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
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
it veers into a suggestion that the poor aren't paying their "fair
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
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
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
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
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