Hostname: page-component-586b7cd67f-2plfb Total loading time: 0 Render date: 2024-11-23T00:35:06.689Z Has data issue: false hasContentIssue false
  • English
  • Français

LABOR TAX REDUCTIONS IN EUROPE: THE ROLE OF PROPERTY TAXATION

Published online by Cambridge University Press:  18 June 2020

Marcin Bielecki  and
Nikolai Stähler
Marcin Bielecki
Affiliation:
Narodowy Bank Polski, Swietokrzyska 11/21, 00-919 Warsaw, Poland
Nikolai Stähler*
Affiliation:
Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt, Germany
*
Address correspondence to: Nikolai Stähler, Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt, Germany. e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We use a New Keynesian DSGE model with search frictions on the housing market to evaluate how financing a labor tax reduction by higher property taxation affects the real economy and welfare. Search on the housing market enables us to explicitly model stocks and flows, which is necessary to differentiate between recurrent property taxes (levied on stocks) and property transaction taxes (levied to flows). We find that using recurrent property taxation as financing instrument outperforms other instruments although all policy measures increase aggregate economy-wide welfare. Our simulations suggest that using property transaction taxation as financing instrument is the least favorable measure.

Keywords

Search Frictions in Housing MarketsProperty TaxationTax ReformGeneral Equilibrium
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 2 , March 2022 , pp. 419 - 451
Copyright
© Cambridge University Press 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The paper represents the authors’ personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank, the Narodowy Bank Polski, the Eurosystem or its staff. Any errors are ours. We would like to thank our anonymous Bundesbank research paper referee, two anonymous journal referees, participants at the 2018 Theories and Methods in Macroeconomic conference in Paris as well as the 2019 EEA/ESEM Meeting in Manchester and seminar participant at Bundesbank and Narodowy Bank Polski as well as Andreas Gulyas for helpful comments.

