Abstract
It is well known that land does not prevent dynamic inefficiency (a rate of capital accumulation higher than the Golden rule level, or, a return to capital, MPK, less than the economy’s growth rate, g) if land is subject to a transaction tax. This paper attempts to evaluate quantitatively the potency of this argument, both positively as well as normatively. Using a heterogenous-agent, general equilibrium overlapping generations growth model calibrated to the U.S. economy, the main quantitative finding is that a 6.18% tax on the sale of land produces balanced growth paths that exhibit dynamic inefficiency. When an unfunded social security system is introduced, the economy moves toward dynamic efficiency, welfare improves, and the optimal replacement rate is 70%.