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

David Stadelmann and Reiner Eichenberger

Southern Economic Journal, 2012, vol. 78, issue 3, 976-998

Abstract: Public debts capitalize into property prices. Thus, they are a burden to the present generation who owns the devalued property. This largely neglected fact has important consequences for the tax versus 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, higher property ownership rates in a jurisdiction lead to less debt financing. 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.

Date: 2012
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