The Property Tax as a Tax on Value: Deadweight Loss

Abstract

Consider an atomistic developer who decides when and at what density to develop his land, under a property value tax system characterized by three time-invariant tax rates: τ V , the tax rate on pre-development land value; τ S , the tax rate on post-development residual site value; and τ K , the tax rate on structure value. Arnott (2005) identified the subset of property value tax systems that are neutral. This paper investigates the relative efficiency of four idealized, non-neutral property value tax systems [(i) “Canadian'' property tax system: τ V = 0, τ S = τ K ; (ii) simple property tax system: τ V = τ S = τ K ; (iii) residual site value tax system: τ K = 0,τ V = τ S ; (iv) two-rate property tax system: τ V = τ S > τ K > 0] under the assumption of a constant rental growth rate.