A long-run spatial general equilibrium model of an urban area is used to examine the effects of a change from a tax system in which land rents and capital values are not differentiated for tax purposes to one in which land rents are much more heavily taxed than are capital values. The model is parameterized to fit a particular metropolitan area and solved on a computer. It is estimated that, for the most realistic parameterization considered, the welfare gain in making such a policy change can be as high as 6.6 percent of tax revenues raised. Further gains can be obtained by appropriately discriminating between residential and business property. Structural changes included lower land rents and housing prices, higher wages, and a reduced size of the urban area. Sensitivity analysis revealed the results to be fairly robust.
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Joseph A. DiMasi (1987) studied this question.