DP15845 Land is back, it should be taxed, it can be taxed

Author(s): Odran Bonnet, Guillaume Chapelle, Alain Trannoy, Etienne Wasmer
Publication Date: February 2021
Keyword(s): Capital, First best, housing, land, Optimal tax, Second best, wealth
JEL(s): D63, R14
Programme Areas: Public Economics, International Trade and Regional Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15845

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.