The Impact of Two-Rate Taxes on Construction in Pennsylvania

The evaluation of policy-relevant economic research requires an ethical foundation.Classical liberal theory provides the requisite foundation for this dissertation, which usesvarious econometric tools to estimate the effects of shifting some of the property tax frombuildings to land in 15 cities in Pennsylvania. Economic theory predicts that such a shiftwill lead to higher building activity. However, this prediction has been supported little byempirical evidence so far. The first part of the dissertation examines the effect of the land-building taxdifferential on the number of building permits that were issued in 219 municipalities inPennsylvania between 1972 and 1994. For such count data a conventional analysis basedon a continuous distribution leads to incorrect results; a discrete maximum likelihoodanalysis with a negative binomial distribution is more appropriate. Two models, a non-linear and a fixed effects model, are developed to examine the influence of the taxdifferential. Both models suggest that this influence is positive, albeit not statisticallysignificant. Application of maximum likelihood techniques is computationally cumbersome ifthe assumed distribution of the data cannot be written in closed form. The negativebinomial distribution is the only discrete distribution with a variance that is larger than itsmean that can easily be applied, although it might not be the best approximation of the truedistribution of the data. The second part of the dissertation uses a Markov Chain MonteCarlo method to examine the influence of the tax differential on the number of buildingpermits, under the assumption that building permits are generated by a Poisson processwhose parameter varies lognormally. Contrary to the analysis in the first part, the tax isshown to have a strong and significantly positive impact on the number of permits. The third part of the dissertation uses a fixed-effects weighted least squares methodto estimate the effect of the tax differential on the value per building permit. The taxcoefficient is not significantly different from zero. Still, the overall impact of the taxdifferential on the total value of construction is shown to be positive and statisticallysignificant.