References

Alesina, A. F., Glaeser, E. L. and Sacerdote, B. (2006) Work and Leisure in the U.S. and Europe: Why so different? NBER, pp. 1–100.Google Scholar
Alpanda, S. and Zubairy, S. (2016) Housing and tax policy. Journal of Money, Credit and Banking 48(2–3), 485–512.CrossRefGoogle Scholar
Alpanda, S. and Zubairy, S. (2017) Addressing household indebtedness: Monetary, fiscal or macroprudential policy? European Economic Review 92(C), 47–73.CrossRefGoogle Scholar
Arce, Ó., Hurtado, S. and Thomas, C. (2016) Policy Spillovers and synergies in a monetary union. International Journal of Central Banking 12(3), 219–277.Google Scholar
Attinasi, M.-G., Prammer, D., Stähler, N., Tasso, M. and van Parys, S. (2019) Budget-neutral labor tax wedge reductions: A simulation-based analysis for the Euro area. International Journal of Central Banking 15(4), 1–54.Google Scholar
Balta, N. and Delgado, J. (2009) Home bias and market integration in the EU. CESifo Economic Studies 55(1), 110–144.CrossRefGoogle Scholar
Benigno, P. (2009) Price stability with imperfect financial integration. Journal of Money, Credit and Banking 41, 121–149.CrossRefGoogle Scholar
Bickerdike, C. F. (1902) Taxation of site values. The Economic Journal 12(48), 472–484.CrossRefGoogle Scholar
Bielecki, M., Brzoza-Brzezina, M., Kolasa, M. and Makarski, K. (2019) Could the boom-bust in the eurozone periphery have been prevented? Journal of Common Market Studies 57(2), 336–352.CrossRefGoogle Scholar
Boscá, J. E., Doménech, R. and Ferri, J. (2013) Fiscal devaluations in EMU. Hacienda Pública Española 206(3), 27–56.CrossRefGoogle Scholar
Burgert, M. and Roeger, W. (2014) Fiscal Devaluation: Efficiency and Equity. Technical Report 542, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.Google Scholar
Burnside, C., Eichenbaum, M. and Rebelo, S. (2016) Understanding booms and busts in housing markets. Journal of Political Economy 124(4), 1088–1147.CrossRefGoogle Scholar
Calvo, G. A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12(3), 383–398.CrossRefGoogle Scholar
Caplin, A. and Leahy, J. (2011) Trading frictions and house price dynamics. Journal of Money, Credit and Banking 43, 283–303.CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M. and Evans, C. L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113(1), 1–45.CrossRefGoogle Scholar
Coenen, G., Erceg, C. J., Freedman, C., Furceri, D., Kumhof, M., Lalonde, R., Laxton, D., Lindé, J., Mourougane, A., Muir, D., Mursula, S., Resende, D., Carlos, J. Roberts, W. Roeger, S. Snudden, M. Trabandt and J. in’t Veld (2012) Effects of fiscal stimulus in structural models. American Economic Journal: Macroeconomics 4(1), 22–68.Google Scholar
Coenen, G., McAdam, P. and Straub, R. (2008) Tax reform and labour-market performance in the euro area: A simulation-based analysis using the New Area-Wide Model. Journal of Economic Dynamics and Control 32(8), 2543–2583.CrossRefGoogle Scholar
Davis, M. A. and Heathcote, J. (2005) Housing and the business cycle. International Economic Review 46(3), 751–784.CrossRefGoogle Scholar
Davis, M. A. and Heathcote, J. (2007) The price and quantity of residential land in the United States. Journal of Monetary Economics 54(8), 2595–2620.CrossRefGoogle Scholar
Diamond, P. A. and Mirrlees, J. A. (1971) Optimal taxation and public production I: Production efficiency. The American Economic Review 61(1), 8–27.Google Scholar
Díaz, A. and Jerez, B. (2013) House prices, sales, and time on the market: A search-theoretic framework. International Economic Review 54(3), 837–872.CrossRefGoogle Scholar
Engler, P., Ganelli, G., Tervala, J. and Voigts, S. (2017) Fiscal devaluation in a monetary union. IMF Economic Review 65(2), 241–272.CrossRefGoogle Scholar
Erceg, C. J., Guerrieri, L. and Gust, C. (2005) Expansionary fiscal shocks and the US trade deficit. International Finance 8(3), 363–397.CrossRefGoogle Scholar
European Commission (2013) Tax Reforms in EU Member States - Tax Policy Challenges for Economic Growth and Fiscal Sustainability. Technical Report 5/2013, European Economy, Brussels.Google Scholar
European Commission (2014) Taxation Trends in the European Union. Technical report.Google Scholar
