This paper discusses the main aspects of the taxation of housing drawing on general principles of optimal taxation. It focuses on the role of the property tax in achieving neutrality between rental and owner-occupied housing. Assuming that landlords are taxed according to a neutral profits tax, it follows that the property tax should be based on the rate of interest. The paper discusses how the tax rate could be adjusted to account for the lack of effective taxation of capital gains, the double taxation of dividends and the differences in the cost of labour between rental and owner-occupied housing. In most OECD countries, the combined effect of the different housing taxes amounts to a tax subsidy to owner-occupied housing. It is demonstrated how this subsidy has been reduced in Sweden—as in many other countries—in the past decade as a result of tax reforms and a lower rate of inflation. The subsidy has effects on consumption patterns, saving, capital accumulation, the distribution of welfare across generations and the allocation of risks. The paper provides a brief overview of the literature, trying to quantify some of these effects. Finally, a number of problems are noted in the practical application of a property tax.
