The value of a given property in a given county in Pennsylvania is assessed to b
ID: 1106532 • Letter: T
Question
The value of a given property in a given county in Pennsylvania is assessed to be $100,000 for the improvements, and $500,000 for the land. Suppose the county must raise $10,000 in property tax revenue. Under property tax policy A, the county will levy a mill rate of $0 on the land. Under property tax policy B, the county will levy a mill rate of $0 on improvements.
a) What mill rate must this county levy on the value of improvements under policy A? What mill rate must this county levy on the value of land under policy B?
b) Calculate deadweight loss in dollars under policy A. Explain.
c) Calculate deadweight loss in dollars under policy B. Explain.
Explanation / Answer
a) A "Mill Rate" or millage rate is the amount per $1000 of the assessed value property, which is used to calculate the value of a property tax. Here we can calculate the mill rate using the formula given below
Property tax levied on property=(mill rate*taxable property value)/1000
With a 0$ tax on the land, the mill rate will be imposed over improvements only. Thus using the formula we can solve the mill rate. Denoting the mill rate by "M", we get
10000=(M*100000)/1000
M=100
Again, when there is $0 tax on improvements, the tax will be imposed over land only. Again using the above mentioned formula for solving
10000=(M*500000)/1000
M=20
b) Deadweight loss is the loss in total surplus resulting from taxation.
Under policy A
Before taxation, the value of the property was 100000+500000=600000
After taxation the value becomes 600000+10000=610000
Deadweight loss under policy A is $10000
Since the property holder has already improved his property with a given sum. It belongs to his production cost. And as a result of taxation, the taxable amount he has to pay is itself the deadweight loss as he has to pay the extra sum of the taxable amount which reduces his surplus.
c) Under policy B, there is no tax imposed on improvements, and all of the tax is imposed on land. But, land is a good which is not produced but exists all the time. Which implies that the supply of land is perfectly inelastic. That is why land bears a zero dead weight loss. So the amount of deadweight loss under policy B is $0.
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