Responses

-1.2

5-1

-.75

-.5

-.25

0.2

5.5

Nor

mal

ised

Log

Num

ber

of T

rans

actio

ns

2007m1 2008m12008m9 2010m1 2011m1 2012m1Month



Stimulus: Timing and Extensive ResponsesDiff-in-Diff Adjusting for Bunching Responses

bH = 0.20 bR = -0.08 bP = -0.00(0.022) (0.032) (0.010)

-1.2

5-1

-.75

-.5

-.25

0.2

5.5

Nor

mal

ised

Log

Num

ber

of T

rans

actio

ns

2007m1 2008m12008m9 2010m1 2011m1 2012m1Month



Stimulus: Timing and Extensive ResponsesDiff-in-Diff Adjusting for Bunching Responses (Cumulative Effect)

0.5

11.

52

2.5

33.

5C

umul

ativ

e D

iffer

ence

-35

-30

-25

-20

-15

-10

-50

5C

umul

ativ

e N

orm

alis

ed L

og

2007m1 2008m12008m9 2010m1 2011m1 2012m1Month

£125K - £175K £175K - £225KCumulative Difference

Short Term Timing


Stimulus: Timing and Extensive ResponsesReversal / Total Stimulus Effect (Sensitivity to Reversal End Date)

-(12bR)/(16bH) = 0.31 (0.124)

0.2

5.5

.75

1R

ever

sal /

Tot

al E

ffect

2010m1 2010m7 2011m1 2011m7 2012m1 2012m7Month


Stimulus: Timing and Extensive ResponsesSummary

I Housing stimulus increases activity during the 16 months of theprogram (timing + extensive margin) [20% per month]

I But reduces activity for about 12 months after the program(timing) [8% per month]

I Reversal is less than 50% of stimulus effectI Differ from Mian and Sufi (2012) on US car market stimulus

I Why stimulate house purchases during crisis?I Homeowner mobility too low during crisisI Moving house triggers spending on repairs, renovations, durable

goods and commissions → increase in GDPI Other housing market spillovers (including house prices)


Outline

Introduction

Stamp Duty Land Tax

Data


Conclusions

Immediate Effect of Stimulus on Real Economy

I Lower-bound: stimulus effect only through moving-relatedspending (not including multiplier effects)

I Using consumption data, we estimate that a house purchasetriggers spending of 5% of the house value

I Effect on GDP per dollar of tax cut ∆GDP/∆Tax ≈ 1

I Work on fiscal stimulus through income tax rebates find smallereffects (∆GDP/∆Tax ≈ 0.2− 0.7)

I Success of stamp duty holiday relies on (i) strong responsiveness ofhouse purchases to this tax, (ii) strong complementarities betweenmoving house and spending


Outline

Introduction

Stamp Duty Land Tax

Data


Conclusions

Long Run Revenue and Welfare EffectsConceptual Framework

I Marginal cost of public funds

MCF = −dWdT

=1

1− t1+t (ε+ η)

I Laffer rate (Pareto Bound)

tL =1

ε+ η − 1

I ε ≡ intensive margin elasticity wrt 1 + tI ε from house price notches (upper bound)

I η ≡ extensive margin elasticity wrt 1 + tI η = 14.3 from stamp duty holiday (permanent effect)I η = 23.2 from earlier permanent reform Estimates


Long Run Revenue and Welfare EffectsResults

Bracket Rateε

Marginal Cost of Funds(£000s) (%) η = 14.3 η = 23.2

125 – 250 1 0.16 1.17 1.31250 – 500 3 0.08 1.72 3.11500 – 1,000 4 0.04 2.23 9.421,000 – 2,000 5 0.09 3.18 L2,000 – 7 0.13 17.86 L

Laffer Rate tL 0.16 7.43 4.47

I UK income tax: MCF = 1.2 overall; 1.1–2.7 across distributionI US income tax: MCF = 1.1 overall


Outline

Introduction

Stamp Duty Land Tax

Data


Conclusions

Conclusions

I First comprehensive study of the distortions created by propertytransaction taxes (which are ubiquitous)

I We have benefitted fromI First-time access to complete UK transaction tax recordsI Compelling variation from notches, reforms, and stimulus

I We find that property transaction taxes are extremely distortionaryI Bad long run policyI Transaction tax cuts / subsidies provide effective stimulusI Note: this is not about notches

I Remaining question: effects on asset-price bubbles and volatilityI Difficult to identify; our study increases the burden of proof


Appendix

Appendix Slides

Effect of Notch on House Price DistributionIntensive & Extensive Responses

Density

hvhv

Density under linear tax

Density under notched tax

Extensive Responses

Intensive Responses

House Price Responses

250K

Estimating the Counterfactual Distribution

I Use a flexible polynomial to estimate g0 (hv), excluding dataaround the notch:

ci =

q∑j=0

βj (zi)j +∑r∈R

ηrI

{hv + zir

∈ N}

+

h+v∑

k=h−v

γkI {i = k}+µi

where ci is count of transactions in price bin i, q is the order of thepolynomial, zi is the distance between bin i and the cutoff hv , h−vis the lower bound of the excluded range, h+

v is the upper bound ofthe excluded range, N is the set of natural numbers,R = {500, 1000, 5000, 10000, 25000} is a set of round numbersmultiples, I {·} is the indicator function, and µi is the error term.

