Neutral Property Taxation Under Uncertainty
In a framework where no uncertainty arises, Arnott (J Publ Econ Theor 7:27–50, 2005) investigates a neutral property taxation policy that will not affect a landowner’s choices of capital intensity and timing of development. We investigate the same issue, but allow rents on structures to be stochastic over time. We assume that a regulator implements taxation on capital, vacant land, and post-development property so as to expropriate a certain ratio of pre-tax site value as well as to achieve neutrality. We find that the optimal taxation policy is to tax capital and subsidize properties before and after development. We also investigate how this optimal policy changes in response to changes in several exogenous forces related to demand and supply conditions of the real estate market.
KeywordsNeutral property taxation Real options Tax revenues Uncertainty
JEL ClassificationG13 H21 R11
We would like to thank the guest editors (Richard Buttimer and Kanak Patel), one anonymous reviewer, Richard Arnott, Edward Coulson, Steven Ott, Dean A. Paxson, Brenda A. Priebe, and participants at the 2007 Cambridge-UNCC Symposium, the 2007 Joint AsRES-AREUEA International Conference, and the National Taiwan University for their helpful comments on earlier versions of this manuscript. Jyh-Bang Jou acknowledges financial support from the Social Policy Research Center, College of Social Sciences, National Taiwan University.
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