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

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 asset’s 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.

Citation

Liapis, K.J. and Politis, E.D. (2018), "Disclosure of the Laffer economic effect in property valuations to fair value", Journal of Property Investment & Finance, Vol. 36 No. 3, pp. 305-318. https://doi.org/10.1108/JPIF-10-2016-0079