Working Paper: CEPR ID: DP16652
Authors: Michael Kumhof; Nicolaus Tideman; Michael Hudson; Charles A. Goodhart
Abstract: 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.
Keywords: land; asset value taxation; land rental value taxation; capital income taxation; labor income taxation; balanced budget; fiscal stimulus; rent; unearned income
JEL Codes: E62; H21; H61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increasing the tax rate on land from 0.55% to 5.55% (R51) | Significant welfare and output gains (D69) |
| Increasing the tax rate on land from 0.55% to 5.55% (R51) | Output gain remains the same in model with separate groups of workers, capitalists, and landlords (E25) |
| Increasing the tax rate on land from 0.55% to 5.55% (R51) | Welfare gain increases to 6.4% in model with separate groups of workers, capitalists, and landlords (D69) |
| Wealth tax that raises the same revenue (H29) | Yields only half the output and welfare gains compared to proposed land tax reform (H21) |
| Optimal tax reform raising land taxes as much as politically feasible (H21) | Potential output and welfare increases of 2.6% and 5.2% (D69) |