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Chapter 13 Taxation of wealth

Pe5e chapter 13 v1.0

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Page 1: Pe5e chapter 13 v1.0

Chapter 13

Taxation of wealth

Page 2: Pe5e chapter 13 v1.0

Learning outcomes

• Define the wealth tax base• Explain the merits and shortcomings of taxing personal

net wealth• Define the property tax base• Describe property tax rating and assessment• Explain the effect of property tax on equity using the

benefit principle• Analyse property tax incidence using partial and

general equilibrium analysis• Discuss the efficiency effects of a property tax• Define a capital transfer tax• Discuss the economic effects of capital transfer taxes.

Page 3: Pe5e chapter 13 v1.0

Wealth

• Tangible goods– Houses– Durable goods – Land– Financial assets• Cash, shares, bonds

• Insurance policies• Pension rights• Intangible goods

– Investment in education.

Wealth is the value of accumulated savings, investment, gifts, and inheritances.

OrPersonal wealth is the present value of a person’s expected real

income.

Examples

Page 4: Pe5e chapter 13 v1.0

Wealth taxes

• Annual wealth taxes– On people and/or companies

• Property tax– Land and improvements

• Capital transfer tax– Estates and gifts.

Page 5: Pe5e chapter 13 v1.0

Reasons for taxing wealth

• Equity• Efficiency• Revenue and administration.

Page 6: Pe5e chapter 13 v1.0

Property taxation

• 2 types– Real property

• Realty– Personal property

• Furniture, motor vehicles, shares

• Impersonal tax• Tax base

– Land (farm, residential, commercial)– Capital invested in improvements (farm buildings, homes,

business buildings).

Page 7: Pe5e chapter 13 v1.0

Property taxation (continued)

Urban tax• Site value rating• Flat rating• Composite ratingTax rates• Based on market value of propertyAssessment• Capital value system• Site value system• Market value system.

Page 8: Pe5e chapter 13 v1.0

Equity effects

• Benefit principle of taxation• Incidence of a property tax• Partial equilibrium analysis• General equilibrium analysis.

Page 9: Pe5e chapter 13 v1.0

Incidence of an ad valorem property tax on land

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Incidence of an ad valorem property tax on improvements

Page 11: Pe5e chapter 13 v1.0

Efficiency effects

Elements of selectivity:• Only immovable property is taxed• Tax base can include land or improvements• Tax bases & rates can differ between tax jurisdictionsEffects of selective property taxation:• Decisions are influenced by tax differentials• Discourage investment• Encourage more efficient use of land• Perverse effects.

Page 12: Pe5e chapter 13 v1.0

Why is property tax unpopular?

• Unrealised capital income• Burden on property owner• Increases risk of farming• Administration.

Page 13: Pe5e chapter 13 v1.0

Capital transfer taxes

• Inheritance tax• Estate duty• Donations• Economic effects

– Equity issues– Efficiency issues– Administrative issues.

Page 14: Pe5e chapter 13 v1.0

Thank you.