Rent taxation and its intertemporal welfare effects in a small open economy



Previous literature concludes that replacing wage taxation by taxes on a fixed factor or its rents benefits future generations. However, the effects of such steady-state gains on the transition generations have been left open. In this paper, we show that taxation of rents may also increase utility of the current generation provided tax revenues are earmarked to reduce wage taxes. In particular, a shift in the tax mix may yield an intergenerational Pareto-improvement when the initially prevailing tax mix is sufficiently skewed toward wage taxation.


Rent taxes Capitalization Transitional dynamics Labor supply Asset prices 

JEL Classification

H22 E62 F02 


  1. Calvo, G., Kotlikoff, L., & Rodriguez, C. (1979). The incidence of a tax on pure rent: a new (?) reason to an old answer. Journal of Political Economy, 87, 869–874. CrossRefGoogle Scholar
  2. Chamley, C., & Wright, B. (1987). Fiscal incidence in an overlapping generations model with a fixed asset. Journal of Public Economics, 32, 3–24. CrossRefGoogle Scholar
  3. Eaton, J. (1988). Foreign-owned land. American Economic Review, 78, 76–88. Google Scholar
  4. Feldstein, M. (1977). The surprising incidence of a tax on pure rent: a new answer to an old question. Journal of Political Economy, 92, 329–333. Google Scholar
  5. Gordon, R. H., & Bovenberg, A. L. (1996). Why is capital so immobile internationally? Possible explanations and implications for capital income taxation. American Economic Review, 86, 1057–1075. Google Scholar
  6. Ihori, T. (1990). Economic effects of land taxes in an inflationary economy. Journal of Public Economics, 42, 195–211. CrossRefGoogle Scholar
  7. Immervoll, H., Kleven, H., Kreiner, C. T., & Saez, E. (2007). Welfare reforms in European countries: a microsimulation analysis. Economic Journal, 117, 1–44. CrossRefGoogle Scholar
  8. Koethenbuerger, M., & Poutvaara, P. (2006). Social security reform and investment in education: Is there scope for a Pareto-improvement? Economica, 72, 299–319. CrossRefGoogle Scholar
  9. Krueger, A. B., & Meyer, B. M. (2002). Handbook of public economics : Vol. 4. Labor supply effects of social insurance (pp. 2327–2392). Amsterdam: North-Holland. Google Scholar
  10. Petrucci, A. (2006). The incidence of a tax on pure rent in a small open economy. Journal of Public Economics, 90, 921–933. CrossRefGoogle Scholar
  11. Poutvaara, P. (2003). Gerontocracy revisited: unilateral transfer to the young may benefit the middle-aged. Journal of Public Economics, 88, 161–174. CrossRefGoogle Scholar
  12. Rangel, A. (2003). Forward and backward intergenerational goods: Why is social security good for the environment? American Economic Review, 93, 813–834. CrossRefGoogle Scholar
  13. Rangel, A. (2005). How to protect future generations using tax base restrictions. American Economic Review, 95, 314–346. CrossRefGoogle Scholar
  14. Saez, E. (2002). Optimal income transfer programs: intensive versus extensive labor supply responses. Quarterly Journal of Economics, 117, 1039–1073. CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.Deparment of EconomicsUniversity of ViennaViennaAustria
  2. 2.Department of EconomicsUniversity of HelsinkiHelsinkiFinland

Personalised recommendations