February 2, 2012
By Athiphat Muthitacharoen and George R. Zodrow
This paper analyzes the excise tax effects of a general property tax from the perspective of a small open economy facing a perfectly elastic supply of capital, focusing on the mix of forward tax-shifting to consumers and backward tax-shifting to labor and landowners. The model utilized differs from most that have appeared in the property tax literature as follows:
- the property tax is applied in a four-sector model with three taxed sectors—manufacturing which produces a tradable good, housing and services which produce nontradable goods, and a tax-exempt agricultural sector that produces tradable goods;
- the analysis considers an “intermediate run” time frame in which labor is partially mobile (perfectly mobile across production sectors but fixed in total supply within the taxing jurisdiction), while land is fixed in each production sector; and
- all production sectors use capital, labor and land. Within the context of this model, the excise tax effects of the property tax are borne primarily by labor and land.
This result is in marked contrast to that obtained using a four-sector analog of the “traditional view” of the property tax with immobile labor, under which the excise tax effects are borne by consumers and there is clear and significant over-shifting of the tax to the consumers of nontradable goods. This result is robust to sensitivity analyses with respect to the parameters used in the simulations of the model. Our results also suggest that the degree of backward tax-shifting declines markedly in a longer run time frame where labor is perfectly mobile across jurisdictions.