Harry Geels: Taxing capital gains on house sales is a bizarre plan
This column was originally written in Dutch. This is an English translation.
By Harry Geels
Opinion pieces regularly appear arguing in favour of taxing capital gains on house sales. There are five reasons why this is not a good idea. Two of these – the monetary/banking system and access to it – are rarely, if ever, discussed.
Bas Jacobs has advocated, in interviews and articles (for example in ESB, NRC, and Follow the Money), for introducing a tax on the capital gain from selling one's home—either in the form of a tax on realized capital gains upon sale, or as a general capital gains tax like those found in some other countries. Recently, another such plea appeared in an opinion piece in De Volkskrant by Jona van Loenen, who even proposed taxing 50% of the profit made from selling a house.
Jacobs views rising home values as an undeserved windfall gain resulting from external factors such as scarcity and government policy. From the standpoint of fairness, it would then be just to tax this gain. He also argues it would be an efficient tax, as it would hardly affect homeowner behavior, and thus would not be distortive. Often, reference is also made to other ‘undeserved’ benefits for homeowners, such as mortgage interest deduction, which is said to fuel inequality. However, there are five major objections to this reasoning.
1) Major administrative burden
Taxing ‘capital gains’ on a home requires consideration of both revenues and costs. This means that all investments in a home during the period of ownership must be taken into account—both in terms of time and out-of-pocket expenses. A homeowner who renovates their house themselves should not be penalized compared to one who hires a contractor or painter. This immediately raises questions about fair cost attribution and appropriate hourly rates, creating significant additional bureaucracy.
And that’s without even considering how the tax revenue would be redistributed. I’ve argued before that a larger government and correspondingly rising taxes do not automatically lead to a more equal society. On the contrary, in practice a larger state often leads to more inequality. Tax collection must be fair and efficient, and tied to predetermined spending goals. Taxes as a form of symptom management—in this case, targeting excess profits in the housing market—are dubious.
2) Buying a new home could become problematic
A second practical objection: when homeowners move up the housing ladder, they need the proceeds from the sale—including the profit—to buy a new, likely more expensive, house. A windfall tax makes moving more difficult. This problem could, if such a tax were to be introduced anyway, perhaps be mitigated by deferring taxation until the final sale or by granting exemptions for those who buy another home within a certain time frame—but even that leads to more bureaucracy.
3) House prices don’t always rise
A third objection to a resale profit tax is that the sharp rise in house prices since the early 1980s is due to a unique convergence of factors: globalization, looser lending standards, steadily falling interest rates, and rapid population growth combined with failed government policy (especially on balance pro-cyclical fiscal policy). Those who now fixate on rising house prices suffer from historical short-sightedness. What if we return to a period of structural price declines?
Figure 1
4) Price increases are the result of systemic failure
In addition to the three practical objections, there are two more systemic-philosophical arguments. The rise in house prices in recent decades is not only the result of failed government policy but also of monetary policy. Ever-lower interest rates and increasingly frequent monetary financing and quantitative easing have pushed house prices up. In reality, homes aren’t more expensive—money has become less valuable. In real terms, there is little to no excess profit. Taxing this 'profit' effectively amounts to taxing inflation.
And now those who consciously or unconsciously used homeownership as a hedge against these policies are being presented with the bill. Nominal and real profits are being opportunistically conflated. A home is more a form of self-protection (against system failure) than a source of wealth. A tax on home equity is therefore, in effect, a penalty on self-protection. This touches on the age-old tension between liberalism (freedom of property) and egalitarianism (equality). Renting or owning should be a (fiscally) free choice.
5) Access to the system is the real problem
There is also the forgotten—or perhaps deliberately omitted—mechanism: money creation through mortgages, at least when those mortgages are issued by banks. A large part of mortgage financing is newly created money. More money enters circulation while the housing supply remains the same. The result: price increases. When banks loosen credit standards (e.g., by lowering interest rates or raising loan-to-value limits), house prices rise even more. In other words, house prices largely reflect banking policy.
Banks favor mortgages over business loans. Mortgages are backed by collateral, housing markets are relatively stable (thanks in part to government guarantees, NHG, and support measures—precisely the measures that should be scrapped to lower prices), and potential risks are partly transferred to the state (through bailouts, crisis support, or securitizations). It is a profitable self-reinforcing system. Even more concerning: banks determine who gets access to this system, who may or may not hold a bank account or mortgage. This cuts to the heart of financial inclusivity.
Conclusion
Unfortunately, the monetary and banking Pandora’s box must be opened to get to the root of the inequality issue. It’s like handing out fines to people in a rowboat for having rowed farther than others who weren’t allowed—or able—to get on board. Van Loenen calls those who oppose a capital gains tax “bedroom capitalists,” reducing a complex issue to a simplistic dichotomy. By the same logic, we might call him a “study-room socialist.”
The housing market reflects deeper structural flaws: in monetary policy, banking preferences, and government policy that perpetuates rather than resolves inequality. Taxes on 'windfall profits' target symptoms, not root causes. If we truly want justice and economic health, we must address structural issues—not punish individuals trying to protect themselves. Freedom of choice should be paramount, because ultimately, that too serves the cause of equality.