Housing Wealth and Tax Preferences Across Europe

About this Session

Time

Fri. 12.04.'24 10:40

Room

Speaker

Abstract :

Despite being much more unequally distributed than income, wealth as a determinant of political preferences has received comparatively little attention. We address this gap by studying how housing wealth – the bulk of private wealth for most ordinary citizens, and the dominant factor in explaining wealth inequality – influences attitudes towards the taxation of income, inheritances, capital gains, and wealth. Importantly, we do not only study preferences over individual taxes in isolation. This allows us to test hypotheses relating to the tax mix in addition to tax levels. We posit that people are largely rational economic actors who prefer a tax mix that minimises their expected cumulative tax burden.

To test our expectations, we leverage data from an original survey with 8699 respondents from Denmark, France, Germany, Ireland, Italy, the Netherlands, and Sweden. We collected information about respondents’ socio-demographics, housing situation, and tax preferences, including a forced-choice conjoint experiment.

We find that individuals form rational tax mix preferences based on their housing situation. Compared to renters, homeowners, owners with more valuable houses, and children of homeowners prefer less progressive taxation of wealth and inheritances, but not of incomes. Crucially, we show further that this relationship is driven by homeowners who own their house outright, while homeowners with a mortgage have more progressive preferences. People who believe they are wealthy relative to others are likewise less supportive of progressive taxation. This supports a view of homeowners as rational economic actors who are particularly opposed to taxes that predominantly affect them.

In the conjoint, respondents lean towards progressive yet reduced taxes. Furthermore, when forced to choose between joint income and inheritance tax schedules, a lower income tax is prioritised, even by homeowners. This aligns with our view that people consider their expected cumulative tax burden when forming tax mix preferences, as cumulative income tax payments are likely to exceed inheritance tax payments for all but the largest estates. Furthermore, despite vastly different income and inheritance systems, people’s preferred tax systems are remarkably similar across countries.

As rising house prices and a chronic housing shortage are becoming increasingly salient issues in many countries, our paper sheds light on the ways in which housing wealth affects other distributive preferences. Our insights provide valuable guidance for policymakers aiming to rally support for wealth and inheritance taxes as mechanisms to curb inequality.