and critical comment. The views expressed in the papers are solely the responsibility of the authors. The Incidence of a Tax on Pure Rent in a Small Open Economy ∗

This paper analyzes the effects of a land rent tax on capital forma-tion and foreign investment in a life-cycle small open economy with endogenous labor-leisure choices. The consequences of land taxation critically depend on how the tax proceeds are used by the govern-ment. A land tax depresses capital formation, crowds out foreign investment and increases national wealth and consumption when the land tax revenues are distributed as lump-sum payments. If the pro-ceeds from land taxation are used to finance unproductive government expenditure, the land tax will be neutral in its effects on the capital ∗This paper was written while I was visiting the Economics Department of Stanford University. I am grateful to Ned Phelps for stimulating discussions, Giancarlo Marini and Alberto Pozzolo for comments, and one Editor of the Journal, Robin Boadway, for his encouragement. Special thanks go to an anonymous referee for valuable comments. Financial support from CNR is gratefully acknowledged. † Università del Molise and LUISS G. Carli. 1 stock, nonhuman wealth and labor. When the tax revenues are used to reduce labor taxes, the land rent tax spurs nonhuman wealth accu-mulation and ambiguously affects the capital stock and labor