Disclosure of the Laffer economic effect in property valuations to fair value

Pages305-318
DOIhttps://doi.org/10.1108/JPIF-10-2016-0079
Publication Date03 Apr 2018
AuthorKonstantinos J. Liapis,Evangelos D. Politis
SubjectProperty management & built environment,Real estate & property,Property valuation & finance
Disclosure of the Laffer economic
effect in property valuations to
fair value
Konstantinos J. Liapis
Department of Economic and Regional Development,
Panteion University, Athens, Greece, and
Evangelos D. Politis
Department of Food and Agriculture,
Agriculture University of Athens, Attiki, Greece
Abstract
Purpose The purpose of this paper is to study the effect of income and property taxes on property assets
through the application of fair value accounting and deferred income tax standards.
Design/methodology/approach This approach is based on the whole life costing model that accounts for
the initial expenses, operation and maintenance costs, future revenues, and residual value.
Findings Formulating a step-by-step accounting procedure based on fair valuation and temporary
differences in taxation, this paper shows the existence of the Laffer curve and thus elucidates the economic
effect of the taxes and fully discloses the assets fair value. The optimal taxation rate is lower when a property
tax and an income tax are both present, as the the marginal gain from both taxes is constantly decreasing, due
to the changes in the fair value of the asset, and even has a negative effect in the case of the income tax.
Practical implications Accounting techniques, which combine market-based assumptions, financial
valuation techniques based on discounted fair value models, and standard International Financial Reporting
Standards disclosures, prove to be an unbiased proxy for the optimal taxation rate.
Originality/value This study demonstrates a practical tool for policy makers who are trying to define
macroeconomic policies on property taxation. Moreover, this approach can be used as an evaluation
model for individual investors who wish to measure the future prospects from a property investment under
taxation uncertainties.
Keywords Laffer curve, Property valuation, Fair value, Deferred income tax, Optimal taxation rate,
Whole life costing
Paper type Research paper
Introduction
A crucial question in public finance is the optimal taxation rate that maximizes revenue
(the arithmetic effect) and does not function as the threshold for appropriate economic
growth (the economic effect). Laffer (2004) was the first to discuss the idea of two effects of
tax rates on revenue: the arithmetic effect and the economic effect. This argument suggests
that reduced tax rate policies provide reduced tax revenues, but the physical capital
remaining in the market has a positive impact on economic growth with a knock-on effect on
tax revenue. In the same manner, Ireland (1994) suggested that tax cuts might produce state
deficits in the short term, but in the long term, the aggregate output of this tax decrease
enhances welfare, and consequently, the tax base is extended. The bell-shaped
representation of the Laffer curve indicates that there are two tax ratios, which produce
the same tax revenue, and a peak, where the revenue outcome is maximized. Questions arise
about whether this simple analysis of the tax effect on the economy has a basis in real
economic conditions and whether the Laffer curve effect occurs in different taxation policies.
In real economic terms, the Laffer curve does not take into account the complexity of the
economy and how different economic agents react to tax rate changes. Moreover, the
arbitrary bell-shaped illustration of Laffers (2004) argument does not quantify the optimal
Journal of Property Investment &
Finance
Vol. 36 No. 3, 2018
pp. 305-318
© Emerald PublishingLimited
1463-578X
DOI 10.1108/JPIF-10-2016-0079
Received 20 October 2016
Revised 20 November 2016
Accepted 2 December 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1463-578X.htm
305
Laffer
economic effect
in property
valuations

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