Tax Evasion In The Resale Housing Market:Theoretical Model And Empirical Analysis

It is necessary to understand the resale housing market’s microstructure to figure out the nature of housing price fluctuation in China.To do so,we need to study the real estate transaction tax that plays a crucial role in the resale housing market.However,most housing resale transactions’ transaction parties can evade real estate transaction taxes by underreporting the transaction prices.Tax evasion would reduce the effective tax rates and change the microstructure of the resale housing market.Moreover,tax evasion would hurt the equity and efficiency of taxation as well as the public revenue.Hence,it would result in welfare loss.By conducting theoretical and empirical analyses,this thesis studies the tax evasion in China’s resale housing market from the perspective of stylized facts,determinants,and consequences.This thesis contributes to academic research and has important policy implications.First,based on utility maximization theory,the thesis constructs a theoretical model to capture the tax evasion in the resale housing market and identifies the determinants using comparative static analysis.Second,this thesis describes the tax evasion stylized facts in the resale housing market from the macro and micro perspectives.Third,based on the micro-level cross-sectional data from A city and city-level panel data from 35 cities,this thesis estimates the impact of statutory tax rate,tax enforcement,and capital cost on tax evasion using a difference-in-differences model.Last,this thesis studies the consequences of tax evasion in the resale housing market from the perspective of taxation equity and public revenue.The main findings include(1)Tax evasion results from the bargaining process between the transaction parties and the buyer’s tax evasion decision in the resale housing market.Notably,the cash buyer regards the local tax authorities’ minimum taxable price as the reported price.In contrast,the mortgage buyer chooses the reported price to minimize the transaction cost and the evasion cost.(2)The transaction parties evade transaction taxes by underreporting the transaction prices in most housing resale transactions in urban China.For instance,as for deed tax,the tax evasion amount is around 39% of the tax amount payable in the 35 cities.(3)Several determinants would affect tax evasion in the resale housing market.First,the increase in the statutory tax rate would result in more tax evasion,and the impact concentrates on the mortgage buyers.Second,enhancing tax enforcement by improving the minimum taxable price leads to less tax evasion.Third,the increase in capital cost would increase tax evasion.(4)Tax evasion would hurt taxation equity and reduce public revenue.First,tax evasion can harm horizontal equity and distort the housing market structure and the housing wealth distribution.Second,tax evasion would reduce the fiscal revenue substantially.The findings have important policy implications.This thesis raises several policy suggestions around the policy objectives of improving the tax system.(1)The governments should lower the tax rate and enhance the tax enforcement,but not the reverse.(2)The central government should consider tax evasion when regulating the resale housing market using the real estate transaction tax.(3)The local tax authorities should improve the minimum taxable price system and enhance tax enforcement to reduce tax evasion in the resale housing market.