Property Tax Incidence: An Alternate View.

A great deal has been written in the recent past concerning the incidence of property taxes. According to this view, the main effect of the property tax is to reduce the rate of return on capital-both reproducible and nonreproducible. Thus the current owners of all capital bear the tax in the form of a reduced income on their assets. The traditional view is based on the notion that the supply of land is absolutely fixed but that the supply of reproducible capital is not. With the land supply fixed, the landowners cannot escape the tax burden of the land portion of real property. The application of the property tax, which is an ad valorem tax on capital, would increase the supply price of the reproducible capital in an excise-tax fashion since that capital would not be produced and supplied at a loss. Therefore, the portion of the tax levied on improvements would be passed forward onto the occupant or the consumer of the services or products. The new view recognizes that to the extent that the closed economy's supply of capital is not perfectly inelastic, some of the burden falling on all owners of real property may be shifted. This shifting would decrease saving, which would decrease the reproducible capital stock, which would, in turn, lower wages to labor and decrease total production.