The Theory of Property Tax. Lecturer: Jack Wu. Outline. Topic I: What Are Property Taxes? Topic II: Property Tax Incidence Topic III: Property Tax Capitalization Topic IV: Property Tax Competition and Provision of Local Public Goods. Model of Property Tax Competition. Tiebout Model (1956)
Lecturer: Jack Wu
Topic I: What Are Property Taxes?
Topic II: Property Tax Incidence
Topic III: Property Tax Capitalization
Topic IV: Property Tax Competition and Provision of Local Public Goods
Tiebout Model (1956)
A realistic model of property tax competition: a blend of Tiebout and tax-competition traditions
Traditional thought: markets generally fail to provide public goods efficiently because of free rider problem. Therefore, the government intervention is required.
Tiebout (1956): the ability of individuals to move among jurisdictions produces a market-like solution to the local public goods problem.
The literature has explored the bad side of intergovernmental competition, showing that each community sets its tax rate too low in an attempt to preserve its tax base.
Jurisdictions finance provision of a public good with a tax on locally-employed capital.
Capital is nationally fixed but moves among jurisdictions in response to tax-rate differentials, while community populations are typically immobile.
Public goods are underprovided because each community keeps its tax rate low in an attempt to preserve its tax base.
In such a model, consumers are mobile and self-select into homogeneous communities, which rely on property tax to finance public goods. Since concern about capital flight leads to low tax rates, the equilibrium has efficient sorting of consumers across communities, but it exhibits a tendency toward under-provision of public goods.
Capital’s net return is reduced by higher taxes.
Higher taxes shrink community i’s tax base as capital relocates to equalize net returns.
Assume consumers have identical preferences and community populations and residential land areas are equal. In this case, must hold in the Nash equilibrium, implying
Since the marginal rate of transformation between private and public goods is unitary, this inequality implies that public good is underprovided.