Taxes and residential choice

Abstract

This paper has derived a simple tax-residence choice model to show the alternatives of each household residential choice between land price and land tax rate. The mathematical derivation indicates that people will move away from the CBD if its money income rises. The different land tax rates or tax burden among urban areas and/or rural areas will change household residential location, too. The higher the urban land tax rate is than the rural land tax rate, the more people will move away from the CBD if the differences in public services are insignificant everywhere. Conversely, if the tax burden or tax rates in rural areas are higher than in urban areas, people will move to the urban areas. The urbanization in Taiwanese urban areas seems closely related to this fiscal variable. In 1976, the nominal land tax rate in Taipei, for example, was 0.80%; but in the Yun-lin Hsien, the poorest jurisdiction, it was 9.29%. In this empirical study, we find that more than one-third of the migration in Taiwan can be explained by fiscal variables. People leave fiscal slums (rural Hsiens) to reside in fiscal havens (cities, municipal and industrial Hsiens). Urbanization has followed industrialization since the end of 1950s. Urban population has increased each year. Metropolitan areas have been formed. Jurisdiction has been consolidated under a shortage of housing space, public construction, water supply, and traffic congestion in these metropolitan areas. Taipei and its neighboring townships (Sanchung, Panchiau, Yungho, Chungho, Hsinchuang, and Hsintien), for example, are populous and have grown at a surprising rate with polluted air, traffic jams, and an ill-conditioned housing environment. Because a lot of migrants moving from the other rural areas cannot afford housing in Taipei, they agglomerate in the peripheral cities. Also, in the metropolitan area, land price and housing cost increase significantly. In particular, the assessed land tax value is less than half of its market value so a good deal of land is held for speculation with very high social costs (Galenson, 1979). In view of our theoretical model and the above situation, our policy implications suggest that the equalization of the land tax burden is very important in Taiwan and hence the critical progressive points of land tax should be equalized among jurisdictions. More specifically, we propose to impose the urban construction earmarked tax on urban land and urban housing as well as to reduce the agricultural land tax rate so as to abolish the big differences in the rural-urban land tax burden, which is shown in the Appendix. In practice, if the land tax payments are the decreasing function of the distance to the CBD and correspond to its market value everywhere, the price of land can be fully reflected by the quality and cost of the public services provided by the community where the land is located (Oates, 1969). Also, by doing so, the land tax rate will be equalized in the urban-rural spatial location, the Pareto-efficient frontier will be reached in equilibrium, and social cost can be reduced due to decreasing immigration into the urban areas.