Reconstructing cities: Stimulating redevelopment through the tax code

The welfare effect of urban renewal policies depends on the size of the external effects and the quantity of the building stock that gets redeveloped. While evidence on the externalities is growing, there is still a need for credibly identified estimates of the responsiveness of redevelopment. I exploit a sharp reduction in the value-added tax (VAT) on construction services for redevelopment in a select group of 32 Belgian cities to fill this gap. The results show that a 15 percentage point reduction in the VAT rate leads to an increase in the amount of demolished and redeveloped floorspace of respectively 36% and 35%.