Equity and Efficiency Effects of Land Value Taxation

IMF Working Papers, December 16, 2022

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Land value taxation is efficient because it does not distort the supply of the tax base; considering only efficiency, land value should be fully taxed.
Using optimal taxation theory with heterogeneous households, the paper shows 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 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 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.

Data sources cited: empirical data from the US and France (as reported in the paper).
Key empirical finding: ownership of land value (in absolute terms) is negatively correlated to the social welfare weight.

Full taxation of land value, while efficient, may be adjusted downward on equity grounds depending on the covariance between land ownership and social welfare weights.
Revenue recycling is crucial: with reasonable revenue recycling, land value taxation can be progressive in net effect, reducing net tax burdens for low and middle income earners.
Policy design should account for distributional characteristics of land value ownership across income groups.

Subject: Housing, Income, Labor, Labor supply, Labor taxes, Land tax, National accounts, Taxes
Keywords: Housing, Income, income earner, inequality, Labor supply, Labor taxes, land rent tax, Land tax, land value taxation, net tax burden, optimal taxation, tax land value