Stamping Out Stamp Duties: Consumption or Property Taxes?

Please join us for the first Professional Development seminar of the year to hear from Dr May Li, Senior Lecturer, University of Melbourne on the welfare implications of property transaction taxes aka stamp duty.

About the topic

This paper seeks to examine the welfare implications of property transaction taxes-also known as stamp duties- in Australia, where the potential reforms to such taxation has been hotly debated lately. We first document some empirical facts of the Australian housing market which suggest that the increasing stamp duty burden for home buyers might be underlying the declining housing turnover rate and owner-to-owner transitions. We then develop a general equilibrium overlapping generations model with heterogeneous agents to model households’ housing demand over the life cycle, in particular, a housing preference shock is included to capture housing transitions driven by reasons other than changing size or quality. The model is calibrated to match the salient features of the Australian housing market. Counterfactual policy experiments are then conducted in which stamp duties on housing purchase are replaced with revenue neutral ad-valorem property taxes or consumption taxes. The main findings are as follows. First, while removing stamp duties does not influence house prices and rents much, it leads to substantial changes in housing allocations across different age groups. Removing stamp duties greatly relaxes the down payment constraint and increases the housing demand and home ownership of young households. Second, the elimination of stamp duties stimulates housing activities and increases the housing transition rates and the match quality of housing significantly. Third, it leads to a long run welfare gain of 3.2 percent under property tax and 1.5 percent under consumption tax, arising from a more efficient allocation of housing. Fourth, over the transition, existing renters who tend to be poorer are better off while existing homeowners who are relatively richer lose. However, homeowners are not hurt when stamp duties are replaced by consumption taxes.

About our speaker

May Li is a Senior Lecturer at Department of Economics, the University of Melbourne. She joined the University after receiving her Ph.D. in Economics from the University of Texas at Austin in 2005. Her main research interests are in  macroeconomics, housing, and finance. She has published in Journal Economic Dynamics and Control, Economic Inquiry, The B.E. Journal of Macroeconomics, Canadian Journal  of Economics, Macroeconomic Dynamics, etc.