Taxing Land

The fact that the supply of land is fixed ‘has a very important consequence. Consider the land market in Figure 14-2 on page 269. Suppose the government introduces a 50 percent tax on all land rents, taking care to ensure that there is no tax on buildings or
improvements, because that certainly would affect the volume of construction activity, All that is being taxed is the rent on the fixed supply of agricultural and urban land sites.
After the tax, the ‘total demand for the land’s services will not have changed. At a price of 5200 in Figure 14-2. people will continue to demand the entire fixed supply of land. Hence, with land fixed in supply, the market rent on land services (including the tax) will be Interchanged and must be at the original market equilibrium at point E . What will happen to the rent received by landowners? Demand and quantity supplied are unchanged. so the market price will be unaffected by the tax. Therefore, the tax must have been completely paid out of the situation can be visualized 111 Figure 14-2.

What the farmer pays and what the landlord receives are now two quite different things. As far as’ the lords are concerned, once the government steps 111 to take its 50 percent share. the effect is just the same as it would be if the net demand to the owners had shifted down from DD to D’ D’. Landowners’ equilibrium return after taxes is now only E’, or half as much as E. The whole of 0., tax has been shifted backboard 01110 of the factor in perft inelastic supply.

Landowners will surely complain. But under perfect competition there is nothing they can do about it, since they cannot alter the total supply and the land must work for whatever it can get. Half a loaf IS better than none. You might at this point wonder about the effects of such a tax on economic efficiency. The striking re- .suit is that a tax on rent will lead to no distortions or economic inefficiencies. This surprising result comes because a tax on pure economic rent does not change anyone’s economic behavior, Demands are unaffected because their price is unchanged. The behavior of suppliers is unaffected because the supply of land is fixed and cannot react. Hence, the economy operates after the tax exactly as it tax-with no distortions or inefficiencies a result of the land tax. A tax on pure economic rent will lead to no distortions or inefficiencies.

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