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Arnold, Jen, 2008, “Do Tax Structures Affect Aggregate Economic Growth?: Empirical vidence from a Panel of OECD Countries”, OECD Economics Department Working Papers, No. 643, OECD Publishing.
Benchetrit, Gilat, 2014, “A Decade without A Housing Policy,” TAUB Center for Social Policy Studies in Israel Policy Paper No. 2014.03, Jerusalem, 2014.
Crowe, Christopher; Giovanni Dell’Abriccia; Deniz Igan; and Pau Rabanal, 2011, “How to Deal with Real Estate Booms: Lessons,” IMF Working Paper 11/91, International Monetary Fund, 2011.
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Prepared by Aiko Mineshima.
A transation tax is a tax (fee) imposed on the transfer of title to property from one entity to another. Examples for such taxes include some forms of stamp duty, real estate transfer tax, and levies for the forma registration of a transfer. Recurrent property taxes consist of taxes payable regularly, usually each year, in respect of the use or ownership of land, buildings, or other structures utilized by enterprises in production, whether the enterprises own or rent such assets. A recurrent tax on net wealth is a levy on the net value of personal assets. Assets include owner-occupied housing, cash, bank deposits, money funds, and savings in insurance and pension plans, investment in real estates and unincorporated businesses, and corporate stock, financial securities, and personal trusts. Other non-recurrent taxes on property include estate, inheritance, gift taxes, and others.
VAT is a tax levied on all sales of commodities at every stage of production. Its defining feature is that it credits taxes paid by enterprises on their material inputs against the taxes they must levy on their own sales. A capital gains tax is a tax on the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale.
For example, among the EU member states, only few countries (e.g., Luxemburg, Netherlands) tax imputed rents for main dwellings. In the case of the United Kingdom, the Mirrlees review proposed a Housing Service Tax to approximate a VAT on housing services. It reflects the fact that the United Kingdom applies a zero VAT rate on construction and sale of residential property, and difficulties of covering both new and old houses.
The final value that a purchaser faces would be lower if, everything else is same, a country imposes a zero VAT rate to the supply of houses than exempting VAT from new houses. It is because builders would factor in the lack of input credits into the final value for the case of VAT exemption. Among the countries that exempt the sale for new buildings, Germany and Portugal apply instead the property transfer tax (registration duty). The rate of the transfer tax is lower than the standard VAT rate. However, no inputs credit is available.
Article 110, “COUNCIL DIRECTIVE on the common system of value added tax” (2006/112/EC, November 28, 2006).
A number of studies (e.g., IMF, 2009; Crowe and others, 2011; Hendershott and others, 2003), however, raise the issue of a bias toward debt-financed homeownership through providing mortgage interest relief. In light of such concern, several countries have taken steps to reduce these distortions. For example, Ireland and Spain have eliminated mortgage interest deductibility on new loans, and it is being gradually reduced in Denmark and the Netherlands (IMF, 2014).
The base for recurrent property tax varies from country to country, which can include land only, land and immovable improvements, just the improvements, or different combinations of land and improvements for different types of land use (UN, 2011). One element worthwhile mentioned would be the use of a pure site (land) tax. If better or more productive use of land is the driving motive, a pure land tax on land value would offer the best tax design since—being independent from actual land use—this would maximize the incentive to apply the land to its optimal use (OECD, 2008; Norregaard, 2013). For the case of Israel, where over 90 percent of land is state owned, the use of a land tax would not be effective in the short run. However, a good use of a land tax could be explored as the privatization of land proceeds in the future.
For this reason, some countries replacing transfer taxes—totally or partially—with recurrent immovable property taxes (e.g., Ireland, Portugal).
For the case of capital gains taxes, buyers do not have an incentive to agree on a low invoice as their capital gain tax burden would go up when selling.
Given the low elasticity of housing supply to price changes, it is unclear if the increased profits for developers stimulate housing supply.
The total impact on the overall housing prices is difficult to project because the prices of houses below NIS1.6 million percent would go up closer to the upper limit, while houses that would have been priced slightly above NIS1.6 million may be adjusted downward below the threshold to become eligible for the tax benefit.