AppendixEstimates of the Counterfactual Distribution, Bunching, and Holes

I Estimate of counterfactual distribution:

ci =

q∑j=0

βj (zi)j +

∑r∈R

ηrI

{hv + zir

∈ N}

I Estimates of excess bunching and hole (missing mass):

B(hv)

=

hv∑i=h−

v

(ci − ci) and M(hv)

=

h+v∑

i>hv

(ci − ci)

Results


b = 1.64 (0.510) m = 2.27 (0.387) m-b = 0.63 (0.855)

Dhv = £10,000 (3,808.7)

DTax = £5,000

010

000

2000

030

000

Num

ber

of P

rope

rty

Tra

nsac

tions

450,000 475,000 500,000 525,000 550,000 575,000House Price


House Price Responses to £1,000K Notch, 2011-2012

b = 0.70

Dhv = £30,000

DTax = £10,000

ev = 0.09

0.0

2.0

4.0

6.0

8.1

Den

sity

of P

rope

rty

Tra

nsac

tions

600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000House Price

Actual Density Counterfactual Density

House Price Responses to £2,000K Notch, 2012

b = 1.26

Dhv = £100,000

DTax = £40,000

ev = 0.13

0.0

2.0

4.0

6.0

8.1

.12

Den

sity

of P

rope

rty

Tra

nsac

tions

1,400,000 1,600,000 1,800,000 2,000,000 2,200,000 2,400,000 2,600,000House Price

Actual Density Counterfactual Density250K

Static Price Notches: Bunching and HolesNotch at £60,000; 1 Nov 2004 - 16 Mar 2005

b = 0.41 (0.132) m = 0.92 (0.318) m-b = 0.51 (0.446)

Dhv = £3,500 (1,026.1)

DTax = £600

020

0040

0060

0080

0010

000

Num

ber

of P

rope

rty

Tra

nsac

tions

15,000 40,000 65,000 90,000 115,000 140,000House Price

Actual Distribution Counterfactual DistributionBack

Static Price Notches: Bunching and HolesNotch at £120,000; 17 Mar 2005 - 22 Mar 2006

b = 0.70 (0.068) m = 0.83 (0.226) m-b = 0.13 (0.292)

Dhv = £5,000 (282.2)

DTax = £1,200

020

000

4000

060

000

Num

ber

of P

rope

rty

Tra

nsac

tions

75,000 100,000 125,000 150,000 175,000 200,000House Price


Static Price Notches: Bunching and HolesNotch at £175,000; 3 Sep 2008 - 31 Dec 2009

b = 1.00 (0.270) m = 0.50 (0.267) m-b = -0.50 (0.520)

Dhv = £5,000 (1,981.8)

DTax = £1,750

010

000

2000

030

000

4000

0N

umbe

r of

Pro

pert

y T

rans

actio

ns

125,000 150,000 175,000 200,000 225,000 250,000House Price


Static Price Notches: Bunching and HolesNotch at £125,000; 1 Jan 2010 - 31 Oct 2012

b = 0.78 (0.121) m = 0.73 (0.179) m-b = -0.05 (0.288)

Dhv = £5,000 (274.6)

DTax = £1,250

020

000

4000

060

000

8000

0N

umbe

r of

Pro

pert

y T

rans

actio

ns

75,000 100,000 125,000 150,000 175,000 200,000House Price


Time Notch: Short-Term Timing EffectsDifference-in-Bunching with Price Range Counterfactuals

D-i-Bunching = 2.75 (.392)

050

0010

000

1500

020

000

Num

ber

of T

rans

actio

ns

2009w26 2009w40 2010w1 2010w13 2010w26Week

£75,000 - £125,000 £175,000 - £225,000£125,000 - £175,000

Back to Stimulus

Time Notch: Short-Term Timing EffectsDifference-in-Bunching with Time Period Counterfactuals

D-i-Bunching = 3.44 (.381)

050

0010

000

1500

020

000

Num

ber

of T

rans

actio

ns

2009w26 2009w40 2010w1 2010w13 2010w26Week

1 Year Earlier 2 Years EarlierActual

Back to Stimulus

Time Notch: Short-Term Timing EffectsPlacebo Difference-in-Bunching 1: Price Range Counterfactuals 1 Year Earlier

D-i-Bunching = .09 (.42)

050

0010

000

1500

020

000

Num

ber

of T

rans

actio

ns

2008w27 2008w40 2009w1 2009w13 2009w26Week

£75,000 - £125,000 £175,000 - £225,000£125,000 - £175,000

Back to Stimulus

Time Notch: Short-Term Timing EffectsPlacebo Difference-in-Bunching 2: Price Range Counterfactuals 2 Years Earlier

D-i-Bunching = -.03 (.241)

050

0010

000

1500

020

000

Num

ber

of T

rans

actio

ns

2007w26 2007w40 2008w1 2008w14 2008w27Week

£75,000 - £125,000 £175,000 - £225,000£125,000 - £175,000

Back to Stimulus

Permanent Reform: Extensive ResponsesDiff-in-Diff Adjusting for Bunching Responses

bP = 0.23(0.018)

-.25

0.2

5.5

.75

1N

orm

alis

ed L

og N

umbe

r of

Tra

nsac

tions

2005m1 2005m4 2005m7 2005m10 2006m1Month

£60K - £120K £120K - £180K

Permanent Reform: Extensive ResponsesDiff-in-Diff Adjusting for Bunching Responses (Cumulative Effect)

02

46

810

Cum

ulat

ive

Diff

eren

ce

2005m1 2005m4 2005m7 2005m10 2006m1Month

£120K - £180K £60K - £120K

Back to Conceptual Framework

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