An Estimation of the Relationship between Taxation Environment and Real Property Asset Value

Abstract

The paper, following Laffer's basic idea, is focused on property asset value. Changes in tax rates have two effects on tax revenues: the arithmetic effect and the economic effect. The arithmetic effect is simply that if tax rates are lowered, tax revenues (per euro of tax base) will be lowered by the amount of the decrease in the rate. The economic effect, however, recognizes the positive impact that lower tax rates have on property assets by providing incentives to increase this activity. Raising tax rates has the opposite economic effect by penalizing participation in property assets activities. The arithmetic effect always works in the opposite direction from the economic effect. The property assets are affected, not only by property tax, but from all other direct and indirect taxes and, thus, the taxation environment has serious impact in Real Estate activities.By constructing a Whole-Life Costing (WLC) model for a commercial property asset and by using sensitivity analysis we examine the impact of tax environment, ceteris paribus, on a property asset value. With this way, we estimate the level of tax rate per tax and globally, penalizing the participation on commercial property assets activities.With this procedure we find and present the relation between tax environment and real property asset value in order to contribute to the current debate concerning the performance of the real estate sector.