Question

The 19th century American economist Henry George argued that the government should levy a sizable tax on land, the supply of which he took to be completely inelastic. a. George believed that economic growth increased the demand for land and made rich landowners richer at the expense of the tenants, who make up the demand side of the market for land. Explain this argument by using a supply and deinand diagram. (5 pts) b. Who shoulders the burden of a tax on land - the land owners or the tenants? (5 pts) c. is the deadweight loss of this tax large or small? (5 pts) d. Many cities today levy taxes on the value of real estate. Why might the above analysis of George's land tax not apply to this modern tax on real estate? (5 pts)

Answer 1

Price of Land Quantity of Land Qi Q2

1. As evident from the first diagram, when land purchasers face an inelastic supply for land, an increase in the demand leads to a more than proportionate increase in price.

As demand shifts due to economic growth. Quantity demanded increases from Q₁ to Q₂, and price increases from P₁ to P_2, with the proportionate change in price much higher than the proportionate change in Quantity. This results in higher profit realization by land-owners at the expense of consumers.

2. 
   Price of Land Initial CS Initial PS Government Tax Revenue Deadweight Loss Quantity of Land 0 Q2 Q1
   Now, as evident from the second picture that dead-weight loss is minimum if taxation is levied on the agent with less elasticity. Thus, tax will be levied on the owner.

3. Clearly, dead-weight loss will be minimum if taxation is levied on the agent with less elasticity. Thus, it is small in this case. Had it been levied on the consumer, a huge deadweight loss would have occured.

4. The modern tax on real estate is different from the one discussed. In the modern world, with increasing population pressure, land prices have surged, and there is a dearth of land, compared to what it was two centuries ago. Thus, demand has become more inelastic that what it used to be.