In 1992 the State of Nebraska changed property tax law in a way that lowered the rate of taxation on capital in the non-residential sector of the economy while the rate of applied on residential capital was unchanged. (This policy change was known as Amendment One.)
a. Analyze the effects of such a policy change in the context of a two-sector general equilibrium graphical model and explain the capital flows that result and the incidence of the tax reduction.
b. Explain who benefits from the reduction in capital taxation of non-residential capital.