The housing market is overheated: this leads to staggering prices for houses and lots of overbidding. If we are to believe the Dutch central bank (De Nederlandsche Bank), part of the solution lies with moving houses from box 1 to box 3 in the tax system. What does this mean and what are the consequences? In an article from Elsevier Weekblad, Professor of Public Economics at Erasmus School of Economics Bas Jacobs gives his explanation.
Current situation
Currently, everyone’s home resides in box 1: this effectively means that taxes on this form of capital are very low. Therefore, it is very attractive to invest in a house. This results in an overheated housing market, because regulations and laws make that there is a really high demand for housing in comparison with supply. De Nederlandsche Bank wants to (partly) overcome this problem by decreasing the benefits house owners receive.
Influencing behaviour?
Professor Jacobs: ‘If you want a tax system that works, it’s impossible to leave out one of the most important components of capital. As an economist, I am of the opinion that the government should try to stay away from influencing the behaviour of consumers with regards to saving and investing. This is why it is better to tax all the capital at a moderate rate instead of subsidizing one part and taxing another part at a higher rate’. In the current situation, the starting point of the system is right. One’s home is regarded as income in kind, with deductible costs made to acquire that income.
A more refined way of taxing houses
Jacobs says that there is a better, more refined way of arranging the tax system. If homes stay in box 1 in the next years and rates are altered, there is no situation in which the change is as rigorous. If the fictitious rate of return is slowly increased, the tax burden will eventually be equal to the tax burden in box 3. ‘If you slowly increase the fictitious rate, homes can be transferred to box 3 without grave economic consequences’, Jacobs says.
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You can read the full article from Elsevier Weekblad, 25 October 2021, here.