A three-sector model for real property tax incedence

Abstract

This article presents a new three-sector general-equilibrium model for tax incidence analysis. The model differs from the usual two-sector model not only in the addition of an extra sector but also in abandoning the classical tradition of specifying with capital and labor arguments. The property tax in the model is specified as a partial tax applying to real — but not to personal — property used in the production of housing services and other goods. The model is quantified by selecting numerical values for its parameters in order to estimate percentage changes in the endogenous variables caused by the introduction of an exogenous property tax. The major effect of the tax is to make real property relatively more expensive and to cause less real property to be produced.