Land Taxation, Lobbies and Technological Change: Internalizing environmental externalities

Abstract: We study the effect of a land tax on agricultural land on the allocation of land between agriculture and forestry, and on damages from agriculture. Land is used in the production of agricultural and forestry goods, and we assume that two lobbies attempt to influence the government while it sets the tax. We find that in social optimum the government always imposes a land tax on agriculture. In political optimum, the strength of the agricultural lobby determines whether land will be taxed or subsidized. The strength of the agricultural lobby further determines whether the tax rate falls (a strong lobby and a government that is susceptible to lobbying) or rises (a weak lobby or a government that is not susceptible to lobbying) in technological progress in agriculture. Finally, the perceived total damages from agriculture, which determine the tax rate, are shown to be lower than would be socially optimal if the government is susceptible to lobbying and they fall even further in agricultural technology.