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Economists have generally argued that if a land tax is administratively feasible, then to increase efficiency it should be used to the exclusion of output taxes. This article shows that underlying this policy prescription is the assumption that institutions for pooling and spreading production risks are perfect. When account is taken of the imperfections in those institutions, some use of output taxes will be Pareto superior to a pure land tax regime and may induce higher output, as well. Henry George was wrong. These results generally apply even when the land tax is indexed to regional output, and when land is farmed under sharecropping. Even in these cases, a move from a pure land tax to a mix of land and low output taxes will reduce pre-existing distortions in both consumption and production arising from the imperfection in risk markets.
