Transaction taxes in a search model of the housing market

We incorporate transaction taxes in a housing market search model with endogeneous house prices and show that these taxes unambiguously create lock-in effects that reduce welfare. The lock-in effects are larger at low vacancy rates. Seller taxes raise prices and buyer taxes lower them, and this asymmetry helps to explain the differences in the welfare effects of the two taxes. Lock-in effects are smaller with a buyer tax, since the price reduction dampens the negative effect on search effort caused by the tax. (C) 1999 Academic Press.