Transaction-tax evasion in the housing market

• Authors: Amedeo Piolatto and José García-Montalvo.
• political economy
• Regional Science and Urban Economics
• Econometrics and Quantitative Methods
• Public Economics

We model the behaviour of a mortgagor considering to evade the real estate transfer tax. We build an observable measure of over-appraisal that is inversely related to tax evasion and conclude that the tax authority could focus auditing efforts on low-appraisal transactions. Our empirical analysis confirms the predictions using a unique database for Spain, where we directly observe: real payment, value declared to the authority and appraisal. We also argue that individual characteristics (e.g. education of the buyer) and local characteristics (e.g. local levels of corruption and trust) explain part of the observed heterogeneity in evasion. The theoretical model is augmented with guilt and stigma to be consistent with the observed heterogeneity.