Taxing home ownership: distributional effects of including net imputed rent in taxable income

Imputed rental income of homeowners is tax exempt in most countries, despite the long-standing arguments recommending its inclusion in the tax base, on both equity and efficiency grounds. While the financial and fiscal crisis revived interest towards this form of taxation, this paper investigates the fiscal and distributional consequences of including homeowners’ imputed rent, net of mortgage interest and maintenance costs, in taxable income as any other income source that extends consumption opportunities. Three scenarios are analysed in six European countries: in the first imputed rent is included in taxable income for homeowners, while at the same time existing mortgage interest tax relief schemes and taxation of cadastral incomes are abolished. In two further revenue-neutral scenarios, the additional tax revenue raised through the taxation of imputed rent is redistributed to taxpayers, either through a proportional rebate or a lump-sum tax credit.Results show how including net imputed rent in the tax base might reduce inequality in each of the countries that are considered. Housing taxation hence appears a promising avenue for raising additional revenues, or lightening taxation of labour, with no inequality side-effects to be envisaged.