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Financing Public Capital through Land Rent Taxation: A Macroeconomic Henry George Theorem

Author

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  • Linus Mattauch
  • Jan Siegmeier
  • Ottmar Edenhofer
  • Felix Creutzig

Abstract

Financing productive public capital through distortionary taxes typically creates a trade-off: the optimal investment is determined as a compromise between efficiency-enhancing public investment and perturbing market efficiency, but is never socially optimal. In contrast, such a trade-off can often be avoided if public capital is financed by taxing rents of a fixed production factor, such as land. Here, we provide a macroeconomic version of the Henry George Theorem. Specifically, we prove that the socially optimal level of the public capital stock can be reached by a land rent tax, provided land is a more important production factor than public capital.

Suggested Citation

  • Linus Mattauch & Jan Siegmeier & Ottmar Edenhofer & Felix Creutzig, 2013. "Financing Public Capital through Land Rent Taxation: A Macroeconomic Henry George Theorem," CESifo Working Paper Series 4280, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_4280
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp4280.pdf
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    References listed on IDEAS

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    1. Calvo, Guillermo A & Kotlikoff, Laurence J & Rodriguez, Carlos Alfredo, 1979. "The Incidence of a Tax on Pure Rent: A New (?) Reason for an Old Answer," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 869-874, August.
    2. Francesco Caselli & James Feyrer, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 535-568.
    3. Jerome Creel & Gwenaelle Poilon, 2008. "Is public capital productive in Europe?," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(6), pages 673-691.
    4. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    5. Ottmar Edenhofer & Linus Mattauch & Jan Siegmeier, 2013. "Hypergeorgism: When is Rent Taxation as a Remedy for Insufficient Capital Accumulation Socially Optimal?," CESifo Working Paper Series 4144, CESifo Group Munich.
    6. David E. Bloom & David Canning & Jaypee Sevilla, 2001. "The Effect of Health on Economic Growth: Theory and Evidence," NBER Working Papers 8587, National Bureau of Economic Research, Inc.
    7. Burgstaller,Andre, 1994. "Property and Prices," Cambridge Books, Cambridge University Press, number 9780521419031, April.
    8. Richard J. Arnott & Joseph E. Stiglitz, 1979. "Aggregate Land Rents, Expenditure on Public Goods, and Optimal City Size," The Quarterly Journal of Economics, Oxford University Press, vol. 93(4), pages 471-500.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Kalkuhl, Matthias & Fernandez Milan, Blanca & Schwerhoff, Gregor & Jakob, Michael & Hahnen, Maren & Creutzig, Felix, 2017. "Fiscal Instruments for Sustainable Development: The Case of Land Taxes," MPRA Paper 78652, University Library of Munich, Germany.
    2. Ottmar Edenhofer & Jan Christoph Steckel & Michael Jakob, 2014. "Does Environmental Sustainability Contradict Prosperity?," Global Policy, London School of Economics and Political Science, vol. 5, pages 15-20, October.
    3. Nguyen Thang Dao & Ottmar Edenhofer, 2018. "Feldstein Meets George: Land Rent Taxation and Socially Optimal Allocation in Economies with Environmental Externality," CESifo Working Paper Series 6937, CESifo Group Munich.
    4. Vincent Viguie & Stéphane Hallegatte, 2015. "Urban Infrastructure Investment and Rent-Capture Potentials," Working Papers hal-01136199, HAL.
    5. repec:kap:itaxpf:v:24:y:2017:i:2:d:10.1007_s10797-016-9403-6 is not listed on IDEAS
    6. Jan Siegmeier & Linus Mattauch & Max Franks & David Klenert & Anselm Schultes & Ottmar Edenhofer, 2015. "A Public Finance Perspective on Climate Policy: Six Interactions That May Enhance Welfare," Working Papers 2015.31, Fondazione Eni Enrico Mattei.
    7. Viguie, V. & Hallegatte, S., 2014. "Urban infrastructure investment and rent-capture potentials," Policy Research Working Paper Series 7067, The World Bank.
    8. Fuss, Sabine & Chen, Claudine & Jakob, Michael & Marxen, Annika & Rao, Narasimha D. & Edenhofer, Ottmar, 2016. "Could resource rents finance universal access to infrastructure? A first exploration of needs and rents," Environment and Development Economics, Cambridge University Press, vol. 21(06), pages 691-712, December.
    9. Creutzig, Felix & Goldschmidt, Jan Christoph & Lehmann, Paul & Schmid, Eva & von Blücher, Felix & Breyer, Christian & Fernandez, Blanca & Jakob, Michael & Knopf, Brigitte & Lohrey, Steffen & Susca, Ti, 2014. "Catching two European birds with one renewable stone: Mitigating climate change and Eurozone crisis by an energy transition," Renewable and Sustainable Energy Reviews, Elsevier, vol. 38(C), pages 1015-1028.
    10. Michael Jakob & Claudine Chen & Sabine Fuss & Annika Marxen & Narasimha Rao & Ottmar Edenhofer, 2015. "Using Carbon Pricing Revenues to Finance Infrastructure Access," Working Papers 2015.94, Fondazione Eni Enrico Mattei.

    More about this item

    Keywords

    land rent tax; public investment; Henry George Theorem; social optimum;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • Q24 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Land

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