The economic effects of taxing land values

Abstract

The purpose of this research is to investigate the functional incidence of a tax on land values and compare it with the incidence of a tax on reproducible capital. First, the nature of the supply of land and the role of land rent is explored. An upward sloping supply curve for economic land is proposed. The supply of land is determined to be less elastic than the supply of capital, but not perfectly inelastic as traditional theory dictates. Second, the three major theories concerning the incidence of a property tax based on reproducible capital are critically evaluated and compared to the theories concerning the incidence of a land value tax. The economic effects of a tax on land rents is developed under the assumption that the supply of land slopes upward. Third, Granger and Sims's causality tests examine the extent to which increases in a tax on reproducible capital or a tax on land values affects the price of homes, rental values of private housing, consumer price indexes, and wage rates. These tests are performed using data from the six Australian capital cities. The test results support no current theory concerning the incidence of a land value tax or a tax on reproducible capital. A combination of the excise tax theory for both land and reproducible capital and benefit view theory is proposed.