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Secular trends in Wealth and Heterogeneous Capital: Land is back...and should be taxed

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  • Odran Bonnet

    (Sciences Po)

  • Guillaume Chapelle

    (Sciences Po)

  • Alain Trannoy
  • Etienne Wasmer

    (Département d'économie (ECON))

Abstract

The increase in wealth-to-income ratios in the second half of XXth century has recently received much attention. We decompose the trend in physical capital and housing, further decomposed into structures and land. In four out of five major countries analyzed, the positive trend in capital-income ratio arises from housing and specifically from its land component. We therefore revisit the question of wealth inequality and taxation in adopting a Georgist perspective (from Henry George, 1879) subsequently endorsed by prominent economists. We introduce land and housing structures in Judd’s optimal taxation framework. We show that an optimal taxation implies a property tax on land and no tax on capital. When the range of property taxes is politically constrained, taxing the product of housing rents is not optimal, even with additional taxes on "imputed rents". Rent taxes are however less distortive than a capital tax. The distortion depends on the share of housing structures and how they react to the tax on rents. However, a tax on rents complemented by a subsidy on structures investments in rental housing units does almost as well as a land tax. As a side result, we find that Judd’s result of no second best capital taxation extends to a larger range of parameters at the steady-state.

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  • Odran Bonnet & Guillaume Chapelle & Alain Trannoy & Etienne Wasmer, 2019. "Secular trends in Wealth and Heterogeneous Capital: Land is back...and should be taxed," Sciences Po publications 92, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/56k383m9o9kpb1g6f8rvv74ok
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    1. Nicola Borri & Pietro Reichlin, 2021. "Optimal Taxation with Home Ownership and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 64-84, April.
    2. Nicola Borri & Pietro Reichlin, 2021. "Optimal Taxation with Home Ownership and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 64-84, April.

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    More about this item

    Keywords

    Capital; Wealth; Housing; Land; Optimal tax; First best; second best;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns

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