The privilege of living in the house owned

Fiscal policy favors the purchase of the home. It is a choice that has no justification from an economic point of view. It benefits landlords rather than tenants and limits geographical mobility.

The benefits of those who live in their own home

For decades, Italian tax policy has favored the purchase of a home and consequently encouraged the owners to live there. But is this a fair and effective orientation?

Let us take an example to understand the implications of this fiscal orientation. If an Italian citizen, citizen A, lives in a rented house, she pays the rent to the owner. Assume that the citizen also owns a rented apartment, which provides a rental income on which it pays fixed tax.

Then suppose that there is another city, city B, which is in an apartment it also owns and which has an economic profile similar to city A. Although the apartments they both live in, as well as the ones they owner, are equivalent, citizen A will have a higher tax burden than city B. In fact, citizen A with a standard of living and wealth corresponding to his counterpart bears the cost of the fixed tax on rental income that is collected.

The reason for the tax advantage is that citizen B is neither taxed for the alternative costs of living in his own apartment (a tax on the so-called imputed rent), nor with a property tax, Imu, which in Italy was abolished for the first houses when the owner is also resident.

When it comes to fairness, the regulatory choice places more weight on the people who own and live in their apartment. Since the home is exempt from IMU, the beneficiaries are the owner-occupiers, who pay less tax.

It is a choice that may or may not be agreed upon, it depends on the preferences of a given company. Tenants in Italy are the minority, accounting for approximately 20 percent (Istat). However, they are a group that should not be underestimated because, as theories of urban economics teach, they comprise marginal citizens (i.e., those who have considered the possibility of moving) who determine the housing market equilibrium (see, e.g., Glaeser, 2008). . Therefore, it is legitimate to believe that, for reasons of fairness, tenants should not receive less consideration from the legislature than owner-occupiers. If so, the debate over which policy to pursue will be one of efficiency.

Two efficiency issues

As far as efficiency is concerned, the choice of the Italian legislator has at least two fundamental problems.

The first is that geographic mobility is discouraged after negative economic shocks. Blanchard and Katz (1992) show that regional mobility is one of the ways in which a territory responds to economic shocks. If the economy in a territory is bad, the territory also recovers with the decision of some of the unemployed or underemployed to move to places where there are better opportunities. For example, if the auto industry does poorly in Detroit and there is widespread unemployment, there will be an emigration from Detroit to areas that demand jobs, balancing the initial negative economic shock over time. Decressin and Fatas (1995) show that regional mobility in Europe is significantly lower than in the USA. This means that the recovery from local recessions is slower on the old continent than in the United States. However, regional mobility has also declined in recent years in the United States. Benefiting landlords over tenants will increase the implicit cost of leaving your home if things go badly financially, the so-called “lock-in effect”.

In Italy, there is a deduction for employees who move their place of residence for work reasons. However, it does not cover the self-employed and is likely to be lower than the actual costs of the move. Exempting the self-employed from the deduction is questionable. For example, Reuschke (2011) has shown with German data that the self-employed have a geographical mobility no less than that of wage earners. And many episodes of geographic mobility are due to employees becoming self-employed after a decision to relocate, for example a bank employee who loses his job and decides to become an independent financial promoter. This implies that all self-employed persons, and even wage earners who are married to a self-employed person, will have fewer incentives for geographic mobility than they would have in an optimal situation.

The other critical issue is the fact that, other things being equal, it is not clear why homeowners need these resources more than renters. The reason for this criticism lies in the monetary implication of the current regime, which is effectively transferred from a citizen who lives in rent to one who lives in the owned apartment, all other things being equal, taking into account the gross opportunity costs of living and owning an apartment. The only way to justify such a choice of efficiency parameters would be with a social utility function that weights the different categories equally. But leaving more resources to owner-occupiers, if they are equally important to others, involves arguing that owner-occupiers need more money than renters. Of course, it would be wrong to claim that permanent landlords need more money than landlords who rent an apartment than others. Indeed, the opposite may even be true in reality, namely that resident owners need less money than non-resident owners, given that the literature estimates positive mobility costs (see Artuc, Lederman, and Porto (2015)) and that the owner of a flat, but lives in rent is a person who, for work reasons, probably lives in another geographical area.

It is therefore difficult to understand the economic justification for the Italian legislation. The choice could, for example, be due to the different political weight that the residents-owners of first homes have in relation to the rest of the citizens, and their greater roots in the territory, which determine stronger and more consolidated ties of power.

The Italian tax policy creates an incentive to live in one’s own home and therefore discourages long journeys or changes of residence for work reasons. The choice stands in contrast to the economic literature, where there is broad consensus that relocation is one of the most important ways in which a period of economic decline is mitigated. From an economic point of view, it is difficult to explain the choice of the Italian legislator in terms of efficiency and justice, and it is reasonable to believe that considerations of political expediency have determined it.

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Ugo Antonio Troiano

Associate Professor of Public Finance at the University of California. He was an assistant professor at the University of Michigan, has a Ph.D. in economics from Harvard University under the supervision of Alberto Alesina and a degree in economic and social disciplines from Bocconi under the supervision of Guido Tabellini.

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