A Normative Analysis of Housing-Related Tax Policy in a General Equilibrium Model of Housing Quality and Prices

We evaluate an array of housing-related tax policies in a general equilibrium model with endogenous housing quality and prices. The local government facilitates the provision of local public amenities, financed by an array of housing-related taxes, including a developer gross revenue tax, a property tax, a land tax, and a development license fee. In a competitive spatial equilibrium, all households optimize and reach the same utility, all monopolistically competitive developers optimize and receive zero profit, and both housing and land markets clear. We examine the effects of various tax policies on housing quality, housing prices, land rent, as well as the population and housing density. By evaluating quantitatively the welfare of the local economy, we establish a globally optimal tax scheme in the housing market: complete elimination of the property tax and imposition of a lower gross revenue tax (possibly fully eliminated) than both development and land taxes.     

Using time-varying transition probabilities in Markov switching processes to adjust US fiscal policy for asset prices

This paper tests for nonlinear effects of asset prices on the US fiscal policy. By modeling government spending and taxes as time-varying transition probability Markovian processes (TVPMS), we find that taxes significantly adjust in a nonlinear fashion to asset prices. In particular, taxes respond to housing and (to a smaller extent) to stock price changes during normal times. However, at periods characterized by high financial volatility, government taxation only counteracts stock market developments (and not the dynamics of the housing sector). As for government spending, it is neutral vis-a-vis the asset market cycles. We conclude that, correcting the fiscal balance and, notably, the revenue side for time-varying effects of asset prices provides a more accurate assessment of the fiscal stance and its sustainability.     

Some aspects of the taxation of capital gains

The analysis of the effects of capital gains taxation requires a careful modelling both of the details of the tax code and the imperfections in the capital market. Under the standard assumptions concerning perfect capital markets and under the standard idealizations of the tax code, there are several strategies by which rational investors can avoid note only all taxes on their capital income, but also all taxes on their wage income; these strategies leave individuals' consumption and bequests in each state of nature and at each date unchanged from what they would have been in the absence of taxes. Although certain detailed provisions of the tax code may limit the extent to which rational investors can avail themselves of these tax avoidance activities, there are ways, in a perfect capital market, by which the effects of these restrictions can be ameliorated. Accordingly, any analysis of the effects of capital taxation must focus on imperfect capital markets.If individuals face limitations on the amounts which they can borrow and/or if there are limitations on short sales, then under some circumstances there is a locked-in effect (individuals do not sell securities which they would have sold in the absence of taxation); but under other circumstances individuals are induced to sell securities that they otherwise would have held, in order to take advantage of the asymmetric treatment of short-term losses and long-term gains. A policy of realizing gains as soon as they become eligible for long term treatment dominates the policy of postponing the realization of capital gains, provided the gains are not too large.A simple general equilibrium model is constructed within which it is shown that the taxation of capital gains may increase the volatility of asset prices, and lead individuals not to trade when they otherwise would. While the analysis casts doubt on the significance of the welfare losses resulting from these exchange inefficiencies, there are circumstances in which the tax leads to production inefficiencies, e.g. terminating projects at other than the socially optimal date.Finally, we argue that the focus of some recent policy debates on the short-run revenue impact of a decrease in the tax rate on capital gains is misplaced: even when the short-run revenue impact is positive, consumption may increase (thus exacerbating inflationary pressures) and private savings may decrease (thus leading to a lower level of investment in the private sector). Moreover, there is some presumption that the long-run revenue impact is negative.Our analysis has some important implications for empirical research. In particular, it suggests that the impact of the tax is not adequately summarized by a single number, such as the ‘effective tax rate’ representing the average ratio of tax payments to capital gains. Moreover, the impact of the tax cannot be assessed by looking only at reported capital gains and losses.     

Demand and distance: Evidence on cross-border shopping

An important issue for commodity taxation is the extent to which changes in foreign taxes affect the extent of cross-border shopping and thereby, domestic tax revenue. We use data from Swedish municipalities to estimate how responsive alcohol sales are to foreign prices, and relate the sensitivity to the location’s distance to the border. Typical results suggest that the elasticity with respect to the foreign price is around 0.3 in the border region; moving 150 (400) km inland reduces the cross-price elasticity to 0.2 (0.1). Our estimates suggest that a recent Danish cut in the spirits tax reduced Swedish tax revenues from spirits sales by more than 2%, and that an attempt by Sweden to cut taxes in response would reduce tax revenues further.     

