Wealth and Want
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Land and Public Finance

As a young person, I couldn't imagine a drearier topic than public finance. But I've come to realize that how we finance our public spending is of vital importance. If we tax the wrong things, we throw a wet blanket on our economy and we steal from those who work the fruits of their labor. Equally important, if we fail to tax the right things, we allow some of us to enrich themselves unjustly at the expense of others.

A significant portion of our extremely skewed distribution of income and our even more skewed distribution of wealth can be attributed to these two failures.

And yet, when Americans discuss tax "reform," it is usually either (a) a discussion of income tax brackets or (b) a discussion of so-called "double taxation." Occasionally it veers into a suggestion that the poor aren't paying their "fair share."

There has been talk about budgets being moral documents. Usually the reference is to the spending side of the budget, but it is equally true of the revenue side of the budget: there are things we shouldn't tax at all, or should only tax when we've already taxed those things that should be taxed, and, conversely, there are things that we must tax, if we want a just society. But few of our college economics curricula even mention this.

Nic Tideman: Using Tax Policy to Promote Urban Growth

The efficiency that is entailed in using the rent of land to finance public activities applies to certain other sources of public revenue as well:
1. Charges on any publicly granted privileges, such as the exclusive right to use a portion of the frequency spectrum for radio and TV broadcasts.

2. Payments for extractions of natural resources. Such payments should be set at levels that yield the greatest possible revenue of the resources, in present value terms.

3. Taxes on pollution. Every individual or enterprise that pollutes the air, water or ground should be required to pay the estimated cost of the pollution it generates. The effect of pollution on the rental value of surrounding land is one possible measure of its cost.

4. Taxes on any other activities that reduce the rental value of surrounding land.

5. Taxes on activities such as driving or parking in crowded streets, where one person's activities reduce opportunities for others. The administration of such charges may be so expensive that it is not worth implementing them, but if the administration can be handled sufficiently cheaply, these charges are efficient to the extent that they only charge people for costs imposed on others.

6. Taxes on activities, such as the consumption of alcohol, which impose costs on others (e.g., higher traffic fatalities).

7. Charges for local public services, such as water, electricity, sewer connections, etc. It is not generally desirable to make every service completely self-financing. Rather, what is desirable is that each user be required to pay the marginal cost of the service he receives. Extensions of service networks are efficient when they increase publicly collected land rents by enough to cover the costs not covered by user charges.

8. A self-assessed tax on permanent improvements to land, at a very low rate (perhaps 1/10 of 1% per year). With a self-assessed tax, each possessor of land names a price at which he would be willing to part with the land he possesses (and any immovable improvements). He pays a tax proportional to the value he names, and anyone who wishes to may take over possession at that price. The value of such a tax is that it makes it much easier to assemble land for redevelopment, and to identify appropriate compensation when land is taken for public purposes.

All of the above taxes are positively beneficial and should be collected even if the revenue is not needed for public purposes. Any excess can be returned to the population on an equal per capita basis. If these attractive sources of revenue do not suffice to finance necessary public expenditures, then the least damaging additional tax would probably be a "poll tax," a uniform charge on all residents. If some residents are regarded to be incapable of paying such a tax, then the next most efficient tax is a proportional tax on income up to some specified amount. Then there is no disincentive effect for all persons who reach the tax limit. The next most efficient tax is a proportional tax on all income.

It is important not to tax the profits of corporations. Capital moves from where it is taxed to where it is not, until the same rate of return is earned everywhere. If the city refrains from taxing corporations they will invest more...  Read the whole article


Nic Tideman: Land Taxation and Efficient Land Speculation

The optimal timing of development is an important allocative function that can be either enhanced or degraded by the impact of land taxes on land speculation. This paper discusses four types of taxes on land:

  • taxes on the rental value of land,
  • taxes on the sale value of land,
  • taxes on realized income from land, and
  • taxes on realized gains from the sale of land.

All four taxes reduce incentives for speculation in land, which is generally beneficial. The third and fourth produce distortions with respect to incentives to develop land, while the first and second do not. All four taxes have some beneficial effect of mitigating imperfections in capital markets. All permit reduction or elimination of taxes with significant dead-weight losses, such as those on improvements. ... read the whole article



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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper