The Impact on Development Timing of Property and Profit Taxation

Abstract

bring forward in time the conversion of land from one use to another (Skouras 1978; Bentick 1979; Mills 1981; Noguchi 1982; Wildasin 1982).' Likewise, it is also now accepted that a tax on the profit derived from such conversions-a development gains tax-will not affect the timing of conversion, provided that the true profit from conversion is correctly assessed by the taxing authorities (Bentick and Fischer 1975; Evans 1982; Bentick 1988).2 The purpose of this article is to show that these conclusions are quite specific to the model that has been implicitly or explicitly constructed by the authors cited above and that this model is potentially misleading. To show how the impact of taxation is model specific, three models of development timing are analyzed. Model 1 allows, ex ante, one future (or urban) use for land. This is, obviously, hopelessly unrealistic but it shows the importance of implicit assumptions. Model 2 allows, ex ante, more than one future (or urban) use but treats one of those uses as permanent so that, ex post, urban development is a once only event presumably as a result of prohibitive conversion costs. Finally, Model 3 allows many future (or urban) uses which can be undertaken in sequence through a process of urban development and redevelopment so that both ex ante and expost there are many land uses. The features common to all three models are that land is currently in a use which offers a fixed rental of R in, say, farming; that there is at least one alternative urban use which offers a rental of R,; and that there are costs involved in converting land from one use to another. We consider each of these models in turn