Laffer strikes again: Dynamic scoring of capital taxes

We set up a neoclassical growth model extended by a corporate sector, an investment and finance decision of firms, and a set of taxes on capital income. We provide analytical dynamic scoring of taxes on corporate income, dividends, capital gains, other private capital income, and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium. We then calibrate the model for the US and explore quantitatively the revenue effects from capital taxation. We take adjustment dynamics after a tax change explicitly into account and compare with steady-state effects. We find, among other results, a self-financing degree of corporate tax cuts of about 70–90% and a very flat Laffer curve for all capital taxes as well as for tax depreciation allowances. Results are strongest for the tax on capital gains. The model predicts for the US that total tax revenue increases by about 0.3–1.2% after abolishment of the tax.     

The Effect of Capital Gains Taxation on Home Sales: Evidence from the Taxpayer Relief Act of 1997

The Taxpayer Relief Act of 1997 (TRA97) significantly changed the tax treatment of housing capital gains in the United States. Before 1997, homeowners were subject to capital gains taxation when they sold their houses unless they purchased replacement homes of equal or greater value. Since 1997, homeowners can exclude capital gains of $500,000 (or $250,000 for single filers) when they sell their houses. Such dramatic changes provide a good opportunity to study the lock-in effect of capital gains taxation on home sales. Using 1982-2008 transaction data on single-family houses in 16 affluent towns within the Boston metropolitan area, I find that TRA97 reversed the lock-in effect of capital gains taxes on houses with low and moderate capital gains. Specifically, the semiannual sales rate of houses with positive gains up to $500,000 increased by 0.40-0.62 percentage points after TRA97, representing a 19-24 percent increase from the pre-TRA97 baseline sales rate. In contrast, I do not find TRA97 to have a significant effect on houses with gains above $500,000. Moreover, the short-term effect of TRA97 is much larger than the long-term effect, suggesting that many previously locked-in homeowners took advantage of the exclusions immediately after TRA97. In addition, I exploit the 2001 and 2003 legislative changes in the capital gains tax rate to estimate the tax elasticity of home sales during the post-TRA97 period. The estimation results suggest that a $10,000 increase in capital gains taxes reduces the semiannual home sales rate by about 0.1-0.2 percentage points, or 6-13 percent from the post-TRA97 average sales rate.     

Optimal taxation in a monetary economy with financial intrmediaries

The problem of optimal taxation when the government must levy distorting taxes to meet its revenue needs is considered for a monetary economy with financial intermediaries. In contrast to most other studies of optimal taxation in a monetary economy, money is treated as an intermediate good which is held because doing so economizes on the scarce resources that must be devoted to the exchange process. Attention is focused on the roles of the inflation tax, reserve requirements, and deposit taxes. The key result is that revenue considerations do not justify taxing cash and deposits. That is, the optimal tax structure calls for adopting the optimum quantity of money rule and setting deposit taxes to zero. When the optimal tax structure is in place, reserve requirements turn out to be irrelevant from both the fiscal and welfare perspectives.     

REAL ESTATE TAX IN URBAN CHINA

Since its foundation in 1949, the People's Republic of China (PRC) has adopted several contrasting policies to address the urban housing problem. Among them have been changes in real estate tax law. The first real estate tax laws in the PRC were promulgated in January 1950. Amended several times, they became ineffective after 1973. In September 1986, the State Council promulgated a new real estate tax law affecting all urban properties. According to this new law, real estate taxes are to be levied on owners, so that most real estate taxes have been paid by enterprises rather than households. However, with the recent drive to privatize housing in urban China, property rights are being transferred from public to private ownership, and in conjunction with real estate taxes, this is producing undesired inequalities. This paper investigates the development of real estate taxation, examines the role of property tax in the ongoing housing reform, and recommends changes in real estate taxes that would better achieve the government's egalitarian goals. ( JEL H20, R31)     

The Efficiency of State Taxes

The states have increased their share of national revenue from about 16 per cent in the late 1980s to over 20 per cent. This shift may not have improved the efficiency of raising national taxation revenue. Eight taxes with total revenue in 1995–96 of $26.5 billion are considered. In order of revenue these are payroll tax, business franchise taxes, stamp duties, gambling taxes, government business enterprise taxes, financial institutions taxes, land tax and mineral taxes. Business franchise taxes fall on a few items of consumption that are already taxed heavily by the Commonwealth. Financial taxes and stamp duties are suspect because they are transactions taxes, not taxing economic activity directly. Two important state taxes—on payrolls and on land—have badly fractured bases. The pressure on the states to raise more revenue is continuing. In meeting their revenue requirements efficiently the short-term solution lies in substantial reforms of existing taxes, including repairing the bases of the payroll and land taxes, and removal or reduction of the least efficient ones. The longer term solution lies in the states having access to broader based taxes, particularly consumption.     

