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Taxes on Buildings and Land in a Dynamic Model of Real Estate Markets

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  • Alex Anas

    (State University of New York at Buffalo)

Abstract

Henry George’s single tax on land is an elusive concept to implement, because land is occupied by a variety of buildings or is undeveloped. Land value is undefined since the value of the land lying under buildings is difficult to estimate and does not correspond to real market value. Therefore, it is hard to find taxes that are accurately related to land value and, hence, to the ability to pay and still satisfy George’s axiom. Static models unrealistically pretend that all the land is available in the market at all points in time. To properly treat dynamics, a generalized perfect-foresight model of real estate markets solvable by simulation is presented. Using a version of this model stripped-down to its bare essentials, the effects of the conventional ad-valorem property tax and of an ad-valorem tax on undeveloped land are analyzed. We show a new result that the conventional tax speeds up the demolition-reconstruction cycle, shortening the life span of buildings and thus resulting in excessive use of structural capital over time, while a tax on undeveloped land has the opposite effects. We then turn to the application of the dynamic simulation model to the optimal taxation problem adapted to real estate markets. In this problem a different tax rate is levied on each type of undeveloped land and each type of building to meet a desired revenue goal, recognizing the different price elasticities of demand and supply for these assets. The formulation is designed to calculate deadweight losses associated with such optimal taxation schemes.

Suggested Citation

  • Alex Anas, 2003. "Taxes on Buildings and Land in a Dynamic Model of Real Estate Markets," Urban/Regional 0302004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpur:0302004
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/urb/papers/0302/0302004.pdf
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    References listed on IDEAS

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    1. Anas Alex & Arnott Richard J., 1993. "Technological Progress in a Model of the Housing - Land Cycle," Journal of Urban Economics, Elsevier, vol. 34(2), pages 186-206, September.
    2. Small, Kenneth A & Rosen, Harvey S, 1981. "Applied Welfare Economics with Discrete Choice Models," Econometrica, Econometric Society, vol. 49(1), pages 105-130, January.
    3. Alex Anas & Richard Arnott, 1989. "Dynamic Housing Market Equilibrium with Taste Heterogeneity," Discussion Papers 834, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Bentick, Brian L, 1979. "The Impact of Taxation and Valuation Practices on the Timing and Efficiency of Land Use," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 859-868, August.
    5. Anas, Alex & Arnott, Richard J., 1997. "Taxes and allowances in a dynamic equilibrium model of urban housing with a size--quality hierarchy," Regional Science and Urban Economics, Elsevier, vol. 27(4-5), pages 547-580, August.
    6. Richard Arnott, 2005. "Neutral Property Taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 7(1), pages 27-50, February.
    7. Mills, David E., 2001. "Land value taxation," Regional Science and Urban Economics, Elsevier, vol. 31(6), pages 765-770, November.
    8. Kanemoto, Yoshitsugu, 1985. "Housing as an asset and the effects of property taxation on the residential development process," Journal of Urban Economics, Elsevier, vol. 17(2), pages 145-166, March.
    9. Anas, Alex & Arnott, Richard J., 1993. "A fall in construction costs can raise housing rents," Economics Letters, Elsevier, vol. 41(2), pages 221-224.
    10. Skouras, A, 1978. "The Non-Neutrality of Land Taxation," Public Finance = Finances publiques, , vol. 33(1-2), pages 113-134.
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    Cited by:

    1. Larson, William D. & Shui, Jessica, 2022. "Land valuation using public records and kriging: Implications for land versus property taxation in cities," Journal of Housing Economics, Elsevier, vol. 58(PA).

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    JEL classification:

    • R - Urban, Rural, Regional, Real Estate, and Transportation Economics

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