Beginning in 2013, a local government in Georgia is instituting a tax on owners of land at a flat rate of $100 per acre every year.

Question

i. Explain who gains and loses from the tax. Specifically comment on what happens to the value of the land, who ends up bearing the burden of the tax.
ii. If in 100 years the local government decides to repeal the tax, who will gain and who will lose as a result of the repeal? Explain.

Answer 1

i. As long as the market believes that the tax will go on in perpetuity, then the value of an acre of land will fall by $110/r (i.e. the entire burden of the tax falls on land owners) because supply is perfectly inelastic. Consumers of land are not hurt by the tax since the new price fully compensates them for the future tax payments and also because there is no reduction in available land since supply is perfectly inelastic. The government gains a net present value of $100/r in tax revenue per acre of land.
ii. If the government were to repeal the land tax, original owners of land who still own their land simply regain the value that was originally lost because of the tax. The government loses its tax revenue. The parties that benefit are those who bought the land below value because of the tax liability,. but now are not forced to pay the tax for perpetuity.