Question

"If one city lowers property taxes, then most of the benefit will go to landowners in that city when taxes were reduced." Evaluate this statement in terms of economics by analyzing first the effects of the tax decrease on the amount of capital in the city and then on the markets for land, labor, and housing in the city. Under what conditions is the statement correct?

Answer 1

Answer: Property taxes comes under the head of taxes , reducing taxes in an economy is known as ‘TAX CUT’.

Taxes are the main source of government revenue. When expenditures exceed tax revenue, a government accumulates debt. A portion of taxes may be used to service past debts.

Governments also use taxes to fund welfare and public services.

Effect:

tax cuts improve the economy in the short-term but depress the economy in the long-term if they lead to increased federal debt.

Lower property tax rates increase the spending power of landowners and can increase aggregate demand, leading to higher economic growth (and possibly inflation) in future.

Capital:

  A lower property tax rate— income earned on assets—encourages additional saving and investment by raising the after-tax return.

The increased investment boosts the size of the capital stock and expands the productive capacity of the economy.

The increased investment boosts the size of the capital stock and expands the productive capacity of the economy.

Markets:

Tax cuts boost after-tax income. People typically spend some of the additional income, raising demand for goods and services.

Firms respond to the increased demand by expanding production.

Land:

There will be an increase in the rate of property as cash flow in the market increases and purchasing power of the landowners rise it tends to raise the demand for more investment.

Which leads to the price rise of the land

Labor:

Workers will see an increase in their discretionary income.

With lower property tax rates, they would keep more of their gross income, so effectively they have more money to spend.

Housing:

Increase in the housing sector

expect to see a rise in consumer spending because workers are better off.

Because consumers spending is a component of aggregate demand (AD) (roughly 60%), then a rise in consumer spending should cause a rise in AD, leading to higher economic growth.

The statement is correct under the condition where there is decrease in the real income of the government and an increase in the real income of those whose tax rates have been lowered (land owners).