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Financing Public Capital When Rents Are Back: A Macroeconomic Henry George Theorem

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By taxing rents, governments can avoid a trade-off between productivity-enhancing public investment and efficiency losses from raising funds. However, it is unclear whether the rents present in a growing economy are sufficient to finance the socially optimal investment. We prove that the social optimum can be attained if the income share from a fixed factor, such as land, exceeds the public investment requirement. We thus translate the Henry George Theorem from urban economics to neoclassical and endogenous growth settings: here, the socially optimal land rent tax rate is below 100%. Our finding may address the underfunding of national infrastructure investments.
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Keywords: land rent, public investment, infrastructure, Henry George Theorem, optimal growth

Appeared or available online: 25 June 2018

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