European Commission (2015) Tax Reforms in EU Member States - Tax Policy Challenges for Economic Growth and Fiscal Sustainability. Technical Report 8/2015, European Economy, Brussels.Google Scholar
European Commission (2016) The Economic Impact of Selected Structural Reform Measures in Italy, France, Spain and Portugal. Technical Report No. 023, European Economy, Brussels.Google Scholar
Farhi, E., Gopinath, G. and Itskhoki, O. (2014) Fiscal devaluations. The Review of Economic Studies 81(2), 725–760.CrossRefGoogle Scholar
Feldstein, M. (2006) The Effect of Taxes on Efficiency and Growth. Working Papers No: 12201, National Bureau of Economic Research. DOI: 10.3386/w12201.CrossRefGoogle Scholar
Funke, M. and Paetz, M. (2013) Housing prices and the business cycle: An empirical application to Hong Kong. Journal of Housing Economics 22(1), 62–76.CrossRefGoogle Scholar
Gadatsch, N., Hauzenberger, K. and Stähler, N. (2016) Fiscal policy during the crisis: A look on germany and the euro area with gear. Economic Modelling 52, 997–1016.CrossRefGoogle Scholar
Gadatsch, N., Stähler, N. and Weigert, B. (2016) German labor market and fiscal reforms 1999-2008: Can they be blamed for intra-euro area imbalances? Journal of Macroeconomics 50(Supplement C), 307–324.CrossRefGoogle Scholar
Galí, J., López-Salido, J. D. and Vallés, J. (2007) Understanding the effects of government spending on consumption. Journal of the European Economic Association 5(1), 227–270.CrossRefGoogle Scholar
Gervais, M. (2002) Housing taxation and capital accumulation. Journal of Monetary Economics 49(7), 1461–1489.CrossRefGoogle Scholar
Gomes, S., Jacquinot, P. and Pisani, M. (2016) Fiscal devaluation in the euro area: A model-based analysis. Economic Modelling 52(Part A), 58–70.CrossRefGoogle Scholar
Head, A., Lloyd-Ellis, H. and Sun, H. (2014) Search, liquidity, and the dynamics of house prices and construction. American Economic Review 104(4), 1172–1210.CrossRefGoogle Scholar
Hedlund, A. (2016a) The cyclical dynamics of illiquid housing, debt, and foreclosures. Quantitative Economics 7(1), 289–328.CrossRefGoogle Scholar
Hedlund, A. (2016b) Illiquidity and its discontents: Trading delays and foreclosures in the housing market. Journal of Monetary Economics 83(Supplement C), 1–13.CrossRefGoogle Scholar
Hunt, B. and Rebucci, A. (2005) The US dollar and the trade deficit: What accounts for the late 1990s? International Finance 8(3), 399–434.CrossRefGoogle Scholar
Iacoviello, M. (2005) House prices, borrowing constraints, and monetary policy in the business cycle. American Economic Review 95(3), 739–764.CrossRefGoogle Scholar
Iacoviello, M. and Neri, S. (2010) Housing market spillovers: Evidence from an estimated DSGE model. American Economic Journal: Macroeconomics 2(2), 125–164.Google Scholar
IMF (2014) Fiscal Monitor 2013 Taxing Times. Technical report, International Monetary Fund, World Economic and Financial Surveys, Washington.Google Scholar
Jacquinot, P., Lozej, M. and Pisani, M. (2018) Labor tax reforms, cross-country coordination, and the monetary policy stance in the euro area: A structural model-based approach. International Journal of Central Banking 14(3), 65–140.Google Scholar
Kaufmann, C. (2019) Optimal fiscal substitutes for the exchange rate in monetary unions. Journal of Economic Dynamics and Control 103(C), 43–62.CrossRefGoogle Scholar
Kiyotaki, N., Michaelides, A. and Nikolov, K. (2011) Winners and losers in housing markets. Journal of Money, Credit and Banking 43(2–3), 255–296.CrossRefGoogle Scholar
Kiyotaki, N. and Moore, J. (1997) Credit cycles. Journal of Political Economy 105(2), 211–248.CrossRefGoogle Scholar
Krainer, J. (2001) A theory of liquidity in residential real estate markets. Journal of Urban Economics 49(1), 32–53.CrossRefGoogle Scholar
Kydland, F. E., Rupert, P. and Sustek, R. (2016) Housing dynamics over the business cycle. International Economic Review 57, 1149–1177.CrossRefGoogle Scholar
Langot, F., Patureau, L. and Sopraseuth, T. (2014) Fiscal Devaluation and Structural Gaps. Technical Report 508, Banque de France.CrossRefGoogle Scholar
Le Blanc, J., Porpiglia, A., Teppa, F., Zhu, J. and Ziegelmeyer, M. (2014) Household saving behavior and credit constraints in the Euro area. Technical Report 16/2014, Deutsche Bundesbank, Research Centre.CrossRefGoogle Scholar
