Hypergeorgism: When is Rent Taxation as a Remedy for Insufficient Capital Accumulation Socially Optimal?

Abstract

Imperfect altruism between generations may lead to insufficient capital accumulation. We study the welfare consequences of taxing the rent on a fixed production factor, such as land, in this setting. We prove that taxing the rent is welfare-enhancing as it increases capital investment. This holds for any tax level and any recycling of the tax revenues except for combinations of high taxes and strongly redistributive recycling. Specific forms of redistribution of the land rent tax – a capital subsidy or a transfer directed at fundless newborns – allow to reproduce the social optimum under parameter restrictions valid for most economies.

Keywords: land rent tax, overlapping generations, revenue recycling, social optimum, underaccumulation

JEL Classification: H210, H220, H230, Q240