Taxing homeowners in China: Who are the winners and losers?

Abstract This article examines the impacts of implementing a property tax on China's housing markets and its welfare consequences. We first provide reduced‐form evidence showing that the policy adoption in Shanghai had little impact on the overall housing market, with suggestive evidence of a reduction in the unit prices of larger homes. Next, we develop a general equilibrium overlapping generations model of housing and rental markets with heterogeneous agents to study the welfare implications of universal and targeted property taxes. By calibrating our model to China's housing market, we obtain three main results: First, the universal property tax reduces house prices and raises rents. Second, the increased rents and higher ongoing housing expenditure due to a larger tax burden make housing services less affordable. However, low‐income households benefit more from the redistribution of additional government revenue. Finally, we show that universal property taxes result in a long‐run welfare gain driven by redistribution and lower house prices. Along the transition, 55% of existing households experience a welfare loss. The policy reform generates significant redistributive effects where poorer households gain and richer households lose.