Consequences of Debt Capitalization: Property Ownership and Debt/Tax Choice
Public debts capitalize into property prices. Therefore, property owners tend to favor tax over debt financing for government spending. In contrast, tenants do not suffer from debt capitalization. Thus, they tend to favor debt over tax financing. Our model of the resulting democratic fight between property owners and tenants over public debts and taxes predicts that the property ownership rate in a jurisdiction negatively effects the debt level. 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.
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