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Chapter 13
Taxation of wealth
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.
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
Wealth taxes
• Annual wealth taxes– On people and/or companies
• Property tax– Land and improvements
• Capital transfer tax– Estates and gifts.
Reasons for taxing wealth
• Equity• Efficiency• Revenue and administration.
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).
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.
Equity effects
• Benefit principle of taxation• Incidence of a property tax• Partial equilibrium analysis• General equilibrium analysis.
Incidence of an ad valorem property tax on land
Incidence of an ad valorem property tax on improvements
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.
Why is property tax unpopular?
• Unrealised capital income• Burden on property owner• Increases risk of farming• Administration.
Capital transfer taxes
• Inheritance tax• Estate duty• Donations• Economic effects
– Equity issues– Efficiency issues– Administrative issues.
Thank you.