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TAXES ON WEALTH, PROPERTY, AND ESTATES
C h a p t e r 17
Comprehensive Wealth Tax Base
Wealth – market value of accumulated assets in a nation
Can acquire wealth through saving, gifts, inheritances
Comprehensive wealth tax base would include all wealth in the economy
As society reaches economic maturity, tax on wealth becomes tax on real estate
Real estate or real property – land and structures
Many argue it is necessary to tax wealth in order to achieve an equitable tax structure
Measuring Wealth
Can be measured by determining net value of financial assets, capital assets, and land
Tax on wealth can be viewed as tax on return earned on savings, investments
Wealth is a stock rather than a flow like income and consumption
Stock – variable with a value defined at a particular point in time
To determine base for wealth, all forms of property owned by taxpayers must be listed, values must be assessed
Measuring Wealth
Considering only net assets of households (first approach), total wealth has three components:
All real property owned by households (land and improvements)
All tangible personal property owned by households (movable assets)
All intangible personal property owned by households (stocks, bonds, etc.)
Measuring Wealth
Second approach includes assets of corporations but excludes intangible property that represents claims on the assets of such corporations
So excludes outstanding corporate stock
Second approach deducts from tax base all debt incurred by private sector to obtain a measure of net wealth
Assessment of Property Value
Assessment – valuation of taxable wealth by government authorities
Assessment practices criticized for being too subjective
In general property tax, assessors estimate value of both real estate and movable personal property
Assessment easier for intangible personal property (stocks), autos, etc. than for real estate
Property must be reassessed to reflect changing market values
Value varies with factors like location, age, etc.
Comprehensive Wealth Tax
Would be levied on all forms of capital and land at a flat rate
Comprehensive wealth, W, is:
Effective tax on annual return to accumulated savings associated with comprehensive wealth tax:
Comprehensive Wealth Tax
Comprehensive Wealth Tax
Comprehensive Wealth Tax
Compared to equal-yield taxes on income and consumption, wealth tax does not distort work-leisure choice
Not likely to be completely general
Administrative difficulties in measuring and assessing all forms of wealth (especially human capital)
Likely to be progressive with respect to income
Incidence borne largely according to one’s holdings of capital
Selective Property Taxes
Most property taxes selective in that they are levied on only certain forms of wealth
Property tax provides incentive to substitute alternative inputs for real property
Can affect choice of consumption of real property and that of consumer durables
Can be a factor in determining the location of an industry
U.S. Investment and Its Components, 1969 and 2009
Local Property Tax
Considerable variation among rates of taxation from jurisdiction to jurisdiction
Average rate of property taxation reflects portion of property tax common to all jurisdictions
Property tax rate differentials – differences above or below national average rate of property taxation
In states with positive tax differentials, reduction in annual investments results; investment reallocated to low-tax jurisdictions
Burden of property tax transferred to workers and landlords through input price changes, which can affect prices of locally produced goods and services; sometimes called the excise tax effect
Housing costs would fall in areas with increased investment because of negative property tax differentials
Tax Capitalization
Decrease in the value of a taxed asset equal to discounted present value of future tax liability of its owners
Property tax differentials among jurisdictions can be capitalized into lower property values
A discount in the price of a taxed asset that adjusts annual market return of the asset to a level competitive with other assets not subject to the tax
Can be full or partial
Tax Capitalization
Present value of any capital asset depends on:
Annual dollar return earned by holding the asset
Life span of the asset
Rate of discount for the economy
Value of any capital asset that yields annual return of Y dollars each year
Capitalization and Elasticity of Supply
Full capitalization only occurs if owners of taxed asset cannot adjust supply in response to decrease in annual return to holding it caused by tax
Because landlords cannot make land scarcer in response to tax, market rents do not increase, they bear full tax burden
Other taxed assets (structures, vehicles) likely to have elastic supply curves; reduction in investment makes these assets scarcer, increases market rents
Tax-induced increase in market rents prevents full capitalization of property tax differentials
Capitalization and Elasticity of Supply
Assessment and Effective Tax Rates
Fractional assessment of property exists when real property is assessed at a fraction of market value
Some results from infrequent assessment of property in periods of rising property values
Some results from state law
With fractional assessment, property tax rate overstates real rate of taxation
Effective tax rates in major U.S. cities vary from high of 2.89% (Bridgeport) to low of 0.33% (Honolulu)
Residential Property Tax Rates
Residential Property Tax Rates
Residential Property Tax Rates
Taxation of Business Property
Local governments tax business real estate and tangible business assets, including inventories
Common for local governments to offer tax abatements to encourage businesses to locate within the area
Tax competition may be intensifying as governments are now competing with foreign sites as well as each other
Intangible business assets such as trademarks, patents, intellectual property generally not subject to taxation
Tax Preferences
Special property tax relief available to the elderly because their income is often much lower at retirement than in the past
For individuals with low money income, state could borrow money against value of their property to obtain tax due
At death of these taxpayers, property sold and amount pledged against taxes given to local governments
Land Taxes
To increase incentives for land development and redevelopment, support often voiced to substitute tax on land alone for existing real estate tax
Because supply of land is perfectly inelastic, tax on land results in no substitution effects
Equivalent to a lump-sum tax
Rent earned on the land is pure economic surplus that can be taxed without effect on quantity supplied
Historical tendency in most nations is for value of land to decline as percentage of gross domestic product as economy grows
Land tax, therefore, can yield only small amount of revenue, even at high tax rates
Land Taxes
Estate, Inheritance, & Gift Taxes
Estate and inheritance taxes sometimes referred to as death taxes
Essentially excise taxes on rights to transfer property at time of death
Federal government levies taxes on property transfers before death as gift taxation
Taxation levied on individual who makes gift
In absence of gift taxation, all estate taxes could be avoided by transferring before death
Estates left to spouses exempt from tax
Legislation enacted in 2001 will phase out U.S. federal estate tax; tax rates being reduced in phases
Estate & Gift Taxes
Estate & Gift Taxes
Can be viewed as taxes on accumulated savings that reduce return to savings when that wealth is transferred
High taxes could adversely affect work incentives of prospective donors
Can affect the way a donor transfers wealth to heirs
May choose to invest heavily in children’s education; encourage overinvestment in human capital
Can actually increase income inequality if saving is responsive to tax rates for the estate tax
May provide incentives for charitable donations

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