Land Tax Changes and Full Capitalisation

Land Tax Changes and Full Capitalisation 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Fiscal Studies Wiley

Land Tax Changes and Full Capitalisation

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Publisher
Wiley
Copyright
Fiscal Studies © 2018 Institute for Fiscal Studies
ISSN
0143-5671
eISSN
1475-5890
D.O.I.
10.1111/1475-5890.12163
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

Fiscal StudiesWiley

Published: Jan 1, 2018

Keywords: ; ; ; ; ;

References

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