The Capitalization of the Property Tax and Idle Land: Comment

Abstract

Does a property tax discourage holding of vacant land or is it neutral? In a recent interesting article in this journal, Michael Owen and Wayne Thirsk (1974)-hereafter OT-claimed that it is neutral. They observed that tax will be capitalized and took capitalization to mean that the allocative effects of property tax should be intertemporally neutral unless land owners were initially failing to earn highest return from their They are not alone in this view.1 The authors then purported to actually prove this assertion by constructing a theoretical model, and they took its predictions as confirming their view, a conclusion which has been accepted elsewhere.2 In my opinion their proof is not satisfactory, and I shall show that a capitalized property tax does discourage holding of vacant land. I have had some difficulty in following OT model because of their terminology,3 which they may take opportunity to change, and have interpreted it in following way. Imagine a piece of land which at some future time T will have a value in use of V(T), presumably based on rentals which it can then command and which I take to be constant. In absence of property taxes its present value will be: P(o) = erTV(T) [1]