Second-home tax and tax avoidance in the housing market

In many countries, households must pay additional taxes for their second homes, leading to voluntary marriage distortions for tax avoidance, through divorce or delaying marriage. We develop a novel theoretical framework to show (i) such marriage distortions lead to lower effective taxes, which increase the marginal households’ willingness-to-pay for a second house, and housing suppliers respond by raising price; (ii) higher equilibrium prices reduce aggregate consumer surplus, even though tax-avoiding marriage distortions are voluntary choices of households; (iii) simulations show such tax avoidance tends to reduce (resp. increase) social surplus at relatively low (resp. high) levels of tax.