microbook_3e-page92 - . The effective price of an asset...

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Application to Land Value Taxation As you’ll read in my memo (“economic thought on Land Value Taxation”) , I was asked for my opinion on how shifting a city’s property tax burden from the combined value of the land and building, to the value land primarily would affect investment in the city’s existing stock of buildings. If you think of kapital (buildings) and land (abbreviated T for “Terra”) as inputs into the production of asset returns and if you think of tax rates as the input prices, then you can analyze the question with isoquants and isocosts. They had hoped that by taking the tax burden off of the building’s rental value, property owners would have a greater incentive to renovate their properties – renovation is a form of investing in capital . (They were seeking to rid the city of unsightly abandoned properties)
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Unformatted text preview: . The effective price of an asset equals IJ 1 asset p , where asset p is the market price of the asset and IJ is tax on the return to the asset. Land Value Taxation what they thought would happen: what I thought would happen: Under the proposal, the overall tax burden would remain constant, so the only effect would be a substitution effect . If the isoquants have a nice curved shape, then property owners would substitute out of land and into kapital and their asset returns would be higher. I argued that the isoquants may be L-shaped due to the complementarity between land and buildings. Consequently, the proposal would have no effect on the optimal holdings of land and kapital. T K isoquant when inputs are perfect complements T K Page 92...
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This note was uploaded on 12/29/2011 for the course ECO 311 taught by Professor Willis during the Fall '10 term at SUNY Stony Brook.

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