Sarel (2014) estimates that 21 percent of the benefits would go to the top 10 percent income group. In addition, increases in pre-tax housing prices may benefit developers rather than the targeted population.
The EC study argues for applying a reduced VAT rate to certain cases, for example the sectors whose services are easily substituted for do-it-yourself or underground work. In addition, in theory, reducing VAT rates for the sectors employing many low-skilled workers would boost demand for low-skilled workers. However, the EC study finds that the overall impact on demand for low-skilled works is unimpressive because differences in low-skilled employment between industries are limited: indeed making standard VAT rate apply for all sectors currently benefiting from reduced rates is likely to create a similar sized demand boost for low-skilled workers.
Well above 90 percent of the transactions if limiting the sample to buyers with a single home.
The new regime is introduced in two stages: a transition period from January 1, 2014 to December 31, 2017 followed by the permanent regime from January 1, 2018. During the transition period, a reduced tax rate calculated based on the number of days passed since January 1, 2014 will be applied to an ineligible foreigner.
This could be partly explained by the fact that per-square meter/foot price tends to be higher for a commercial property than a residential property—meaning the gap could be smaller when comparing the effective tax rate per property value.
Any gift to a non-Israeli resident is taxable.
On a nominal term, housing prices almost doubled in between 2007 Q1 (the recent bottom) to 2015 Q1.
Israel has a history of promoting homeownership. Benchetrit (2011) indicates that from the establishment of the stat through the early 2000s, the Israeli government gook various steps to encourage homeownership, based on the social, economic, and maintenance-related considerations. Socially, it was believed that homeownership fostered a sense of rootedness and personal connection to one’s geographical locale, and objective of particular importance in so-called “development areas.” Economically, homeownership was believed to encourage savings and lessens government investment, and also contributes to higher home maintenance standards.
Mortgage rates have been on a downward trend since the early 2000s.
Benchetrit (2014), however, argues that the homeownership rates have recently been declining because only a fraction of public housing program remains after a large portion of the public housing was sold.
This may be due to the advice made by the Ministry of Construction and Housing in late 2006 to restrict housing construction in the center of the country in light of the persistent decline in housing prices started in the late 1990s, possibly owing to the excess supply of dwellings after the surge in immigrations in the early 1990s. The government accepted this recommendation on August 24, 2008 (Government resolution No. 3973). This resolution was overturn on July 15, 2010 (Government resolution No. 1980).
In Ireland the unwinding of a credit and housing boom (housing prices declined by 50 percent) triggered a banking crisis and also resulted in a large decline in revenue from the housing sector (by about 3 percentage points of GDP from 2006 to 2011).
Recent studies (e.g., Kahn and Ribon, 2014) indicate a positive correlation between housing prices and private consumption in Israel. This may suggest a sharp correction in housing markets could have a second-round effect on the economy through lowering consumption.
Norregaard (2013) indicates that property taxes have been considered as potentially effective in countering speculative housing price booms and house price volatility. Examples include using property taxation in this respect include China and Singapore although the impact of taxes for this purpose is far from clear. Crowe and others (2011) conclude that the relationship between the level of transaction taxes and housing prices is ambiguous. However, transaction taxes that change with real estate conditions may be, in theory, more promising. On the boom side, China and Hong Kong SAR introduced higher stamp duties to dampen real estate prices and discourage speculation. Their experience, however, indicates that transaction volume responds more than prices do (suggesting that the associated collateral costs are high) and the impact of the introduction of the tax may be transit.
Since the beginning of 2014, housing transactions have been declining. While some may be attributable to the tightening of tax exemptions, but strong rebound in the late 2014 would suggest it was largely due to the “waiting” behavior caused by an anticipation of the introduction of a zero VAT on new apartments starting in 2015. The idea of the zero VAT was eliminated after the dismissal of the government in December 2014.
Capital losses would entail a tax refund.
Housing Committee indicated during the IMF visit in December 2014 that in number of cases developers do not build as agreed in the contract, or do not even build anything, but the government does not follow up on the situation properly.