Consequences of Debt Capitalization: Property Ownership and Debt/Tax Choice

Public debts capitalize into property prices. This so far neglected fact has important consequences for the tax vs. debt choice. Property owners suffer more from the debt burden and, thus, have a stronger preference for tax financing of government spending than tenants. As a consequence of the resulting democratic struggle between property owners and tenants, the property ownership rate in a jurisdiction negatively affects public debts. We provide empirical support for this hypothesis by analyzing a cross-section of the 171 communities in the Swiss Canton of Zurich in the year 2000.