This result may seem counterintuitive, since the parcels with high improvements gain the most from the lower tax rate on improvements. However,
these same properties lose even more from the higher land tax because of
their high land value. Applying this basic intuition to mixed land uses suggests that with a shift to a graded tax, many commercial and industrial
properties would face higher taxes, while single-family homes would generally benefit from lower tax bills.
In sum, the distributional effects of a shift away from property taxation in
favour of land-value taxation are more complex than first appears. Moreover
— and this point is the important one — the distributional and land use effects
of such a shift depend heavily on whether the tax restructuring is done in a
single city or in all cities. The positive effects on economic development
touted by proponents of land-value taxation emerge more strongly when the
restructuring applies to a small part of the metropolitan area rather than the
whole area, and reflect the reduction in the property tax not the increase in
the tax on land value.
The asumption of a fixed number of people rules out the possibility that the tax affects the
number of children that people choose to have or the likelihood that people will commit
suicide. In an intertemporal model even a head tax might not be neutral, as households
change their tax burdens by changing the number of household members.
Based on personal communication from Nicolaus Tideman, 23 June 1995.
4. Arnott and
Lewis ( 1979) and Arnott ( 1996) extend the investigation of neutrality by
looking at systems of property taxes. In the earlier paper, they showed that a property tax
on land value prior to development causes development to occur earlier and at a lower
density, while a tax on total property value after development delays development but
does not alter its density. In his 1996 article, Arnott extends the analysis to demonstrate
the possibility of constructing a system of property taxes that would be neutral with
respect both to the intensity and timing of development of a specific parcel. Under the
assumption that redevelopment rent is zero, a neutral property tax system would require a
zero tax rate on pre-development land value, a positive tax rate on post-development site
value, and a subsidy on the post-development structure value. 6. Implicit in this logic is the requirement that, given marginal cost pricing, the value of
output just equals the value of the inputs, which according to Euler's theorem requires that
production be characterized by constant returns to scale. This condition is met, but only at
the optimal level of population. The planner's task is to select a population that will
minimize the average costs of providing a given level of utility to the population. Given a
U-shaped average cost curve, the minimum point will be characterized by constant returns
to scale and hence the requirement is met. (I thank Richard Arnott for this point of
clarification.) For additional clarification and intuition, see Mieszkowski and
( 1989, p. 1135). Note in addition that the Henry George conclusion about the efficiency of
land taxes is a first best result and applies only if there are no other distortions in the
Questia, a part of Gale, Cengage Learning. www.questia.com
Book title: Local Government Tax and Land Use Policies in the United States:Understanding the Links.
Contributors: Helen F. Ladd - Author, Lincoln Institute of Land Policy - OrganizationName.
Publisher: Edward Elgar.
Place of publication: Cheltenham,UK.
Publication year: 1998.
Page number: 38.
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