Tax Evasion, Capital Gains Taxes, and the Housing Market

In this paper, we exploit a policy shock that differentially increased capital gains taxes for some residential property sellers and document tax evasion in the residential resale market in China. Having precise information of the transaction price and the reported price to the tax authority, we show that after the capital gains tax increase, property seller’s reported price at the tax authority is 15% lower. We also document that the policy has strong heterogeneous effects, wealthy cash buyers are 5.6% more likely to buy a house as opposed to buyers who need financing. This is mainly because financing buyers would like to have a higher reported price to secure higher bank financing but the seller wants to have a lower reported price to evade taxes. This exasperates wealth inequality in a rising housing market.