Counter-arguments against Taxing Land

I. Taxing Land as Ethics and Efficiency
II. What is Land?
III. The simple efficiency argument for taxing land
IV. Taxing Land is Better Than Neutral
V. Measuring the Economic Gains from Shifting Taxes to Land
VI. The Ethical Case for Taxing Land
VII. Answer to Arguments against Taxing Land

There is a case for taxing land based on ethical principles and a case for taxing land based on efficiency principles. As a matter of logic, these two cases are separate. Ethical conclusions follow from ethical premises and efficiency conclusions from efficiency principles. However, it is natural for human minds to conflate the two cases. It is easier to believe that something is good if one knows that it is efficient, and it is easier to see that something is efficient if one believes that it is good. Therefore it is important for a discussion of land taxation to address both question of efficiency and questions of ethics.

This monograph will first address the efficiency case for taxing land, because that is the less controversial case. The efficiency case for taxing land has two main parts. ...

To estimate the magnitudes of the impacts that additional taxes on land would have on an economy, one must have a model of the economy. I report on estimates of the magnitudes of impacts on the U.S. economy of shifting taxes to land, based on a mathematical model that is outlined in the Appendix.

The ethical case for taxing land is based on two ethical premises: ...

The ethical case for taxing land ends with a discussion of the reasons why recognition of the equal rights of all to land may be essential for world peace.

After developing the efficiency argument and the ethical argument for taxing land, I consider a variety of counter-arguments that have been offered against taxing land. For a given level of other taxes, a rise in the rate at which land is taxed causes a fall in the selling price of land. It is sometimes argued that only modest taxes on land are therefore feasible, because as the rate of taxation on land increases and the selling price of land falls, market transactions become increasingly less reliable as indicators of the value of land. The answer to this argument is that collecting a large percentage of the rental value of land through taxes will require new assessment methods based on observing the rental price of land rather than the selling price. I describe how such methods can be devised.

Another basis on which it is argued that greatly increased taxes on land are infeasible is that if land values were to fall precipitously, the financial system would collapse. It is true that many properties have mortgages that would exceed the value of the property if land taxes were increased significantly. This makes it necessary to think carefully about who should absorb the decline in aggregate asset value that would accompany a significant shift toward taxing land. Nevertheless, it is possible to plan for a restructured financial system that would have shed its dependence on land as collateral.

Apart from questions of feasibility, it is sometimes argued that erosion of land values from taxing land would harm economic efficiency, because it would reduce opportunities for entrepreneurs to use land as collateral for loans to finance their ideas. The answer to this argument is that the use of land as collateral encourages banks to lend mindlessly to anyone who has collateral, rather than work to find good lending opportunities. Thus the disappearance of land as collateral would actually improve the efficiency with which financial resources are invested.

Another ethical argument that is made against taxing land is that the return to unusual ability is “rent” just as the return to land is rent. This argument represents a refusal to make a distinction that begs to be made. The first principle of economic justice is that people have rights to themselves. While some scholars have asserted that people have rights to themselves but not to their talents, this is nonsensical. Without talents, there is no self. Talents are fundamentally different from land. The equal rights of all to land can consistently be asserted while still asserting that every person has right to the use of his or her talents.

But before developing any of these arguments, I must discuss what land is.

Answer to Arguments against Taxing Land

One argument that is sometimes made against high taxes on land is that as land taxes rise, the selling price of land falls, eliminating the base of the tax, so that only modest taxes on land are feasible. As a theoretical matter, this argument is completely false. This is easier to see if you recognize that a tax on land incorporates a time dimension that is arbitrary. The tax is prescribed as some percentage of the value of land per year, but it could just as well be described as a percentage of the value per month, per day or per hour. For land that is not rising in value, the percentage of the rental value of the land that is taken by an accurately assessed tax of t % per unit of time is t/(t + i), where i is the interest rate per unit of time. As the unit of time approaches zero, the interest rate per unit of time approaches zero, so that a tax of t % of value per shrinking unit of time approaches a tax that collects all the rent of land, in the limit as the unit of time approaches 0.

While it is theoretically possible to capture fractions of rent approaching 100% by taxes on the value of land, there are practical difficulties in doing so. The selling price of unimproved land will be the present value of the part of rent that buyers and sellers expect to be left after taxes. Therefore, if taxes collect fractions of rent that approach 100%, the selling price of land will be dominated by the errors that are expected in the assessment process. Therefore a tax system that seeks to collect almost all of the rental value of land must use some assessment system other than observing market prices of land. There are several techniques that may be useful.

First, if nearly all of the rental value of land is collected in taxes, the selling price of land will be nearly zero. Assessors can purchase parcels of land with obsolescent improvements, demolish the improvements, and offer the land for sale at auction, under a rule that the bid will be the tax per year for, say, the first three years, and after that the tax will be determined by the assessor’s estimate of the rental value of the land, as determined by similar auctions and other processes.

If assessors were conducting such auctions regularly, they could hold assessment contests in which the contestants competed by offering land value functions that would be evaluated by the accuracy with which they predicted auction results. The contestant who provided the function with the smallest average error would be given a prize, and the winning function would be used to assess the value of land that had not been auctioned.

Another thing that assessors can do is to develop options markets in land. That is, they can enter into contracts with potential users of land to supply land with specified characteristics for specified tax rates. For example, someone who was interested in opening a restaurant might offer £3,000 per month for a parcel of 2,000 square feet within a quarter of a mile of the center of town. Such offers would set lower limits on the rental value of land. With such devices, land can be assessed for tax purposes even if the selling price of land is close to zero.

It is sometimes suggested that collecting all of the rental value of land is not feasible because it would bankrupt the financial system, which uses land as collateral for loans. The use of land as collateral for loans is a fact that would need to be weighed carefully in working out a feasible transition to a system of collecting nearly all rent publicly, but it does not make public collection of rent impossible. Public collection of the rental value of land, and the consequent elimination of other taxes, would represent redistribution from the old to the young and unborn. It is equivalent to saying that each person enters the world with a more complete right to himself or herself (to the extent the income and value added taxes are reduced) and with a right to an equal share of the gifts of nature. If we are to acknowledge that every newborn person does have such rights, we must reduce the wealth of previously born persons, corresponding to the expectation of collecting the shares of rent of the newborns. The question that then arises is, Who should pay?

This can be interpreted as a question of who should pay the cost of an accident. We have had a moral accident. We have been living under the delusion that it is possible for a person to have a respectable claim to a disproportionate share of the gifts of nature. This is akin to the delusion under which humanity long lived, that it was possible for one human being to own another. In recovering from such a delusion, we need to disappoint some people. If not the slave owners, then the people who compensate the slave owners. If not the land owners, then the people who compensate the land owners. I propose that the cost be divided among land owners, shareholders in financial institutions that made loans with land as collateral, and owners of wealth in general.

As a first approximation, people would continue to hold title to the land to which they now hold title, and would continue to owe whatever money they now owe. But compensation could be sought on a case-by-case basis, by individuals who stood to bear the costs of the moral accident disproportionately and did not have substantial assets. Any financial institutional whose continued existence was threatened by the transition would be bailed out in exchange for a significant fraction of its equity. The costs of the compensation would be paid by a capital levy.

Morality requires that we acknowledge the equal rights of all to the gifts of nature. Doing so is feasible and promotes efficiency as well. Read the whole article

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