Note on Measuring Changes in Capital/Land Ratios Related to Tax Changes

Theory strongly supports the conclusion that a reduction in the tax on structures in an urban area will increase the intensity of urban development, measured in terms of the quantity of structures (or capital) per unit of land. However, efforts to provide empirical evidence supporting this conclusion have had only modest success. This note argues that one reason for this modest success it that the likely magnitude of the tax related change in development intensity—about 10 percent—is the same order of magnitude or smaller than measurement errors associated with variables that quantify development intensity.