Optimal Wealth Taxation When Wealth Is More Than Just Capital

We analyze the welfare implications of taxes on wealth, distinguishing between capital and land.We develop an overlapping generations model with heterogeneous agents and calibrate it to OECD data. We find that land rent taxes induce portfolio effects. Savings are shifted away from fixed land towards reproducible capital, enhancing GDP and reducing wealth inequality. Assuming a low pure rate of time preference, this can also raise social welfare, except under very low inequality aversion. By contrast, capital should be taxed only if inequality aversion is very high. We vary inequality aversion by considering three normative views: the Kaldor-Hicks criterion, prioritarian welfare functions and Rawlsian welfare functions.