The mechanism by which the expectation of future land price is formed has not been treated appropriately in the literature, in spite of its importance in the analysis of land taxation. This paper presents a model of intertemporal allocation of land in which expected price appears as anendogenous variable. The solution is obtained by the use of the rational expectation hypothesis. It is shown that under some plausible assumptions, intertemporal allocation of land realized by market is socially optimal.
The effects of the following taxes are examined: a tax on the value of vacant land, a tax on the value of land in active uses, a general tax on the value of land (a property tax), and a capital gain tax. It is shown that the introduction of any of these taxes (or a rise in the tax rate) reduces the amount of land reserved for future uses.
If market fails to achieve the optimal allocation due, for example, to a bias in the speculators' expectation, it is both necessary and possible to utilize any of these taxes to achieve the optimal allocation. The tax rates appropriate for this purpose are calculated.