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The Annals of Regional Science

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15-10-2018 | Original Paper

Absentee ownership, land taxation and surcharge

Author: Kangoh Lee

Published in: The Annals of Regional Science | Issue 1/2019

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Abstract

This paper studies the efficiency of land taxation in a system of jurisdictions with absentee ownership of land. The government of a jurisdiction exploits absentee owners and overtaxes land. Hence, even if land taxation does not distort the use of land, it distorts the allocation of resources between the private and public goods, creating an efficiency loss. If individuals choose their land ownership by trading it in the asset market, they do not necessarily choose an efficient ownership. The government of a jurisdiction also imposes an absentee owner surcharge, reducing the return to absentee ownership and eliminating absentee ownership. Surcharges thus improve the efficiency of land taxation in the long run.

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In a dynamic setting, land taxation may be inefficient, because investors change their portfolio toward nonland assets, or because land taxation alters the timing of land development (Feldstein 1977; Bentick 1979; Mills 1981).

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The surcharges can be viewed as tax exporting (Arnott and Grieson 1981; Wildasin 1986, 1987; Braid 1993), as discussed later.

Some residents of a jurisdiction may still own the land in another jurisdiction despite the surcharge, for example, due to emotional attachment to a parcel of land in another jurisdiction (Needham and de Kam 2004; Hong 2007), and absentee ownership would still exist, as discussed below.

Due to the linear homogeneous production function, the number of firms is of no consequence, and a jurisdiction is assumed to have one firm or one production function, the standard approach in the literature.

This way, the production function can incorporate residential buildings, namely houses, although the focus is on nonresidential land/properties. That is, treating a house as land in the production function, an owner of a house earns rents from the house (imputed rents for an owner-occupier and market rents for an absentee owner).

Starting with Beck (1983), Wilson (1986) and Zodrow and Mieszkowski (1986), a large literature has studied tax competition, and for recent surveys, see, for example, Wilson and Wildasin (2004), Devereux and Maffini (2007), and Karmakar and Martinez-Vazquez (2014).

Land ownership will be endogenized later.

The taxes that maximize the social welfare W are second-best efficient, as lump-sum taxes are not available.

A body of research has studied lobbying, and lobbying models have been used to explain the formation of various policies (for instance, Grossman and Helpman 1994, 1995).

More formally, the choice of \(\tau _i\) by the government of jurisdiction i satisfies the FOC, \(\partial Q_i/\partial \tau _i = U_i^z m_i - U_i^x \theta _{ii}^o m_i - \mu _i u_i' \theta _{ji}^o m_i = 0.\) Dropping \(m_i\) and using \(\theta _{ii}^o = 1 - \theta _{ji}^o\), the FOC can be rewritten as \(U_i^z - U_i^x + (U_i^x - \mu _i u_i')\theta _{ji}^o = 0.\) Since the public good is provided at the efficient level when \(U_i^z - U_i^x = 0\), it is overprovided (underprovided) if \(\mu _i < (>)\;U_i^x/u_i'.\)

An exception to this known result appears that when wages are uncertain, a proportional wage tax is still used in the presence of lump-sum taxation, as the wage tax serves as insurance while the lump-sum tax does not (for example, Eaton and Rosen 1980a, b). However, there is no uncertainty in the present model, yet lump-sum taxation does not obviate the need for distortionary land taxation. Another exception is that the government of a jurisdiction sets the business property tax at a positive rate and has a lump-sum tax that can be zero, positive or negative when a lump-sum tax, a business property tax and a source-based wage tax are available and when business land of a jurisdiction is partially owned by nonresidents (Braid 2005).

That is, some jurisdictions have recently imposed surcharges but have not changed land taxes, and the land tax \(\tau \) is treated as a parameter in this section.

The approach here follows the standard capital asset pricing models (for example, Fama and Miller 1972), except that the public good is included.

The second-period utility is not discounted for simplicity, but it has no effect on the results below.

As (25) and (26) hold for \(i, j = 1, 2,\) (25) and (26) can be used to explain the two analogous conditions for a resident of jurisdiction j. However, to avoid any possible confusion, the conditions for the resident of jurisdiction j are explicitly written below.

The choice variables, \((b_i^*, \theta _{ii}^*, \theta _{ij}^*),\) are functions of the taxes \((\tau _i, s_i, \tau _j, s_j)\), but the effects of the taxes on those choice variables can be ignored due to envelope results. However, the effect of the taxes on \(b_i^*\), namely \(\partial b_i^*/\partial \tau _i\), is included in the FOC (29) in order to compare FOC (29) to another FOC below.

Suppose that a resident of jurisdiction i trades her land ownership in the asset market but still holds land in jurisdiction j, for example, due to attachment to a particular parcel of land (Needham and de Kam 2004; Hong 2007). Jurisdiction j then would impose a surcharge as much as possible. However, such a surcharge is inefficient, as noted earlier.

According to the analysis in the previous section, it is clear that \(\theta _{ii}^{**}= 1, \theta _{ij}^{**} = 0\) and \(s_i^{**}\) = indeterminate.

Absentee owners typically own a second home in a foreign jurisdiction, and the taxation of a second home is an interesting topic and can be analyzed in the property tax framework. However, this topic is beyond the scope of this paper and left for future research.

With a large number of jurisdictions (Wilson 1986; Zodrow and Mieszkowski 1986), each jurisdiction takes \(\rho \) as given, so \(\mathrm{d} \rho /\mathrm{d} \tau _i = 0\) and hence \(\partial k_i/\partial \tau _i = 1/f_i^{kk} < 0\). These changes in (32) do not alter the results, and (35) continues to hold.

To simplify notations, endowment superscript o in \(\theta _{ii}, \theta _{ij}\) and \(\phi _i\) is omitted.

While jurisdictional subscripts are omitted at a symmetric equilibrium, they are kept in \(\partial k_i/\partial \tau _i\) to keep tract of the sign of the derivative correctly, given that \(\partial k_i/\partial \tau _i\) and \(\partial k_j/\partial \tau _i\) have opposite signs.

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Title: Absentee ownership, land taxation and surcharge
Author: Kangoh Lee
Publication date: 15-10-2018
Publisher: Springer Berlin Heidelberg
Published in: The Annals of Regional Science / Issue 1/2019
Print ISSN: 0570-1864
Electronic ISSN: 1432-0592
DOI: https://doi.org/10.1007/s00168-018-0880-7

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