An analysis of constrained property taxes in a simple optimal tax model

We analyze an economy in which desirable land is inelastically supplied. A single government sets taxes on labor income, real property, and other commodities subject to the constraint that pure land rents and elastically supplied land development and structures are taxed at a common rate. The optimal property tax rate rises with the ratio of pure rents to structure and land development costs. Taxing non-housing commodities at a common rate is not optimal, even when their demand elasticities with respect to wages are identical.