Is the Property tax a Capital tax?

Abstract Property tax is generally told as an “efficient” tax, fully capitalised into property values. However, it can become a direct tax on capital, with distorsive effects, when it is applied to business capital. Empirical literature still debates on the nature of business capital which creates distortions, the more or the less fixed, with no conclusive findings. This paper studies the impact of the local property tax on business by exploiting a tax reform approved in Italy at the end of 2015, when heavy equipment are excluded from the business property tax base. In the first part, with a Difference-in-difference approach, I show that firms that previously employ heavy equipment within the production process increase their capital more than companies that do not. This result contributes to demonstrate that the tax acts as a direct tax on that part of business capital which is less fixed. In the second part, with Fuzzy difference-in-difference, I also investigate how increasing investments in capital determines positive effects on value added and profits for firms that employ heavy equipment, affected by the policy. JEL Codes: H20, H25