Taxation of Economic Rents

Summary

This 2020 survey in the Journal of Economic Surveys (Vol. 34, No. 2, pp. 398–423) by Gregor Schwerhoff (MCC Berlin), Ottmar Edenhofer (PIK/MCC), and Marc Fleurbaey (then Princeton) is the standard modern review of the neoclassical literature on taxing economic rent. Its central question: rents have long been identified as an efficient tax base, rent income is concentrated and growing — so why does rent taxation remain "a marginal topic in research and policy making"? The answer the survey develops is that "rent" covers seven distinct phenomena, most of which should be regulated away or preserved as incentives rather than taxed. In the authors' words: "What remains for taxation are land rents, one of the few true scarcity rents." The same three authors later formalized the equity side in a 2022 IMF working paper, Equity and Efficiency Effects of Land Value Taxation.

The article is open access (CC-BY); it was published online in 2019 and appears in the April 2020 issue.

The Seven-Type Rent Typology

Starting from the public-economics definition of rent — payments to a good in excess of the minimum needed to have it supplied (following Wessel 1967 and Varian 2006, generalized to cover demand-side and monopsony rents) — the survey classifies rents by the government intervention each requires:

Three of the seven (political rents, market power, natural monopolies) are market-power phenomena for competition policy — the terrain of rent-seeking analysis. Investment rents are quasi-rents that are the incentive, so taxing them away would destroy the investment they reward. Only regulation rents and true scarcity rents remain as efficient tax bases.

Which Rents Survive the Empirical Screen

Applying the typology to the major rent-generating sectors, the survey's most striking finding concerns nonrenewable resources: empirically, they are not scarce in the economic sense. Tests of the Hotelling model are typically rejected; the survey cites Hart and Spiro (2011), who find that scarcity rents "seem to have been marginal or non-existent historically," and Hamilton (2009) on oil, where scarcity rent made a negligible contribution to price. Rents in the resource sector are instead market-power and political rents — so the efficient response to resource rents is competition policy plus Pigouvian environmental pricing, not rent taxation as such. Renewable-resource rents (fisheries, forests, the atmosphere's disposal space) are mostly regulation rents, often already captured through quota sales or emission certificates; Swiss hydropower is flagged as a rare genuine scarcity rent. Financial-sector rents are classified as political and market-power rents — including a land–credit feedback loop (Ryan-Collins et al. 2017; Turner 2017) by which the financial sector captures a share of land rents.

Land is where scarcity and regulation rents empirically concentrate: conservation policy withdraws land from use (a regulation rent), well-located urban and peri-urban land is genuinely scarce (a scarcity rent), and a third slice — gains from land-augmenting technical change and nearby infrastructure — is an investment rent that a well-designed tax should leave with the investor. Citing Caselli and Feyrer (2007), the survey puts cropland, pasture, and urban land at 11.4%, 4.5%, and 13.1% of total global wealth respectively. On the classic measurement objection, it concludes that separating land value from building value is a challenge "mastered well enough for practical purposes," via a three-step process of appraisal, land/capital separation, and netting out investment rents.

Efficiency and Equity of Land Rent Taxation

The survey then assembles the building blocks of a theory of optimal land rent taxation:

• No distortion of the tax base. Taxes on labor, capital, and consumption shrink their own base and create deadweight loss; a land value tax below 100% of the rent does not, because land is supplied inelastically. Following Fane (1984), an uncompensated land tax has a wealth effect on owners but no distortion — still the most efficient available tax.
• Sparing effect. A unit tax on land (as opposed to a value tax) deliberately pushes marginal land out of use — useful for conservation and for curbing sprawl (citing Banzhaf and Lavery 2010).
• Portfolio effect. Taxing land makes it a worse store of value, shifting household savings toward productive capital (Feldstein 1977; Edenhofer et al. 2015) — a second efficiency gain when capital is underaccumulated.
• Value capture and the Henry George Theorem. Land values capitalize nearby public investment; per the Henry George Theorem (Arnott and Stiglitz 1979), public infrastructure can be financed entirely through land value capture.
• Property rights. A land rent tax expropriates the right to the residual but leaves control rights intact — so it is compatible with the property-rights institutions that new institutional economics ties to growth.
• Financial stability. A high land rent tax would shrink land as loan collateral, winding down the land–credit spiral and, in the long run, improving bank stability (with a short-run transition risk).

On equity, the survey is more guarded than on efficiency. US Survey of Consumer Finances evidence (Bricker et al. 2017) shows land ownership rising with wealth in absolute terms but falling in relative terms — on that evidence a linear land rent tax taken alone would be regressive. The overall reform can still be progressive once revenue recycling is counted: land rent revenue can replace distortionary taxes or fund transfers targeted at low-income households, and the introduction argues land rent taxation is "very likely to be progressive" on net. It also flags intergenerational incidence (the landowning old lose retirement savings unless offset by lower labor taxes), horizontal equity (equal-wealth households with different land shares are hit differently), and developing-country design (exempt subsistence-scale holdings; use revenue for infrastructure access). The 2022 IMF follow-up develops the progressivity case formally. The conclusion revisits Skinner's 1991 question — if land taxation is so efficient, why is it so rare? — and answers that with modern mass valuation and land administration, "it may be time to reconsider using land rent taxation."

Why It Matters to the Wiki

This survey is the wiki's rent gradient in peer-reviewed form. It arrives at the Georgist ordering from inside mainstream public economics: land at the well-established core — the one large tax base that is a true scarcity rent, measurable in practice, and non-distortionary to tax — with every other rent category carrying caveats. Resource rents mostly fail the scarcity test empirically; innovation and platform profits are investment rents or market-power rents where the efficient tool is patent design and competition policy, not confiscatory taxation; financial rents are real but "not completely understood." That is precisely the honesty discipline the wiki's frontier pages (superstar firms, IP rents, FIRE sector) must carry: the survey should be cited as the authority against flattening every rent into a taxable target, as much as for the land case. Note the classification of resource rents as market-power rather than scarcity rents is this survey's reading of the empirical literature, not an uncontested consensus — resource-rent taxation retains serious academic defenders (e.g., Garnaut, whom the survey engages directly).

Bears On

• Outcome: LVT can replace capital taxes without efficiency loss — the non-distortion and portfolio-effect arguments
• Outcome: Land value tax can be progressive — supports the net-of-recycling progressivity case, while flagging that a linear tax alone could be regressive
• Concept: Economic Rent · Resource Rents · Quasi-Rent · Rent-Seeking · Land Value Tax · Henry George Theorem
• Research: Schwerhoff, Edenhofer & Fleurbaey (2022), IMF — same authors' follow-up on equity and efficiency of LVT

Sources

1. Gregor Schwerhoff, Ottmar Edenhofer & Marc Fleurbaey (2020), "Taxation of Economic Rents," Journal of Economic Surveys 34(2): 398–423. doi:10.1111/joes.12340. Open access (CC-BY). — used for the seven-type rent typology, the policy mapping by rent type, the empirical classification of resource/land/financial rents, and the efficiency and equity effects of land rent taxation; all quotations verified against the full text. PDF (PIK repository) · Publisher (Wiley, open access)
2. Gregor Schwerhoff, Ottmar Edenhofer & Marc Fleurbaey (2022), "Equity and Efficiency Effects of Land Value Taxation," IMF Working Paper WP/22/263 — used as the authors' subsequent formalization of the progressivity argument. PDF