Seminar: Allocation of Tax Subsidies on New and Old Housing: Theory and Evidence from Luxembourg

How should the government set transaction taxes on real estate when it can discriminate between old (existing) housing and new housing? We first show how the optimal tax allocation depends on the elasticity of supply of new housing. All else equal, new housing should benefit from more tax subsidies relative to old housing if supply is elastic. We then estimate the elasticity of the price of new and old houses to taxes using data from Luxembourg, where house prices have increased substantially. For identification, we rely on a discontinuity in the transaction tax rate. We find that the price of old houses responds to the tax, while the price of new houses does not. This suggests that the supply elasticity of new housing is relatively low and that tax subsidies to old houses may be a useful policy instrument.