RPT Saga: The payer isn’t always the bearer (Last part)

Let’s go deeper into the economics of taxes, costs, and inflation per readings from economists and even lawyers.

This is now the last part of this column, but our #research continues. If you missed it, read the first part here: https://dailyguardian.com.ph/rpt-saga-the-payer-isnt-always-the-bearer-part-1/

The central concept of tax incidence is that the person or firm who physically pays a tax to the government (statutory incidence) is often not the person who ultimately bears the economic burden of the tax (economic incidence).

The true burden of a tax gets shifted to others – consumers, workers, or shareholders – through changes in market prices.

I. KEY PRINCIPLES

• It’s All About Elasticity: The economic burden of a tax falls on the party that is less responsive, or less “elastic.”
  • If demand is inelastic (consumers will buy a product regardless of price, like gasoline or medicine), consumers will bear most of the tax burden in the form of higher prices.
  • If supply is inelastic (producers cannot easily change their production levels, like land), producers will bear most of the burden in the form of lower income.
• Taxes Affect Prices: A tax creates a “wedge” between the price consumers pay and the price producers receive. How this wedge affects the final market price determines who bears the burden.
• It Doesn’t Matter Who “Pays” the Tax: The law can require either the buyer or the seller to remit the tax, but the economic outcome is the same. The burden will be shared based on the relative elasticities of supply and demand, regardless of the legal requirement.

Classic Example: Payroll Taxes

Consider a payroll tax for social security. Legally, the tax might be split 50/50 between the employer and the employee. However, the economic incidence is not 50/50.

Because the supply of labor is relatively inelastic (most people need to work and can’t easily change their hours in response to a small change in wages), workers bear most of the actual burden. The tax results in lower take-home pay for the employee and is largely absorbed into their overall compensation, regardless of the legal split paid by the employer.

II. THE ‘NEW VIEW’: PROPERTY TAX AS A TAX ON CAPITAL

The modern economic view treats the property tax not just as a tax on a house, but as a tax on capital.

A house, a factory, a machine, or even a stock portfolio are all forms of capital—assets that generate a return. Because money (capital) is mobile, it will flow to wherever it can get the best after-tax return. This mobility is the key to understanding how the tax burden is passed through the entire system.

This “new view” breaks the property tax into two separate parts:

1. The National Average Effect: The burden of the average property tax rate across the entire country.
2. The Local Excise Effect: The burden of a specific city’s tax rate being higher or lower than that national average.

The National Average Effect (A Tax on All Capital)

Imagine every municipality in the Philippines has a property tax, and the national average rate is 1%.

• Mechanism: This 1% tax reduces the return on investing in property. An investor who could have made a 5% return on a rental property now only makes a 4% return.
• Capital Mobility: That investor will now look for other options. Why build a house for a 4% return when they could invest in a factory or the stock market for a 5% return? They will move their money out of property and into other forms of capital until the after-tax returns are equal everywhere.
• The Result: This flood of capital into non-property assets (factories, bonds, stocks) drives down the return on those assets until everything equalizes at a new, lower level (e.g., 4%).

The Demonstration: The burden of the average property tax rate is not borne by tenants or homeowners alone. It is passed through to all owners of capital nationwide in the form of slightly lower returns on all investments—whether it’s stocks, bonds, or private businesses. It’s a broad, shallow tax on wealth.

The Local Excise Effect (A Tax on Immobile Factors)

Now, let’s look at a specific city. The national average property tax is 1%, but Iloilo City decides to set its rate at 1.5%. That extra 0.5% is the “excise” portion.

• Mechanism: This extra tax makes investing in property specifically in Iloilo City less attractive than investing in neighboring towns or other assets. Capital will flow out of Iloilo City.
• Who Can’t Move? Capital can leave. But some things are stuck in Iloilo City. These are the immobile factors of production.
• The Result: The burden of this extra local tax falls on those immobile factors. This includes:
  • Land: Land cannot move. As the location becomes less attractive for investment, the value of land falls. Landowners bear a significant part of the burden.
  • Local Labor: Workers who cannot easily move to another city may face lower wages or fewer job opportunities as businesses find it more expensive to operate in Iloilo City.
  • Renters: In the short term, as the supply of housing and commercial buildings stagnates due to lower investment, renters face less choice and can be forced to absorb the tax through higher rents.

The Demonstration: If Iloilo City raises its property taxes well above its neighbors:

1. A developer planning a new condominium might choose to build in a nearby municipality with a lower tax rate.
2. The supply of new housing in Iloilo slows down.
3. With fewer new units available, existing landlords can charge higher rents, passing the tax burden to tenants.
4. Ultimately, the city becomes a slightly less desirable place for business and investment, which can depress land values and local wages over the long term.

III. PASS-THROUGH EFFECTS

The pass-through effect for property taxes is a classic topic, and it’s unique because a property has two distinct components: the land and the structure (the building) on it. The tax burden falls differently on each.

Tax on Land: Borne by the Landowner

The tax on the unimproved value of land is almost entirely borne by the landowner. It cannot be passed on to tenants.

The reason is that the supply of land is perfectly inelastic—you can’t make more of it. Because the supply cannot change, the landowner has no mechanism to shift the tax. They can’t reduce the supply of land to drive up prices, so they must absorb the full cost of the tax. This makes a pure land tax one of the most efficient taxes from an economic perspective, as it doesn’t distort market behavior.

Tax on Structures (Buildings): Partially Passed Through

The tax on the value of the structure (the building, or “improvements”) is more complicated and can be partially passed through to tenants in the form of higher rents.

The supply of buildings is elastic. In the long run, if taxes on buildings are too high, developers will build fewer new structures, and existing landlords may invest less in maintenance. This reduction in the supply of rentable space drives up rental prices. Therefore, a portion of the tax is effectively paid by the tenants. The exact split depends on how sensitive landlords and tenants are to price changes in the local market.

The Combined Effect

In summary, the property tax is really two taxes in one:

• Tax on Land Value: Falls on the owner.
• Tax on Building Value: Shared between the owner and the tenants.

This is why landlords often claim they “pass on” property tax increases to renters. They can, but typically only the portion of the tax that applies to the building itself, not the portion that applies to the land underneath it.

Now, what is one of the major commodity group factor in inflation per the Philippine Statistics Authority? Housing rental.

Even if inflation was driven by food costs, electricity, and fuel, we must remember that these commodities don’t float in the air. They are located in buildings built in land, which are properties subject to tax.

Clear? Crystal.

Sources:

1. Musgrave, R. A. (1959). The Theory of Public Finance. New York: McGraw-Hill.
2. Fullerton, D., & Metcalf, G. E. (2002). Tax Incidence. Handbook of Public Economics, 4,1787–1872.
3. https://www.respicio.ph/commentaries/tax-and-expense-allocation-in-real-estate-transactions-philippine-rules#:~:text=After%20payment%20and%20registration%2C%20a,obligation%20for%20future%20RPT%20payments.