Global capital markets,direct taxation and the redistribution of income

Standard fiscal theory suggests that taxation should be heaviest on the least mobile factors of production – for both efficiency and revenue reasons. A shift in tax burdens from capital to labour as economies become globally integrated is thus justified. This theoretical tradition (founded by Ramsay and continued by Mirrlees and Lucas) assumes by construction that profit taxes reduce investment and growth; and while sensitive to inter-generational equity, sidesteps the issue of income distribution within generations. In contrast, starting from Keynes’ critique of these assumptions and building on modern endogenous growth models, it can be shown that profit taxation is not necessarily injurious to productive investment. In practice, moreover, the effect of globalisation has not been to reduce tax rates on capital, but rather to erode the tax base itself (i.e. ‘tax evasion’). Improved information exchange between tax authorities, which is now being driven by fiscal insolvency in developed countries, would allow tax incidence to be shifted so as to improve income distribution within OECD countries. Such cooperation could also permit the replacement of the current discretionary system of fiscal transfers from rich to poor countries (‘development aid’) by equitable sharing of global capital tax revenue.     

Federalism and horizontal equity across Switzerland and Germany: a new rationale for a decentralized fiscal structure

Higher wages in agglomerations often do not reflect an increase in purchasing power, because a high percentage of the wage increase has to be spend on housing. Thus, after housing is considered taxpayers may have identical disposable incomes, although gross as well as after-tax income may differ. This unequal treatment of taxpayers is due to the taxation of nominal incomes. If tax systems taxed income based on regionally adjusted purchasing power, horizontal equity would be assured. Since this is an unfeasible option, the differences could be corrected by allowing a deduction on housing costs. Given the large revenue losses, it seems unlikely that governments in OECD countries move to a system where rents are deductible in determining taxable income. Another alternative—taxation of potentially achievable income—is unfeasible due to political opposition. A final and less costly alternative is fiscal federalism. Granting autonomy to the lower levels of the government offers local governments the power to design the tax system in a way that reflects differences in living costs. Although this option does not necessarily imply that governments effectively design the tax schedule in that way, a comparison of Germany and Switzerland shows that governments are aware of these differences across regions. The paper concludes that granting tax autonomy to the lower tiers in Germany would make many citizens, especially in the Southern part, better off and would promote horizontal equity among German taxpayers.     

Smoke screen: Estimating the tax pass‐through to cigarette prices in Pakistan

This article estimates and compares the speed and magnitude of the tax pass‐through across major cigarette brands at different price points (budget, mainstream, and premium) in Pakistan by using a novel dataset of monthly observations on cigarette prices in 50 cities during the period 2004 to 2015. The empirical analysis indicates that the pass‐through of cigarette taxes to the final consumer price is fast but incomplete in Pakistan. The pass‐through coefficient is estimated to be in the range of 70 to over 90 percent across four major cigarette brands, and most of the pass‐through occurs contemporaneously within a period of 2 months. The results imply that a 1‐Pakistan rupee (PR ) increase in taxation leads to an increase of PR s 0.8, on average, in cigarette prices. In other words, cigarette taxes are undershifted to consumers in Pakistan. With respect to the tax pass‐through at different price tiers (budget, mainstream, and premium), I find significant variation in the pass‐through coefficient, which is close to one for the premium cigarette brand and significantly lower for the budget and mainstream cigarette brands.     

Excise taxes,over-shifting,cross-elasticity,and tax revenue

This article examines cross-elasticity effects in excise taxation for markets characterized by monopolistic competition and over-shifting. Extending the constant elasticity demand model to consider cross-elasticity leads to notably different results regarding tax revenue maximization. With nonzero but weak cross-elasticity effects relative to the price elasticity, we derive a higher optimal tax-price ratio compared to prior research. With strong cross-elasticity, revenue can continually be increased by raising the excise tax. Overall, the study offers government greater incentive to use excise taxes to obtain revenue.     

