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Pure rent taxation and allocation of capital in a two-sector open economy: A long-run analysis

Alberto Petrucci

Economic Modelling, 2020, vol. 91, issue C, 421-427

Abstract: In this paper, the long-run incidence of a tax on pure rent is analyzed in an OLG two-sector small open economy, in which one sector produces a capital good and one sector a consumer good. Contrary to what is obtained in a one-sector closed economy, a land rent tax does not necessarily foster nonhumam wealth accumulation and capital formation. The accommodating scheme for the government budget plays a crucial role for the effects of pure rent taxation. A rent tax stimulates nonhuman wealth if distortionary taxes on wealth or on income from nonland inputs are alleviated. The mechanism spurring capital formation is brought into action, instead, only when the rent tax is matched by a fall in capital taxation or, if the capital sector is capital intensive, by an increase in government spending on the capital good.

Keywords: Land rent tax; Capital good; Consumer good; OLG; Wealth accumulation (search for similar items in EconPapers)
JEL-codes: E62 H22 J22 O41 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:91:y:2020:i:c:p:421-427

DOI: 10.1016/j.econmod.2020.05.020

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