Lipinska, A. and von Thadden, L. (2019) On the effectiveness of fiscal devaluations in a monetary union. Macroeconomic Dynamics 23(8), 3424–3456.CrossRefGoogle Scholar
Lucas, R. E. (2003) Macroeconomic Priorities. American Economic Review 93(1), 1–14.CrossRefGoogle Scholar
Mankiw, N. G., Weinzierl, M. and Yagan, D. (2009) Optimal taxation in theory and practice. Journal of Economic Perspectives 23(4), 147–174.CrossRefGoogle Scholar
Mora-Sanguinetti, J. S. and Rubio, M. (2014) Recent reforms in Spanish housing markets: An evaluation using a DSGE model. Economic Modelling 44(Supplement 1), S42–S49.CrossRefGoogle Scholar
Moyen, S., Stähler, N. and Winkler, F. (2019) Optimal unemployment insurance and international risk sharing. European Economic Review 115(C), 144–171.CrossRefGoogle Scholar
Ngai, L. R. and Tenreyro, S. (2014) Hot and cold seasons in the housing market. American Economic Review 104(12), 3991–4026.CrossRefGoogle Scholar
Nickell, S., Nunziata, L. and Ochel, W. (2005) Unemployment in the OECD Since the 1960s. What do we know? The Economic Journal 115(500), 1–27.CrossRefGoogle Scholar
Novy-Marx, R. (2009) Hot and cold markets. Real Estate Economics 37(1), 1–22.CrossRefGoogle Scholar
OECD (2012) OECD Economic Surveys: Spain 2012. Technical report, OECD Publishing, Paris.Google Scholar
OECD (2015) OECD Economic Surveys: Italy 2015. Technical report, OECD Publishing, Paris.Google Scholar
Ohanian, L., Raffo, A. and Rogerson, R. (2008) Long-term changes in labor supply and taxes: Evidence from OECD countries, 1956–2004. Journal of Monetary Economics 55(8), 1353–1362.CrossRefGoogle Scholar
Ortega, E., Rubio, M. and Thomas, C. (2011) House purchase versus rental in Spain. Technical Report 1108, Banco de España & Working Papers Homepage.CrossRefGoogle Scholar
Piazzesia, M., Schneider, M. and Tuzel, S. (2007) Housing, consumption and asset pricing. Journal of Financial Economics 83(3), 531–569.CrossRefGoogle Scholar
Pissarides, C. A. (2000) Equilibrium Unemployment Theory. MIT Press.Google Scholar
Poterba, J. M. (1990) Taxation and Housing Markets: Preliminary Evidence on the Effects of Recent Tax Reforms. Working Papers: No. 3270, National Bureau of Economic Research. DOI: 10.3386/w3270.CrossRefGoogle Scholar
Poterba, J. M. (1992) Taxation and housing: Old questions, new answers. The American Economic Review 82(2), 237–242.Google Scholar
Prescott, E. C. (2004) Why do Americans work so much more than Europeans? Quarterly Review 28(Jul), 2–13.CrossRefGoogle Scholar
Rubio, M. (2014) Housing-market heterogeneity in a monetary union. Journal of International Money and Finance 40(Supplement C), 163–184.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2003) Closing small open economy models. Journal of International Economics 61(1), 163–185.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2007) Optimal simple and implementable monetary and fiscal rules. Journal of Monetary Economics 54(6), 1702–1725.CrossRefGoogle Scholar
Slemrod, J. (1990). Optimal taxation and optimal tax systems. The Journal of Economic Perspectives 4(1), 157–178.CrossRefGoogle Scholar
Sommer, K. and Sullivan, P. (2018) Implications of US tax policy for house prices, rents, and homeownership. American Economic Review 108(2), 241–274.CrossRefGoogle Scholar
Stähler, N. (2019) Who benefits from using property taxes to finance a labor tax wedge reduction? Journal of Housing Economics 46(C) 101634.CrossRefGoogle Scholar
Stähler, N. and Thomas, C. (2012) FiMod - A DSGE model for fiscal policy simulations. Economic Modelling 29(2), 239–261.CrossRefGoogle Scholar
Sterk, V. (2015) Home equity, mobility, and macroeconomic fluctuations. Journal of Monetary Economics 74(Supplement C), 16–32.CrossRefGoogle Scholar
Ungerer, C. (2015) Monetary Policy, Hot Housing Markets and Leverage. Technical Report 2015-48, Board of Governors of the Federal Reserve System (U.S.).CrossRefGoogle Scholar
Wheaton, W. C. (1990) Vacancy, search, and prices in a housing market matching model. Journal of Political Economy 98(6), 1270–1292.CrossRefGoogle Scholar
Supplementary material: PDF

Bielecki and Stähler supplementary material

Appendix

Download Bielecki and Stähler supplementary material(PDF)
PDF 409.8 KB