Academic journal article Public Finance and Management

Taxing Owner-Occupied Housing: Comparing the Netherlands to Other European Union Countries

Academic journal article Public Finance and Management

Taxing Owner-Occupied Housing: Comparing the Netherlands to Other European Union Countries

Article excerpt

ABSTRACT

This paper compares owner-occupied housing tax regimes in the Netherlands and the other countries in the EU-15. The Netherlands appears to stand apart in two respects. First, in Luxembourg and the Netherlands owner-occupiers have to include an imputed rental income in their taxable income. Second, in the Netherlands, the tax-deductibility of mortgage interest payments is almost unrestricted.

The tax regime of owner-occupied homes increasingly erodes the personal income tax base in the Netherlands, so that higher tax rates are needed to collect a given amount of revenue. However, elimination or reduction of the mortgage interest deduction can only be realized gradually.

Due to a lack of data both within the various tax regimes and across time periods, a comprehensive multivariate time-series comparison among the various tax regimes in the EU-15 is not possible. Thus, the statistical analysis is limited to bivariate comparisons.

1. INTRODUCTION

In Europe, approximately two thirds of the households own the dwellings that they occupy. In the Netherlands the home ownership rate of 54% lags the European average (VROM-raad, 2004, p. 11). However, the Netherlands is gradually closing the gap as the lion's share of new estate construction consists of owneroccupied houses. In 2002, this share was over 78 percent (CBS, 2005, p. 78). As a result, the share of owneroccupied dwellings has increased from 39 percent in 1977 (CBS, 1982, p. 71) to 54 percent in 2002. This is consistent with Dutch housing policy as evidenced by a statement made by the Dutch housing secretary that "... given the housing preferences, the share of [home owners] has to increase considerably" (Parliamentary Papers, 2000, p. 22).

The goal of enhancing private home ownership through public policy has been pursued for decades. The government can deploy a number of policy instruments to enhance home ownership. In the past, subsidies for homebuyers were one of these instruments. These homebuyer subsidies were aimed at offering people in the lowest income brackets a choice of renting a home with a rental subsidy or buying a house with a purchase subsidy. However, the Dutch government has discontinued this policy. The most important policy instrument now seems to be the mortgage interest deduction. This in turn is one of the most sensitive issues in modern Dutch politics. There is no theme that politicians deal with as prudently as the deductibility of home-mortgage interest.

Successive Dutch cabinets have taken the view that the mortgage interest deduction does not constitute a tax expenditure. Tax expenditures can be described as "a loss of governmental tax revenue attributable to some provision of tax law that allows a special exclusion, exemption, or deduction from gross income or that provides a special credit, preferential tax rate, or deferral of tax liability" (U.S. House of Representatives, 2005). So far, all Dutch cabinets have regarded the deductibility of mortgage interest as an element of the regular tax structure rather than a special deduction. As a result, the mortgage interest deduction has never been included in the list of tax expenditures that the government has published on an annual basis from 1999.

To a certain extent this is a logical approach. If a taxpayer's own dwelling is considered a source of income, the income derived from this source should be taxed, whereas the cost associated with this income should be tax-deductible. This has been the position of the Dutch government - irrespective of the coalition's political color. In the Dutch system this would imply that an owner-occupied house should be taxed similar to other assets (in Box 3).1 Currently, however, it is taxed together with labor income at a progressive rate (in Box 1). For the vast majority of taxpayers the current taxation results in a negative income from owner-occupied houses because the deduction of mortgage interest outweighs the imputed rental income (0. …

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