Property Tax Web Series

Abstract

Housing is the main asset through which households accumulate wealth and its taxation is highly debated. We provide the first empirical estimates of the long-run effects of shocks to property taxation on lifetime wealth accumulation and investment. To do so, we examine a unique 18th-century tax reform in Holland which resulted in large and unanticipated changes in the effective tax rates on real estate wealth, plausibly exogenous to the owners and different for each property. We collect archival data on the wealth and home-ownership of all 18th-century Amsterdam inhabitants and determine their individual exposure to the shock. We find large effects of the shock on long-run household wealth, with the effect growing over time. On average, a tax increase that implied a 1% drop in the property price led to a 3.5% decrease in wealth-at-death. We show that a growing effect is consistent with households not updating housing consumption in response to large tax changes: large positive or negative shocks had few impact on the likelihood of selling voluntarily, even in a liquid market with low transaction taxes. Instead, changes in taxation primarily affected annual saving. The shock had a large impact on foreclosure rates and still affected vacancy and owner-occupancy rates 70 years after the reform. Our findings suggest that property tax changes have long-lasting effects on household wealth and the housing stock, which extend far beyond their direct capitalization effects.

This paper was presented by Matthijs Korevaar (Erasmus University Rotterdam) on March 10, 2023 as part of the 2022-2023 Syracuse-Chicago Webinar Series on Property Tax Administration and Design. Marius Ring (University of Texas at Austin) was the discussant for this presentation. Ring comments on Korevaar's "Shocking Wealth: The Long-Term Impact of Housing Wealth Taxation."