Hypergeorgism: When rent taxation is socially optimal∗ Ottmar Edenhoferyz, Linus Mattauch,x Jan Siegmeier{ June 25, 2014 Abstract Imperfect altruism between generations may lead to insufficient capital accumulation. We study the welfare consequences of taxing the rent on a fixed production factor, such as land, in combination with age-dependent redistributions as a remedy. Taxing rent enhances welfare by increasing capital investment. This holds for any tax rate and recycling of the tax revenues except for combinations of high taxes and strongly redistributive recycling. We prove that specific forms of recycling the land rent tax - a transfer directed at fundless newborns or a capital subsidy - allow reproducing the social optimum under pa- rameter restrictions valid for most economies. JEL classification: E22, E62, H21, H22, H23, Q24 Keywords: land rent tax, overlapping generations, revenue recycling, social optimum ∗This is a pre-print version. The final article was published at FinanzArchiv / Public Finance Analysis, doi: 10.1628/001522115X14425626525128 yAuthors listed in alphabetical order as all contributed equally to the paper. zMercator Research Institute on Global Commons and Climate Change, Techni- cal University of Berlin and Potsdam Institute for Climate Impact Research. E-Mail:
[email protected] xMercator Research Institute on Global Commons and Climate Change. E-Mail:
[email protected] {(Corresponding author) Technical University of Berlin and Mercator Research Insti- tute on Global Commons and Climate Change. Torgauer Str. 12-15, D-10829 Berlin, E-Mail:
[email protected], Phone: +49-(0)30-3385537-220 1 1 INTRODUCTION 2 1 Introduction Rent taxation may become a more important source of revenue in the future due to potentially low growth rates and increased inequality in wealth in many developed economies (Piketty and Zucman, 2014; Demailly et al., 2013), concerns about international tax competition (Wilson, 1986; Zodrow and Mieszkowski, 1986; Zodrow, 2010), and growing demand for natural resources (IEA, 2013).