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Pure Rent Taxation and Growth in a Two-Sector Open Economy

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  • Alberto Petrucci

    (Department of Economics and Finance, LUISS Guido Carli University)

Abstract

In this paper, the incidence of a tax on pure rent is analyzed in an OLG two-sector small open economy, in which one sector produces a capital good and one sector a consumer good. Contrary to what is obtained by Feldstein (1977) in a one-sector closed economy, a rent tax does not necessarily foster wealth accumulation and economic growth. The accommodating scheme for the government budget plays a crucial role for the effects of pure rent taxation. A rent tax stimulates nonhuman wealth if distortionary taxes on wealth or on income from nonland inputs are alleviated. The mechanism spurring capital formation is brought into action, instead, only when the rent tax is matched by a fall in capital taxation or, if the capital sector is capital intensive, by an increase in government spending on the capital good.

Suggested Citation

  • Alberto Petrucci, 2015. "Pure Rent Taxation and Growth in a Two-Sector Open Economy," Working Papers CELEG 1501, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    • Handle: RePEc:lui:celegw:1501
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Land Rent Tax; Capital Good; Consumer Good; OLG; Wealth Accumulation.;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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