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Optimal Wealth Taxation When Wealth Is More Than Just Capital

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  • Max Franks
  • Ottmar Edenhofer

Abstract

We analyze the welfare implications of taxes on wealth, distinguishing between capital and land.We develop an overlapping generations model with heterogeneous agents and calibrate it to OECD data. We find that land rent taxes induce portfolio effects. Savings are shifted away from fixed land towards reproducible capital, enhancing GDP and reducing wealth inequality. Assuming a low pure rate of time preference, this can also raise social welfare, except under very low inequality aversion. By contrast, capital should be taxed only if inequality aversion is very high. We vary inequality aversion by considering three normative views: the Kaldor-Hicks criterion, prioritarian welfare functions and Rawlsian welfare functions.

Suggested Citation

  • Max Franks & Ottmar Edenhofer, 2023. "Optimal Wealth Taxation When Wealth Is More Than Just Capital," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 79(3), pages 175-207.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2023-0011
    DOI: 10.1628/fa-2023-0011
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    More about this item

    Keywords

    wealth inequality; social welfare; land rent tax; Georgism; optimal taxation;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q24 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Land

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