Explaining Burden of a Tax with Words
By David Henderson
Two days ago, I was talking to one of my allies in our recent successful fight against an increase in the property tax in Pacific Grove. He commented that the tax increase would have hurt renters too because landlords would have “passed on” the increase.
I suddenly figured out a way to explain to him why that wouldn’t happen. Here’s what I said:
Rents are determined by the demand for and supply of apartments. The only way rents will change is if the demand changes or the supply changes. The property tax increase won’t affect demand. (Later I realized that I was assuming that the use of the taxes–to buy computers for students–won’t affect demand. It could if the computers enhance education, making schools in Pacific Grove more attractive. But I think the money will be pretty much wasted.) It also won’t affect supply either. The supply of rentals in Pacific Grove is pretty much fixed in the short run. In the long run, the increase in property taxes could discourage replacement of deteriorating apartments but that probably wouldn’t happen, with that relatively small tax increase, in less than 5 years. Bottom line: No increase in rents.
The guy I explained it to said, “Oh, yeah, I get it.”