Post-Corona Balanced-Budget Super-Stimulus: The Case for Shifting Taxes onto Land

CEPR Discussion Papers 2021

89 Pages Posted: 3 Nov 2021

See all articles by Michael Kumhof

Michael Kumhof

CEPR

T. Nicolaus Tideman

Virginia Polytechnic Institute & State University - Department of Economics

Michael Hudson

University of Missouri at Kansas City - Department of Economics ; Bard College - The Levy Economics Institute

Charles Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group

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Date Written: October 20, 2021

Abstract

The post-Corona economic environment puts a premium on finding fiscal means to stimulate the economy while continuing to finance current levels of expenditures and debt. We develop and carefully calibrate a model of the US economy to show that an increase in the tax rate on the value of land, balanced by decreases in the tax rates on the incomes of capital and labor, can meet this need. We find that the US share of land in total nonfinancial assets is more than 50%, so that the tax base is very large. This is corroborated by very high quality OECD data for other industrialized economies that, almost without exception, find land shares of between 40% and 60%. Our baseline proposed tax reform is an increase in the tax rate on the asset value of land from its current 0.55% to 5.55%, accompanied by reductions in tax rates on capital and labor incomes of 28 and 10 percentage points, respectively. In a representative household model, this increases welfare by 3.4% of steady state consumption, and increases output by almost 15% relative to trend. In an economy with separate groups of workers, capitalists and landlords, the output gain is the same, while the welfare gain increases to 6.4% on average across the three groups. Welfare and output gains for a wealth tax that raises the same revenue, and which increases the tax rates on capital and land equally, are only half as large as the baseline. Welfare and output gains for an optimal tax reform, under the assumption that the tax rate on the value of land is capped at 20%, are approximately twice as large as the baseline. This reform raises 55% of all tax revenue through land taxes, with the remaining 45% raised through consumption taxes, while all income taxes are abolished.

Keywords: Land asset value taxation, land rental value taxation, capital income taxation, labor income taxation, balanced budget, fiscal stimulus, rent, unearned income

JEL Classification: E62, H21, H61

Suggested Citation

Kumhof, Michael and Tideman, T. Nicolaus and Hudson, Michael and Goodhart, Charles A.E., Post-Corona Balanced-Budget Super-Stimulus: The Case for Shifting Taxes onto Land (October 20, 2021). CEPR Discussion Papers 2021, Available at SSRN: https://ssrn.com/abstract=3954888 or http://dx.doi.org/10.2139/ssrn.3954888

Michael Kumhof (Contact Author)

CEPR ( email )

London
United Kingdom

T. Nicolaus Tideman

Virginia Polytechnic Institute & State University - Department of Economics ( email )

3021 Pamplin Hall
Blacksburg, VA 24061
United States

Michael Hudson

University of Missouri at Kansas City - Department of Economics ( email )

Bard College - The Levy Economics Institute ( email )

Blithewood
Annandale-on-Hudson, NY 12504
United States

Charles A.E. Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)

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