Capitalization of intergovernmental transfers and the income effects of the abolishment of the Dutch property tax.

This paper studies the effects of the abolishment of the user part of the property tax in the Netherlands in 2006. This major tax reform meant that municipalities lost a substantial part of their income, but they were compensated for this via an additional grant from the central government. The first part of this study discusses the income effects of the tax reform and finds that low incomes gained the most from this tax reform relatively, although in absolute terms the high incomes profited more. The second part estimates the capitalization of the compensating additional transfers from the central government to the municipalities into the house prices. Using fixed effects specifications and an instrumental variable approach, this study evidence for capitalization of over 100 percent.