The Homeowner Tax and Economic Efficiency in Sweden

Abstract: Several studies have shown that housing capital receives preferential tax treatment in many countries, and that this creates welfare reducing distortions. This happens through an over-investment in housing capital that distorts the composition of the aggregate capital stock. In Sweden, the tax reform of 1991 aimed at creating tax neutrality between different types of capital. This thesis argues that the neutrality goal not yet has been reached and that there is scope for welfare enhancing reforms. It also tries to quantify the potential welfare gains. An increase in the homeowner tax to 1.5 percent is found to be welfare enhancing, while a removal of the homeowner tax and the mortgage interest deductions is found not to effect welfare. These conclusions are reached through simulations of different fiscal policy regimes in a dynamic long-run equilibrium model of the Swedish economy.