Consider a city where the owners of vacant lots will vote on a proposed growth b

Question

Consider a city where the owners of vacant lots will vote on a proposed growth boundary. There are 14 vacant lots (one per owner), six inside and eight outside the proposed boundary. The initial price of land is $40 per lot. The growth boundary will reduce the price of land outside the boundary to zero. Fill in the blanks/circle the word for the following statements, and show your work:

Assume (as in (b)) that the growth boundary will triple the value of land inside the boundary. The city wants to propose that the growth boundary be combined with a capital gains tax on the increase in land value inside the boundary, where the revenue from the tax will be distributed equally to landowners outside the boundary.

In order for the proposal to pass, the capital gains tax must be at least _________%.

Explanation / Answer

Value of land inside growth boundary = $120

Let tax be r%

Increase in land value per lot=$80

Total increase=$6*80=$480

Tax collected=480*r/100=4.8r

Money distributed to owners=4.8r/8=0.6r (8 owners outside the boundary)

0.6r=40

r=40/0.6=66.67%

Capital gains tax must be 66.67%

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