|Wealth and Want|
|... because democracy alone is not enough to produce widely shared prosperity.|
|Home||Essential Documents||Themes||All Documents||Authors||Glossary||Links||Contact Us|
Efficiency of Land Value Taxation
There are many good reasons for choosing to use a tax on land value. Tax efficiency is one of them.
Nic Tideman: The Case for 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. ...
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. ...
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. ...
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. ...
But before developing any of these arguments, I must discuss what land is. ...
The simple efficiency argument for taxing land
A tax creates a difference, a ‘wedge’, between the price that a buyer pays and the price that the seller receives. Sometimes the wedge generated by a tax is enough to inhibit a transaction that would otherwise occur. If the tax that must be paid on a transaction is greater than the gains from trade that would accrue in the absence of a tax, then the tax precludes any mutually advantageous trade. Thus taxes often reduce economic efficiency. ...
Taxing Land is Better Than Neutral
The analysis above explained how a tax on land can be ‘neutral’, that is, how such a tax can have no excess burden. In fact, taxing land is better than neutral; it improves economic efficiency compared to the no-tax situation. This section explains how.
First, a land tax can be used to take account of positive and negative externalities associated with land use. The typical example of a negative externality is pollution. ...
The last way in which a tax on land can be better than neutral is that it can reduce inefficiency associated with land speculation. If everyone had the same view as to what the future held, then there would be no possibility of making speculative gains. But people differ in their views about the future, creating opportunities for people to engage in speculations that they believe will be profitable. For speculations in widely traded standardized commodities, it is not necessary to own the commodity to speculate; one can speculate through futures contracts. With land however, while there are some rudimentary futures contracts, these are available in only a few places and do not reflect the individual variations in land values that arise because of land’s locational fixity. Therefore most of the speculations that people might wish to make with respect to land require that the speculators own land for the duration of the speculation.
In theory, land speculation can either improve or worsen economic efficiency. The way that land speculation can improve efficiency is by preventing the premature development of land at suboptimal intensity. ...
The way that land speculation can worsen economic efficiency is by giving land the greatest value to those who make the most foolish overestimates of the rate at which it will rise in value. The result is that much land is owned by people who have paid more for it than can ever be recovered from its use. This is an example of a phenomenon that economists call ‘the winner’s curse’. ... Read the whole article
Nic Tideman: The Case for Site Value Rating
The Social Justice of Site Value Rating
The Efficiency of Site Value Rating
How Valuations would be Made
Both for reasons of social justice and for reasons of economic efficiency, site value rating deserves a continued place in the programme of the Liberal Party.
The case for site value rating in terms of social justice is founded on two understandings: first, that the value of land in the absence of economic development is the common heritage of humanity, and second, that increases in the rental value of land arising from economic development and government expenditures should be collected by governments to finance those activities. What is meant by "land" is the unimproved value of sites and the value of extractable natural resources such as North Sea oil.
While there may someday be institutions capable of implementing a recognition of land as the heritage of all humanity on a worldwide basis, in the absence of such institutions each nation should implement a recognition that land within its boundaries is the common heritage of its citizens. This is accomplished not by making the nation a gigantic Common or by instituting government management of all land, but rather by requiring all persons and corporations that are granted the use of land to pay a fee or tax equal to what the rental value of the land they control would be if it were in an unimproved condition.
The case for site value rating in terms of economic efficiency is founded on the fact that a tax on resources that are not produced by human effort is one of the few sources of government revenue that does not reduce incentives for people to be productive. Two other revenue sources that have this virtue are taxes on other government-granted privileges such as exclusive use of radio frequencies and taxes on activities with harmful consequences, such as polluting the air. An economy will be more efficient if revenue sources that do not diminish productivity are employed to the greatest possible extent before any use is made of taxes that impede productivity.
