The Effects of Land Value Taxation in a Computable General Equilibrium Model

The paper reports on the application to land taxation, of the RELU-TRAN model, a spatially detailed general equilibrium model of a regional economy that treats labor and building markets, production of goods and services and real estate development. The model is used to investigate the efficiency gains that can be obtained by switching from the conventional ad-valorem property tax (CPT) to a uniform ad-valorem land tax (ULT) on residual imputed land value. The ULT is not a perfectly neutral tax but it has the advantage that it is relatively easily implementable and the fact that it is proportional to imputed land value, makes the ULT fair and defensible. The simulations are done by using the Los Angeles version of RELU-TRAN, calibrated for the year 2000. Three types of tax switches are evaluated. In the first, the CPT revenue is fully replaced by the ULT revenue and higher levels of the ULT are examined. In the second and third simulations the ULT is used in place of the CPT. In the second, 10% of the revenue from the combined Federal and State income tax is replaced by the ULT and in the third, 10% of the sales tax revenue is replaced by the ULT. Except for the third simulation, all the others show that the switch to the ULT does increase total welfare calculated as the sum of an approximate measure of consumer surplus, total tax revenues from all tax bases and aggregate change in the value of real estate (the only source of non-zero producer surplus in the model).

Keywords: land value taxation, sales tax, property tax, income tax, CGE models,