COMPETITIVE JURISDICTIONS, CONGESTION, AND THE GEORGE,HENRY THEOREM - WHEN SHOULD PROPERTY BE TAXED INSTEAD OF LAND

Despite the apparent gains to moving from property to land taxation, nearly all local taxing authorities in the United States tax land and capital equally. If, as many studies suggest, the removal of the tax on housing capital would significantly increase welfare, why haven't local governments done so? I show that if the government service is a publicly-provided private good, taxing land and capital equally will maximize the locality's land rents and, consequently, its residents' welfare. As long as the government service has some degree of congestibility, a positive tax on capital is always optimal. While a uniform move from property to land taxation in all jurisdictions will make all jurisdictions better off, this does not imply that taxing land at a higher rate than capital in a single jurisdiction is optimal for that jurisdiction. The tax on housing capital serves as a proxy for a tax to cover the increased cost of congestion incurred by having another household enter the locality.