Skip to main content

Heterogeneity in Income Tax Capitalization: Evidence from the Swiss Housing Market

Summary

There is evidence that taxes capitalize into housing prices, but great uncertainty about the magnitude of income tax capitalization. One explanation why empirical evidence is unclear may stem from the fact that capitalization is something personal, depending on income, mobility, and on the individual tax burden of the bidding households. Therefore, income tax capitalization may theoretically differ substantially between different housing price segments. Results obtained from the analysis of a large Swiss dataset suggest that capitalization is lower for apartments for rent compared to apartments for sale. Capitalization is insignificant or less than 100% for all rental segments. Concerning apartments for sale, capitalization is well above 100% for the low and top price segments.

References

  1. Anglin, Paul M., and Ramazan Gençay (1996), “Semiparametric Estimation of a Hedonic Price Function”, Journal of Applied Econometrics, 11, pp. 633–648.

    Article  Google Scholar 

  2. Arellano, Manuel (1993), “On the Testing of Correlated Effects with Panel Data”, Journal of Econometrics, 59(1–2), pp. 87–97.

    Article  Google Scholar 

  3. Baum, Christopher F., Mark E. Schaffer, and Steven Stillmann (2007), “Enhanced Routines for Instrumental Variables / Generalized Method of Moments Estimation and Testing”, Stata Journal, 7(4), pp. 465–506.

    Google Scholar 

  4. Boije, Robert (1997), “Capitalization, Efficiency and the Demand for Local Public Services”, Economic Studies No. 33, Department of Economics, Uppsala University.

    Google Scholar 

  5. Cameron, A. Colin, and Pravin T. Trivedi (2005), Microeconometrics: Methods and Applications, New York: Cambridge University Press.

    Google Scholar 

  6. Crampton, Graham (1996), “Local Government Structure and Urban Residential Location”, Urban Studies, 33(7), pp. 1061–1076.

    Article  Google Scholar 

  7. Dowding, Keith, Peter John, and Stephen Biggs (1994), “Tiebout: A Survey of the Empirical Literature”, Urban Studies, 31(4–5), pp. 767–797.

    Article  Google Scholar 

  8. Edel, Matthew, and Elliott Sclar (1974), “Taxes, Spending, and Property Values: Supply Adjustment in a Tiebout-Oates Model”, Journal of Political Economy, 82(5), pp. 941–954.

    Article  Google Scholar 

  9. Epple, Dennis, and Thomas Romer (1989), “On Flexible Municipal Boundaries”, Journal of Urban Economics, 26(3), 307–319.

    Article  Google Scholar 

  10. Ellickson, Bryan (1971), “Jurisdictional Fragmentation and Residential Choice”, American Economic Review, 61, 334–339.

    Google Scholar 

  11. Feld, Lars, and Gebhard Kirchgässner (1997), “Die Kapitalisierung von Steuern und öffentlichen Leistungen in den Mietzinsen: Eine empirische Überprüfung der Tiebout-Hypothese für die Schweiz”, in Finanz- und Wirtschaftspolitik in Theorie und Praxis, Hans Schmid and Tilman Slembeck, eds., pp. 63–92, Berne: Haupt.

    Google Scholar 

  12. Feld, Lars, and Gebhard Kirchgässner (2001), “Income Tax Competition at the State and Local Level in Switzerland”, Regional Science and Urban Economics, 31(2–3), pp. 181–213.

    Article  Google Scholar 

  13. Feld, Lars, Justina A. V. Fischer, and Gebhard Kirchgässner (2010), “The Effect of Direct Democracy on Income Redistribution: Evidence for Switzerland”, Economic Inquiry, 48(4), pp. 817–840.

    Article  Google Scholar 

  14. Goodspeed, Timothy J. (1989), “A Re-Examination of the Use of Ability to Pay Taxes by Local Governments”, Journal of Public Economics, 38(3), pp. 319–342.

    Article  Google Scholar 

  15. Greene, William H. (2008), Econometric Analysis, 6th ed., Upper Saddle River, NJ: Prentice-Hall.

    Google Scholar 

  16. Halvorsen, Robert, and Henry O. Pollakowski (1981), “Choice of Functional Form for Hedonic Price Equations”, Journal of Urban Economics, 10, pp. 37–47.

    Article  Google Scholar 

  17. Hilber, Christian A. (1998), Auswirkungen staatlicher Massnahmen auf die Bodenpreise. Eine theoretische und empirische Analyse der Kapitalisierung, Zurich: Verlag Rüegger.

    Google Scholar 

  18. Kirchgässner, Gebhard, and Werner W. Pommerehne (1996), “Tax Harmonization and Tax Competition in the European Union: Lessons from Switzerland”, Journal of Public Economics, 60(3), pp. 351–371.

    Article  Google Scholar 

  19. Liebig, Thomas, Patrick A. Puhani, and Alfonso Sousa-Poza (2007), “Taxation and Internal Migration - Evidence from the Swiss Census Using Community-Level Variation in Income Tax Rates”, Journal of Regional Science, 47(4), pp. 807–836.

    Article  Google Scholar 

  20. Morger, Mario (2013), “What Do Immigrants Value Most about Switzerland? Evidence of the Relative Importance of Income Taxes”, CESifo Working Paper No. 4134.

