Value-Added Tax Incidence in Housing Markets: Price and Property Size Responses to a National Reform

• In Event: Consumption Taxes in Developing Countries

Abstract

Housing constitutes a significant share of household wealth, and governments levy taxes on real estate assets. However, the extent to which these taxes are passed through to consumers, and whether they generate unintended consequences, remains unclear. We estimate the pass-through of a Value Added Tax (VAT) to housing prices by exploiting a large, anticipated, and salient national reform in Chile. It introduced a 19% VAT on a subset of residential property transactions applying only to the sale price net of the land value. Using transaction-level data covering the universe of residential real estate sales from 2010 to 2022, we implement a difference-in-differences strategy and find that the VAT led to a 2.4% anticipatory increase in prices, followed by a sustained increase of 5.6% to 9%. We estimate tax incidence separately for apartments and houses, which differ in the share of land in total value. Our results suggest full pass-through for apartments, while houses exhibit only partial or transitory price increases. Furthermore, we document effects along the intensive margin (property size) rather than the extensive margin (number of transactions). The volume of registered transactions does not decline following the reform, and evidence from purchase agreements indicates only modest re-timing behavior. However, the size of new apartments declines significantly post-reform, while house sizes remain unchanged.

Authors

• Juan Nicolas Herrera La Rotta, jherreralarotta@ucsb.edu

• Sebastian Espinoza-Rojas, University College London