Equity and Efficiency Effects of Land Value Taxation

29 Pages Posted: 29 Dec 2022

See all articles by Gregor Schwerhoff

Gregor Schwerhoff

International Monetary Fund (IMF)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Marc Fleurbaey

Paris School of Economics

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.

Keywords: land value taxation, inequality, optimal taxation

JEL Classification: D31, H21, H24

Suggested Citation

Schwerhoff, Gregor and Edenhofer, Ottmar and Fleurbaey, Marc, Equity and Efficiency Effects of Land Value Taxation. IMF Working Paper No. 2022/263, Available at SSRN: https://ssrn.com/abstract=4313686 or http://dx.doi.org/10.5089/9798400230370.001

Gregor Schwerhoff (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.imf.org

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

Marc Fleurbaey

Paris School of Economics ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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