What makes a tax efficient is that the amount of tax that is due cannot be reduced by reducing productive activities. When incomes are taxed, people can reduce the amount of taxes owed by working less. They do so, and the productivity of the economy falls. When houses are taxed, people can reduce the amount of taxes owed by building fewer house and smaller houses. They do so, and the housing shortage worsens. But when the unimproved value of land is taxed, there is no resulting diminution in the quantity of land. Thus taxes can be levied on land without diminishing the productivity of an economy. And shifting taxes from other, destructive bases to land will improve the productivity of an economy.
Subsequent sections explain in more detail these social justice and efficiency arguments for site value rating, describe procedures for implementing such a tax system, and explain why a variety of potential objections are without merit. ...
The Efficiency of Site Value Rating
Where justice requires that the value generated by land be shared equally among citizens, efficiency requires that land be managed by persons, individually or in firms, who receive the benefits and bear the losses of the management decisions that they make. Thus efficiency requires secure private titles to land. But secure private titles are consistent with requiring title holders to pay the rental value of land to the public treasury on an annual basis. That is, secure private titles are consistent with site value rating. Site value rating is economically efficient because it is not, like other taxes, a public appropriation of a part of what is produced, but rather social collection of the value in alternative activities of naturally or socially generated resources that are appropriated by individuals. Site value is not produced by the owners of sites. It is what is there before they begin to use sites.
Site value rating embodies the
principle that people are allowed
to keep what they produce and must pay annually for the value of the
naturally occurring and socially created resources they use. This
principle can be extended to take account of individual actions that
have noticeable effects on the rental value of land surrounding that
which individuals use themselves. When land is used in such a way as
to raise the rental value of surrounding land, as by providing
parking near a commercial center or by providing improvements that
are beautiful to see, the person who creates that value should
receive it. Correspondingly, when people use land in such a way as to
lower the value of surrounding land, by generating noise, noxious
smells, air pollution, or unsightly views, they should be charged
according to the reduction in the rental value of the surrounding
land that results from their activity. The opportunity to be paid for
adding to the value of surrounding land will generally make land more
valuable. And the requirement to pay for harmful consequences of land
use will tend to inhibit such uses of land. ... Read
the whole article
Bill Batt: Painless Taxation
Fred Foldvary: The Rent, the Whole Rent, and Nothing but the Rent
If we regard human beings as having equal moral worth, then it is morally wrong for some to be masters and others slaves. Each person therefore has proper moral ownership of his labor and wage. Such self-ownership does not extend to land, but people may properly have individual rights to possess land, since this is necessary for the application of labor, and it is efficient for land to be under private title and control.
But it is not necessary for efficiency for the pure land rent to belong to the individual title holder. Economists use the term "economic rent" for payments beyond what is needed to put a factor of production to efficient use. Land rent is economic rent, since the land is already there, and for real estate, the amount of land within some boundary line is fixed. So when rent is used for the public finances, it does not reduce the quantity of land. The rent will not be passed on to the tenant, since the payment of the rent to a community does not change the supply or demand for land.
The use of rent for public revenues therefore has no excess burden, no burden on society or the economy. Taxes on income, goods, and transactions do have an excess burden, since by raising the price and reducing the quantity of goods, resources do not get allocated to where the people most want them. Taxes on labor and goods raise prices, while rent-based payments do not affect the rent, and they lower the price of land rather than raise it.
Rent is therefore the ideal source of general public and community revenue. Tax reform should therefore shift to rent as the primary source of general funds. Pollution charges can supplement the rent, and indeed can be considered a rental charge for using and abusing the atmosphere, land, soil, and other forms of land. There could also be user fees for services specific to users, fines for violating traffic rules, and profits from enterprises.
The economic rent from minerals, water, and oil would be natural resource royalties that could be paid by bidding for the rights to extract, from payments based on the amount of mining, and the profits from the operations, depending on the circumstances. Read the whole article
Nic Tideman: Applications of Land Value Taxation to Problems of Environmental Protection, Congestion, Efficient Resource Use, Population, and Economic Growth
I. Justifications of Land Value Taxation
Land value taxation is sometimes justified on the ground that, unlike almost all other sources of public revenue, a tax on land value does not impose an excess burden on an economy. This argument can be found in the writings of the Physiocrats, Adam Smith, David Ricardo, and numerous modern writers. It is based on the fact that, with a properly administered tax on land value (unlike other taxes), it is not possible for a person to lower the tax that is due by being unproductive.
