Tax-driven Bunching of Housing Market Transactions: The Case of Hong Kong

Abstract

We study the implications of a property market transaction tax. As property buyers are obligated to pay a transaction tax (“stamp duty” or SD) where the rate increases with the value of the transaction, there are incentives to trade at the cutoff points of the tax schedule or just below them. Thus, both “bunching in transactions” and “underpricing” should be observed near those cutoffs. Furthermore, the bunching points should change with the tax schedule. We confirm these conjectures with a rich dataset from the Hong Kong housing market and provide a measure of tax avoidance.
 

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Keywords

Bunching, Change in Nonlinear Tax Schedule, Housing Market, Tax Avoidance and Tax Evasion, Underpricing

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