Mattauch, L., Siegmeier, J., Edenhofer, O., Creutzig, F.

Financing public capital when rents are back: a macroeconomic Henry George Theorem

in Finanzarchiv: Public Finance Analysis, 25.06.2018

Peer Review , Director , Land Use, Infrastructure and Transport

By taxing rents, governments can avoid a trade-off between productivity-enhancing public investment and efficiency losses from raising funds. However, it is unclear whether the rents present in a growing economy are sufficient to finance the socially optimal investment. We prove that the social optimum can be attained if the income share from a fixed factor, such as land, exceeds the public investment requirement. We thus translate the Henry George Theorem from urban economics to neoclassical and endogenous growth settings: here, the socially optimal land rent tax rate is below 100%. Our finding may address the underfunding of national infrastructure investments.

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