FISCAL STUDIES, vol. 39, no. 2, pp. 365–380 (2018) 0143-5671
Land Tax Changes and Full Capitalisation
†Danish Economic Councils
‡Danish Ministry of Finance
§Danish Economic Councils
We use a unique data set to examine the extent to which changes in the Danish
land tax are capitalised into house prices. The Danish local government reform
in 2007, which caused tax increases in some municipalities and tax decreases
in others, provides plenty of exogenous variation, thus eliminating endogeneity
problems. The results imply full capitalisation of the present value of future
taxes under reasonable assumptions about discount rates. Consequently, the
paper gives an empirical conﬁrmation of two striking consequences of a land
tax. First, it does not distort economic decisions because it does not distort the
user cost of land. Second, the full incidence of a permanent land tax change
lies on the owner at the time of the (announcement of the) tax change; future
owners, even though they ofﬁcially pay the recurrent taxes, are not affected as
they are fully compensated via a corresponding change in the acquisition price
of the asset.
Submitted July 2017.
The authors are grateful for comments from an anonymous referee, colleagues and the chairmanship of
the Danish Economic Councils. An earlier version of this work was published in a report from the Danish
Economic Council, which also funded the work.
Keywords: land tax, housing prices, treatment effect models.
JEL classiﬁcation numbers: C21, E62, H22.
2018 Institute for Fiscal Studies. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford,
OX4 2DQ, UK, and 350 Main Street, Malden, MA 02148, USA.