LVT can replace capital taxes without efficiency loss
Shifting tax from capital to land raises welfare: land taxes carry no deadweight loss while capital taxes discourage investment.
The Claim
Replacing taxes on capital with a tax on land improves economic efficiency with no offsetting loss. Because land is fixed in supply it bears zero deadweight loss, whereas taxing capital reduces investment at the margin. A revenue-neutral swap therefore raises total welfare.
The Evidence
| Source | Approach | Finding |
|---|---|---|
| Bonnet et al. (2021) | Theory + European data | Taxing land dominates taxing capital; a land tax can substitute for capital taxes without the efficiency cost |
| Schwerhoff, Edenhofer & Fleurbaey (2022), IMF WP | Optimal-taxation theory, heterogeneous households | LVT is efficient and can be made progressive — efficiency and equity are not in tension |
This rests on the oldest result in the field: a tax on a factor in perfectly inelastic supply causes no change in quantity, hence no deadweight loss — a point on which economists from Henry George to Milton Friedman (who called LVT the "least bad tax") agree.
Strength of Evidence
Strong — grounded in well-established theory and confirmed by independent calibrated models.
See Also
Sources
- Bonnet, Chapelle, Trannoy & Wasmer (2021), European Economic Review — wiki summary · PDF
- Schwerhoff, Edenhofer & Fleurbaey (2022), "Equity and Efficiency Effects of Land Value Taxation," IMF Working Paper. PDF