# Is there any economical rational for a government to maintain low property taxes and rather high work-related taxes?

I have recently heard an analyst arguing that where I live (Romania) we have very low property taxes (0.08% to 0.20% for residential buildings), but rather high work-related taxes.

This was presented as a significant economical anomaly as it might contribute to a higher underground economy (this article estimated up to 30% of GDP for Romania), since it is easier to avoid these taxes (especially when correlated with a high perceived corruption rate).

I am wondering if there is any economic rationale to have such a taxation distribution (low on property, high on work).

From a political or cultural perspective it kind of makes sense:

• In Romania, all employees negotiate the (typically monthly) payment after taxation, so many do not actually see how much taxation these amounts carry (for both them and their employers)
• On the other hand, property taxes are being computed by the administration and the amounts are clearly visible (typically being sent via postal services or on a platform)
• Does the 0.08% to 0.20% property tax apply to the rental value of property (with an imputed rental value for owner-occupied property)? Or is it applied annually to the capital value of property? This makes a big difference to what might be considered a high or a low rate. Nov 5 at 13:34
• @AdamBailey I think it is applied to the capital value. Example: for a small apartment in the capital city which might be sold with about 50-60K EUR, the annual tax is about 40-50 EUR. Nov 5 at 14:42

It depends on the parameters of the Romanian economy. There are no publicly available estimates of relevant parameters for the Romanian economy, but using some reasonable assumptions answer would be no (aside of economic incentives that politicians face), in fact, there is economic rationale that would be exactly the opposite.

One of the most basic optimal taxation rules is the Ramsey's Rule. One of the Ramsey's rules implication is that the more elastic demand is the smaller will be the optimal tax.

Generally speaking, necessities like housing are expected to have a low price elasticity of demand, because everyone needs some shelter, even though if a price is high you can get some roommate or stay with parents the demand would likely not be as elastic as demand for oranges. Also, generally speaking labor demand tends to be rather elastic.

For example, in the US wage elasticity of employment demand was estimated to be close to -1 (see Beaudry et al 2018), whereas price elasticity of housing demand was estimated to be somewhere between $$-0.35$$ and $$-0.6$$ (see Hanushek & Quigley 1980).

Now, I could not find relevant parameters for the Romanian economy, so in principle, it could be possible that the parameters are such that it makes the Romanian taxes optimal, but as mentioned in the 3rd paragraph, one would expect demand for housing to be less elastic than demand for labor.

Also, just generally speaking empirical studies show property taxes typically cause fewer distortions than labor taxes (e.g. see discussion in Moscarola et al 2015). So without knowing relevant parameters of an economy, a good educated guess would be that property should be more heavily taxed than labor.

However, the above being said, economics is “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses” (Robbins, 1935, p. 16). Hence, broadly speaking economic perspective should include incentives that politicians face as well, who have to choose how they will allocate their scarce political capital among various goals (e.g. re-election, getting to a higher position in the government etc). People who own property might have more political power (maybe they can afford to give more donations etc), and use that to create incentives for politicians to implement tax schemes that benefit them over others.

• Forgot to mention in the question, but I think there is also another factor: a very high home ownership. Nov 4 at 17:00