If people were concerned only with efficiency, this would be a fine reason to use land value taxation. But people are also concerned with issues of justice, or fairness. And so the question arises of whether taxing land values is fair. The fairness of taxing land values is generally defended on the basis of the postulate that natural opportunities are everyone's common heritage; collecting the value of exclusive use of these opportunities and using the proceeds for public purposes is a way of sharing the value of these opportunities while retaining the efficiency of private control of resources. ... Read the entire article
Bill Batt: The Merits of Site Value Taxation
... Tax efficiency is much like tax neutrality, and measures how much shifting of behavior it imposes, resulting in what is called "excess burden," or "deadweight loss" on the economy. Tax economists usually hold that the best taxes are those that are shifted little if at all. Because the elasticities (a technical word for the slope of supply and demand curves) of each differ, a tax on items that have little or zero elasticity is the best way of assuring that taxes are not shifted. Zero elasticity is another way of saying fixed supply, such as, for example, land.14
14 Hence Will Rogers advised people to "Buy land, because they ain't makin' any more of it."
Bill Batt: How Our Towns Got That Way (1996 speech)
There were many arguments to be made for the classical tradition, the result of which would be to rely upon payment of rent of land according to its value to society. George recognized that land value is largely a function of how society has elected to invest in any general neighborhood; there is no argument for any one titleholder to reap the reward of what others have invested. Gaffney points out that, from the standpoint of economic theory, the framework had the following virtues:
Those economists who today still persistently hold to the view that there is something special about land that make it unwise to treat as a form of capital are known as Georgists. They represent a small minority of the economics profession, but, little known as they are, they are among its most esteemed members. ...
Tax efficiency is much like
tax neutrality, and is the
measure of how much shifting of behavior it imposes, resulting in
what is called "excess burden," or "deadweight loss" on the economy.
Tax economists usually hold that the best taxes are those that are
shifted little if at all. Using a tax base that has little or zero
elasticity is the best way of assuring that taxes are not shifted.
Zero elasticity is another way of saying fixed supply, as, earlier
noted, land is.... read the whole article
Bill Batt: The Compatibility of Georgist Economics and Ecological Economics
Because a tax on land is essentially a flat rate percent levied on a base of assessed full market value, it is simple and easy for people to understand. On account of that attribute, a tax on land value is easily visible and is perceived by the public to be fair. Finally, now that applied computer technology can be used to accurately assess the value of land whether or not it is improved, one of the last traditional objections to the administrative feasibility to land value taxation has been allayed. All this enhances the legitimacy of government. The tax is therefore not simply efficient from the narrow measure of tax efficiency as described above. It is efficient also in the broader sense, by its ability to foster sounder government performance, better community relations, more livable community configurations, and enhanced social productivity. It is not just from the standpoint of tax theory alone that a tax on land should be evaluated. ...
The Georgist main agenda, as earlier noted, is economic justice. If one searches the term “economic justice” online, the first site that will appear is the Georgist website, progress.org. The starting point is that people are entitled to what they earn, but only to what they earn.50 The fruits of the commons generated in rent might also be distributed to citizens equally if not used to finance the general services of government. In practice this means the abolition of those taxes that represent an unjust capture of one’s personal property — taxes such as income, sales, and other nuisance taxes. It accepts, to be sure, the need to collect user fees, Pigouvian taxes, and perhaps sumptuary (sin) taxes. It argues aggressively for the collection of economic rent in support of government and, for any remaining surplus, its distribution as a citizens’ dividend. The justification for the collection of rent has several grounds:
The result of these factors leads to a greater equality in the income of each person. ... read the whole article
Frank Stilwell and Kirrily Jordan: The Political Economy of Land: Putting Henry George in His Place
to email this page to a friend: right click, choose "send"
Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper