The Effects of Changes in Capital Gains Taxes on Land Sales: Empirical Evidence from Finland

Abstract

We estimate the landowner response to and fiscal effects of a temporary reduction in capital gains taxes imposed on land sales. The underlying normative decision rules are first derived and solved numerically using stochastic dynamic programming. The landowner preferences and willingness to sell land are then estimated in the reduced form using survey data from Finland. The results suggest that the timing of land sales and land sales quantities respond significantly to tax incentives. Certain temporary tax waiver programs could maintain the current tax revenues with fewer trade distorting effects on the land market. (JEL H21, R10)