    Google Scholar 

  21. Oates, Wallace E. (1969), “The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis”, Journal of Political Economy, 77(6), pp.957–971.

    Article  Google Scholar 

  22. Palmon, Oded, and Barton A. Smith (1998), “A New Approach for Identifying the Parameters of a Tax Capitalization Model”, Journal of Urban Economics, 44(2), 299–316.

    Article  Google Scholar 

  23. Rose-Ackermann, Susan (1983), “Beyond Tiebout: Modeling the Political Economy of Local Government”, in Local Provision in Public Services: The Tiebout Model after Twenty-Five Years, George R. Zodrow, ed., pp. 55–83, New York: Academic Press.

    Google Scholar 

  24. Ross, Stephen, and John Yinger (1999), “Sorting and Voting: A Review of the Literature on Urban Public Finance, in Handbook of Regional and Urban Economics, Paul Cheshire and Edwin S. Mills, eds., chap. 47, pp. 2001–2060, Amsterdam: Elsevier Science B.V.

    Google Scholar 

  25. Schmidheiny, Kurt (2006a), “Income Segregation from Local Income Taxation when Households Differ in both Preferences and Incomes”, Regional Science and Urban Economics, 36(2), pp. 270–299.

    Article  Google Scholar 

  26. Schmidheiny, Kurt (2006b), “Income Segregation and Local Progressive Taxation: Empirical Evidence from Switzerland”, Journal of Public Economics, 90(3), pp. 429–458.

    Article  Google Scholar 

  27. Sheppard, Stephen (1999), “Hedonic Analysis of Housing Markets”, in Handbook of Regional and Urban Economics, Paul Cheshire and Edwin S. Mills, eds., chap. 41, pp. 1595–1635, Amsterdam: Elsevier Science B.V.

    Google Scholar 

  28. Sirmans, Stacy, Dean Gatzlaff, and David Macpherson (2008), “The History of Property Tax Capitalization in Real Estate”, Journal of Real Estate Literature, 16(3), pp. 327–343.

    Google Scholar 

  29. Schaltegger, Christoph A., Frank Somogyi, and Jan-Egbert Sturm (2011), “Tax Competition and Income Sorting: Evidence from the Zurich Metropolitan Area”, European Journal of Political Economy, 27(3), pp. 455–470.

    Article  Google Scholar 

  30. Stadelmann, David (2010), “Which Factors Capitalize into House Prices? A Bayesian Averaging Approach”, Journal of Housing Economics, 19(3), pp. 180–204.

    Article  Google Scholar 

  31. Stadelmann, David, and Steve Billon (2012), “Capitalization of Fiscal Variables and Land Scarcity”, Urban Studies, 49(7), pp. 1571–1594.

    Article  Google Scholar 

  32. Stadelmann, David, and Steve Billon (2015), “Capitalization of Fiscal Variables Persists over Time”, Papers in Regional Science, 94(2), 347–363.

    Google Scholar 

  33. Stull, William J., and Judith C. Stull (1991), “Capitalization of Local Income Taxes”, Journal of Urban Economics, 29(2), pp. 182–190.

    Article  Google Scholar 

  34. Tiebout, Charles M. (1956), “A Pure Theory of Local Expenditures”, Journal of Political Economy, 64(5), pp. 416–424.

    Article  Google Scholar 

  35. Welch, Bernard L. (1947), “The Generalization of ‘Student’s’ Problem when Several Different Population Variances Are Involved”, Biometrika, 34(1–2), pp. 28–35.

    Google Scholar 

  36. Westhoff, Frank (1977), “Existence of Equilibria in Economies with a Local Public Good”, Journal of Economic Theory, 14(1), pp. 84–112.

    Article  Google Scholar 

  37. Wooldridge, Jeffrey M. (2002), Econometric Analysis of Cross Section and Panel Data, Cambridge, MA: MIT Press.

    Google Scholar 

  38. Yinger, John (1982), “Capitalization and the Theory of Local Public Finance”, Journal of Political Economy, 90(5), pp. 917–943.

    Article  Google Scholar 

  39. Yinger, John, Howard S. Bloom, Axel Börsch-Supan, and Helen F. Ladd (1988), Property Taxes and House Values: The Theory and Estimation of Intrajurisdictional Property Tax Capitalization, Boston: Academic Press.

    Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Mario Morger.

Additional information

This study was realized during my employment at Swiss Federal Tax Administration. I am grateful to the Cantonal Bank of Zurich, and especially to Marco Salvi (now Avenir Suisse) and Peter Meier, for providing the homegate.ch dataset. I am also indebted to Thomas Brändle, Martin Daepp, Bruno Jeitziner, Alowin Moes, Rudi Peters, Raphaël Parchet, Christoph Schaltegger, Peter Schwarz, David Stadelmann, Philippe Thalmann, Volker Grossmann, two anonymous referees, and the participants of the 2013 meeting of the Swiss Society of Economics and Statistics (SSES) in Neuchatel for helpful discussions and comments.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Morger, M. Heterogeneity in Income Tax Capitalization: Evidence from the Swiss Housing Market. Swiss J Economics Statistics 153, 227–259 (2017). https://doi.org/10.1007/BF03399508

Download citation

JEL-Classification

  • H22
  • H73
  • R21
  • R38

Keyword

  • housing prices
  • income tax capitalization
  • segregation