DP16652 Post-Corona Balanced-Budget Super-Stimulus: The Case for Shifting Taxes onto Land

Author(s): Charles A E Goodhart, Michael Hudson, Michael Kumhof, Nicolaus Tideman
Publication Date: October 2021
Keyword(s): Balanced Budget, Capital income taxation, fiscal stimulus, labor income taxation, Land asset value taxation, land rental value taxation, Rent, unearned income
JEL(s): E62, H21, H61
Programme Areas: Public Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16652

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.