By Odran Bonnet, Guillaume Chapelle, Alain Trannoy and Etienne Wasmer
Land is back. The increase in wealth in the second half of 20th century arose from housing and land. It should be taxed. We introduce land and housing structures in Judd’s standard setup: first best optimal taxation is achieved with a property tax on land and requires no tax on capital. With positive taxes on housing rents, a first best is still possible but with subsidies to rental housing investments, and either with differential land tax rates or with a tax on imputed rents. It can be taxed. Even absent land taxes, one can tax it indirectly and reach a Ramsey-second best still with no tax on capital and positive housing rent taxes in the steady-state. This result extends to the dynamics under restrictions on parameters.
In the ongoing saga about optimal capital taxation, the new player in town is land and it changes once more everything. And, of course, land is important, is often inherited and its value more determined by externalities than by what the owner puts into it. In other words, taxing it makes sense in more than a Georgian way. Interestingly, the first best leads to no tax on capital.
This literature is making me dizzy. I need someone to put together a RePEc Biblio topic about it.