Black Markets and Optimal Evadable Taxation

In a simple model of evadable indirect taxation, some surprises emerge. Because of a 'market-thinning' effect of high prices, high taxes induce multiple equilibria (low-price black markets and high-price legal markets). Further, evadability introduces a bifurcation to optimal taxation: For less effective tax administrations, the optimal tax system follows a 'cash cow' pattern, with one sector bearing all of the tax; but for relatively effective administrations, the optimum follows a slightly modified Ramsey rule. This discontinuity results from the mathematics of evasion incentives, and may help explain tax reforms commonly seen over the course of economic development     

Federal excise tax increase and its effects on U.S. tobacco production

Using the equilibrium displacement model, we examine the impact on tobacco farms of the decrease in cigarette sales due to the increase in prices induced by the federal excise tax hike that went to effect on April 1, 2009. First we estimate the effect of the increase in the federal excise tax on cigarette price and sales. Then, we estimate the effect of the decrease in cigarette sales on tobacco farms. Results suggest that under a scenario of market power implied by a conjectural elasticity of 0.11 manufactures could charge $0.23 per pack more than the federal excise tax increase, which would be enough to offset the estimated 1.42 billion-pack sales decline and to maintain the industry’s revenue net of taxes. This decrease in cigarette sales induced by the increase in the federal excise tax would result in the tobacco leaf output and price declining by 2.85 and 0.41%, respectively. As a result, the tobacco leaf sector would sustain a loss of 3.25% in revenue, amounting to nearly $48.4 million.     

Lessons from the polder: Energy tax design in The Netherlands from a climate change perspective

This paper evaluates energy tax reform in The Netherlands between 1988 and 2002 from a climate change perspective. In particular, the introduction of two (indirect) taxes on energy products is now responsible for a considerable amount of tax revenue from a green tax base. The paper discusses the energy tax base and rate structure from a modern Pigovian tax perspective and illustrates the practical difficulties involved in the indirect and non-uniform taxation of emissions. Also further improvements of the energy tax structure are discussed, such as a better targeting of the energy tax base and tax rate to fuel characteristics.     

促进区域经济协调发展的税收对策

我国区域经济差距过大的税收政策存在税率相同而实际税负不一,税种设计、税收政策不合理,应利用税收政策刺激企业投资,实行差别税率,调整主要税种和完善税收优惠政策。     

Excess Burden of Taxation and Environmental Policy Mix with a Consumer‐Friendly Firm

This study examines the environmental policy mix of tradable emission permits and emission taxes in a duopoly model with a consumer‐friendly firm. We analyse the interplay of the two policies and the welfare consequences in the presence of excess burden of taxation. We show that an emission tax can be redundant when both the excess burden of taxation and the degree of consumer friendliness are insignificant. However, when the excess burden of taxation is significant, tradable permits policy with tax treatment should be applied to enhance welfare in the presence of a consumer‐friendly firm. Finally, under the tax revenue‐neutral case where the excess burden of taxation does not matter, the environmental policy mix is also efficient if the degree of consumer friendliness is sufficiently high.     

Property Taxation, Capitalization, and the Economic Implications of Raising Property Taxes

This study applies a hedonic pricing model to provide further empirical evidence whether, in the spirit of Tiebout (Journal of Political Economy 64(1):416?C424, 1956), Oates (Journal of Political Economy 77(6):957?C971, 1969), and Tullock (Journal of Political Economy 79(5):913?C918, 1971), property taxes in particular have been capitalized into housing prices in the city of Savannah, Georgia housing market. There were sufficient data in this context to study a total of 2,888 single-family houses for the six-year period 2000?C2005; 591 of these houses were located in the Savannah Historic Landmark District. Estimating the model in semi-log form reveals (after allowing for a variety of factors, including 12 spatial variables, four of which are de facto Tiebout type variables) that the natural log of the real sales price of a single-family house in the city of Savannah environment was in fact negatively affected by the city and county property tax level. This study is prompted by the fact that city and county governments are facing serious financial challenges and are searching for viable revenue sources. Increasing property taxes is one of the potential revenue sources being considered by elected officials. In providing current evidence on the effects of property tax in particular and on the Tiebout hypothesis in general, we seek to alert city and state governments of the potential consequences and perils of property tax hikes.     

A classroom game on a negative externality correcting tax: Revenue return,regressivity, and the double dividend

The concept of negative externality is central to the teaching of environmental economics, but corrective taxes are almost always regressive. How exactly might governments return externality-correcting tax revenue to overcome regressivity and not alter marginal incentives? In addition, there is a desire to achieve a double dividend in the use of externality-correcting taxes, that is, to use the revenue to offset existing distortionary taxes, such as those on labor that produce a dead weight loss. In this article, the authors explain a classroom game that was developed for students to understand the theory of externalities, taxation dead weight loss, and regressivity. Then, the problem helps students explore the actual design of a policy that satisfies the double dividend hypothesis and corrects for regressivity.