Kasper Kragh-Sørensen, Institute for International Economic Studies, Stockholm University (Job Market Seminar)

"Optimal Property Taxation"

Abstract

This paper studies the optimal property tax rate and how it interacts with a tax on capital income. To quantify optimal taxes, I employ a general equilibrium life-cycle model with overlapping generations and incomplete markets calibrated to the U.S. economy. I show that the optimal property tax for newborns in the long run is considerably higher than today’s level of one percent. For example, the optimal property tax is 4.6 percent in the benchmark model and this coincides with a reduction in the capital income tax from 36 percent to around zero percent. Current generations, however, would incur substantial welfare losses from an implementation of the long-run optimal policy. I show that the optimal policy for current generations is actually to keep the property and capital income taxes close to today’s levels. Consequently, I find that a social planner will only set the property tax rate at its long-run optimal level if the social discount rate is significantly lower than the private. A key policy implication is thus that any reasonable analysis of optimal property taxation has to take the short-run welfare implications into consideration.

Contact person: Emiliano Santoro