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Equity and efficiency effects of land value taxation*
Gregor Schwerhoff†, Ottmar Edenhofer‡ Marc Fleurbaey§,
August 30, 2022
Abstract
It is a well-known result in economics that land value taxation is efficient since it does not distort the supply of the tax base. Considering only efficiency land value should thus be fully taxed. Using optimal taxation theory with heterogeneous households, we show that it may be optimal not to tax land value fully for distributional reasons. The decisive variable is the covariance of land value held by households and their social welfare weight. Empirical data from the US and France, however, indicates that ownership of land value (in absolute terms) is negatively correlated to the social welfare weight. Middle income households would pay relatively more land value taxes than high income households, but less in absolute terms. With reasonable revenue recycling, land value taxation would thus reduce the net tax burden of low and middle income earners, because they would benefit more from the recycling than they pay in additional taxes.
JEL classification: D31, D33, H21, H24
Keywords: land value taxation, inequality, optimal taxation
The authors thank Felix Bierbrauer, Max Franks, Emanuel Hansen, Matthias Kalkuhl and Linus Mattauch for helpful comments.
International Monetary Fund (IMF), 700 19th St NW, Washington, DC 20431, USA. Email: gschwer-hoff@imf.org
Potsdam Institute for Climate Impact Research, PO Box 601203, 14412 Potsdam, Germany, email: ottmar.edenhofer@pik-potsdam.de; Mercator Research Institute on Global Commons and Climate Change (MCC), 10829 Berlin, Germany; TU Berlin Institute of Technology, Chair Economics of Climate Change, Faculty VII, 10623 Berlin, Germany.
Paris School of Economics, 48 Bd Jourdan, 75014 Paris, France. E-mail: marc.fleurbaey@psemail.eu