Chapter 17

Taxes on Wealth Property

and Estates

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A Comprehensive Wealth Tax Base
 Real Property is property such as land and
the structures on the land.

 Intangible Property is wealth that is held as

paper or financial assets.

 Personal Property is wealth that is held in

the form of cars, furniture, clothing,
jewelry, etc.

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 Measuring Wealth
 Market value can be used to establish the value of
most real property and intangible property, but
personal property has no acceptable resale
market.

 Serious inequities can arise from

mismeasurement of wealth and serious shifting
can take place when one form of wealth is taxed
while another is not.

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 Assessment of Property Value

 For the property tax, the assessed value of

a home and the land upon which it sits is
quite subjective. Real-estate markets exists
for many homes but not others.

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 A Comprehensive Wealth Tax
A comprehensive wealth tax would tax all
forms of capital equally.
If W = Σ Ri/(1 + r)i then the effective tax
rate on savings would be ts = tWW/Ri
Where
 Ri = the return to asset I

 r = the interest rate

 tW = the wealth tax rate
 W = Wealth 5
Figure 17.1 Impact of a General Wealth Tax
When the Supply of Savings is Perfectly Inelastic
Return (Percent) S

rG*
tW W
Ri
rN*

D = rG
tW W
rN = rG –
R1
0 Q1
Annual Savings and Investments 6
Figure 17.2 Impact of a General Wealth Tax When the
Supply of Savings is Responsive to Changes in Annual
Return
Return (Percent) S

rG1 *
rG*

rN1 *

D = rG
tW W
rN = rG –
R1
Q2 Q1
Annual Savings and Investments 7
 Selective Property Taxes

 Property Taxes in the U.S. are typically

selective in that real property is taxed,
some forms of personal property are taxed,
and intangible property is not taxed.

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Wealth Taxes in an Open Economy
 Capital mobility has increased dramatically in
recent years.
 Wealth taxes in a nation discourage foreign
investment in that nation.
 U.S. gross investment has declined from 22% of
GNP in 1959 to 17% in 1999.
 U.S. net foreign investment is negative, meaning
that foreign capitalists are investing more in the
U.S. than U.S. capitalists are investing abroad.

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Local Property Taxes and Tax Capitalization
 Property Tax Differentials are the differences between
what would be owed in one community on a particular
piece of property relative to what would be owed on an
identical piece of property in a different community.

 If the differential is high, then people will be willing to

pay less for property in the high-tax community and more
for a home in the low-tax community. The tax differential
will be capitalized into the value of each home. The
present value of the differential over the expected length
of time the differential will hold will be the difference in
the prices of the two pieces of property.

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Figure 17.3 Impact of a Property Tax on Housing Rents
S
Rent per Square Foot (Dollars)

120
∆Y
100
tVt =
$60
60

D=Gross Rent
Net Rent = Yt-tVt

0 Q2 Q1
Housing Rented per Year (square feet)
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Capitalization and the Elasticity of Supply
 Full tax capitalization only occurs if there is no
supply elasticity.

 Land is perfectly inelastic but structures are not.

 A differential tax will cause more building in one

area and less building in another.

 After such shifting, less than full capitalization of

the tax differential occurs.

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 Property Taxes in the U.S.
 Fractional Assessment is the practice of assessing a
property at only a fraction of its true value. Typically this
implies that the tax rate is higher.
 Nominal Tax Rates are the rates of tax per assessed value
that a property owner must pay.
 Effective Tax Rates are defined as the taxes owed per true
market value.
For instance, Newark N.J. has a nominal tax rate of 23.85%, but the
assessed value of a piece of property is typically only 16.4% of its market
value. Thus, the effective rate is 3.91%. The average U.S. effective rate is
1.67%, the median 1.42%.

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 Reliance of the Property Tax by Local
Governments
 The property tax is an important source of
revenue for most local governments.

 It raises more than 95% of all local revenue in

CT, ID, MA, MN, MT, NH, NJ, RI, VT, WI.

 In no state does it provide less than a third of

local government revenue.

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 Property Tax Preferences
 Communities often enact “circuit-breakers” that
do not allow assessed evaluation to increase more
than a fixed percentage in a period of time to help
the elderly living on fixed incomes.

 Agricultural land is also taxed at a much lower

rate than residential and commercial land.

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 Land Taxes

 A criticism of property taxes is that they

reduce the incentive to build on a piece of
property.

 A solution is to impose a tax on the land

rather than the buildings on it.

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 Figure 17.4 Impact of a Land Tax
S
Rent per Acre

R*
G

tV
R*
N

Entire Tax Borne D = RG

by Landlords
RN = RG – tV

Q1
Usable Acres of Land 17
 Estate and Gift Taxes
 The estate tax places a tax on the estate of those
who have died before their assets may be
transferred to their heirs.

 The gift tax prevents people from avoiding the

estate tax by giving away their assets before they
die. You may give up to $10,000 to each person
per year.

 Estate taxes were substantially reduced in 2001.

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