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Nic Tideman: The Case for Taxing Land
I. Taxing Land as Ethics and EfficiencyHerbert J. G. Bab: Property Tax -- Cause of Unemployment (circa 1964)
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. ...
As with negative externalities, the fact that labor and capital are not perfectly mobile means that not all of the effects of activities with positive externalities are reflected in land values. And to the extent that labor and capital are affected, negative effects are likely to be more prominent than positive effects. Consider structures. If an existing structure is efficient for the current pattern of surrounding land uses, and if new use of surrounding land raises the value of the land under the structure, then the structure can be expected to thereby become suboptimal. The pre-existing structure is generally not as intensive a use of land as would have been chosen with knowledge of the new activity. Therefore the economic life of the pre-existing structure (the time until it is efficient to demolish it) is shortened by the new activity that increases land value. Even though rent per square foot of built space rises, the rise is not enough to offset the increase in land value, which presumes the newly efficient size for a structure, thereby reducing the amount of the current return that is attributable to the existing structure and pushing the structure toward obsolescence.
A similar phenomenon occurs with respect to the personal value that people attach to locations, what might be called ‘location-specific human capital’. If all persons had equal demands for all locations, there would be no location-specific human capital. But incomes, tastes and personal histories differ, leading to differing personal values for locations. Familiarity with a location tends to lead people to attach a special value to it, a value that tends to be lost if the characteristics of the location change. Thus a change in land use that raises surrounding land values will generally reduce the location-specific human capital of the residents of that area. One example of this phenomenon occurs when a neighborhood is ‘gentrified’, and the prior residents of modest means can no longer afford to live there and must seek other housing options that are less attractive to them than the opportunities they lost. This represents a reduction in their location-specific human capital. Read the whole article
... A defect of our property tax system that is seldom mentioned is that it puts a premium on obsolescence and penalizes new housing. This is so because property taxes are ad valorem taxes. Every piece of real estate except land is subject to depreciation. Thus the owners of old and obsolete real estate will pay little in taxes, while newly constructed buildings will bear the brunt of the tax.
This characteristic of the property tax is obscured by the rising trends of land values, which in many cases offset the loss in value of the improvement. Increases in tax rates and differences in assessment procedures and practices further hide the fact that ad valorem taxes favor obsolete real property. ...
As has been mentioned before, ad valorem taxes by their very nature put a premium on obsolescence. It is in the power of the Federal Government to convert the ad valorem tax into an incentive tax, a tax on obsolescence. Read the whole article
Charles T. Root — Not a Single Tax! (1925)
Mason Gaffney: Property Tax: Biases and Reforms
It is equally important to use the "Building-Residual Method" of allocating value between land and buildings. This means you value the land first, as though it were vacant, based on highest and best use. You subtract this land value from the total value of land-&-building as currently improved: the residual, if any, is building value.
Valuing one lot or parcel this way, you have information needed for valuing neighboring and other comparable parcels. Using a map with value contours, you can value a whole city this way with surprising ease and speed.
Using this method, I valued Milwaukee land in 1963 and 1967. The building-residual method nearly tripled the land values reported by the City Assessor, who was using the assessor's usual inconsistent mix of various other methods. How's that again? Did I say tripled? Yes, I really said "tripled." By his methods, buildings on the eve of demolition were carrying values higher than their sites; by the building-residual method these old buildings had no value at all, which of course is why they were being torn down. Besides depreciation and technological obsolescence, many buildings suffered severe "locational obsolescence," owing to shifting demand patterns. The land was re-usable, and had as much or more value without the extant buildings.
Using the building-residual method requires no change in present laws. It is within the latitude of assessing officials, who, in turn, respond to public opinion. The conscientious citizens' move is to educate and bring pressure, just as the old single-tax campaigners like Jackson Ralston did. In the process of "losing" they won over half of what they sought, just by taking a stand and making the effort. ... Read the whole article
3. The Land Fraction of Real Estate Value (LFREV) is much higher than standard modern sources show. On most assessment rolls the value of old “junker” buildings, on the eve of demolition, is listed as higher than the land under them. This betrays the erroneous use of the “land-residual” method of separating land from building values. It should be obvious that the old junker has no residual value: that is why it is being junked. Junking is continuous in enclaves of high value like Kenilworth, Illinois, or Beverly Hills, California. “Locational obsolescence” is the key concept. The high and growing value of the underlying site cannibalizes the residual building value. ... Read the whole article
Mason Gaffney: The Taxable Capacity of LandTed Gwartney: A Free Market Strategy to Reduce Sprawl
How does one come to so startling a finding? Wisconsin is not a backward state. It prides itself on the high quality of its public administration. What I did was study sites on the eve of demolition.
When you buy an old junker to tear down and replace with a new building, you (the market) are obviously recognizing that the building has no residual value. All the value is then in the land. However, in Milwaukee in 1969 the Assessor was saying the building was worth about three times as much as the land, just before tear-down. That is a good way to measure to what extent land is underassessed.
Try that in Manhattan. When the visitor first gapes at its skyline from afar, it looks like one big modern high-rise. If you poke around on foot much, though, you soon realize those are the exception. Most of the lots are covered with obsolete junk, some of it tumbledown, commanding rents mainly for their location value.
Check the Empire State Building. Old as it is, it is still nearly the tallest building in the world. As to its site, it is in a so-so reach of 5th Avenue (34th Street), many blocks from the 100% location (57th Street, I would guess). Even so, when the site and the building sold in separate transactions a few years ago, the site represented 1/3 of the total value. What does that say about the land fraction on neighboring parcels, covered only with the remains of ordinary old structures? What does that say about the land fraction nearer the 100% location? ... Read the whole article
...What is needed is a continuously self-renewing city and a public policy that can work effectively. Buildings have a limited useful life. Continuous maintenance and frequent retrofitting sometimes extends this life span. Other buildings reach a point where they should be replaced. Some buildings sit vacant for decades even in the city's central business district. Valuable parcels of land are left undeveloped or paved over and used as surface parking lots. The result is a lower tax base and an eyesore.
As urban buildings deteriorate, owners often don't renovate, remodel or make repairs because their property tax may rise. Thus the typical property tax creates suburban sprawl and urban decay. Shifting the property tax off buildings and onto land reverses these processes. Taxing land more than buildings usually reduces taxes for homeowners. ... Read the whole articleMichael Hudson: The Lies of the Land: How and why land gets undervalued
Turning land-value gains into capital gains
Hiding the free lunch
Two appraisal methods
How land gets a negative value!
Where did all the land value go?
A curious asymmetry
Site values as the economy's "credit sink"
Immortally aging buildings
Real estate industry's priorities
THE FREE LUNCH
* Its cost to citizens
* Its cost to the economy
One obvious problem with the land-residual approach is that many buildings would not be rebuilt in their existing form. Occupancy use changes over time. In Lower Manhattan and many other inner-city areas, industrial factories, commercial loft buildings and even office buildings on Wall Street have been gentrified into residential properties. After New York City's near bankruptcy in 1975 over 40,000 manufacturing spaces in Manhattan were shifted from commercial to residential purposes. A similar conversion of industrial structures to residential or high-density commercial use is found in most large American cities. It is part of the economy's de-industrialization (euphemized as "the postindustrial economy"), as described for instance in Robert Fitch's The Assassination of New York. As formerly commercial and industrial districts have changed their character, site values have skyrocketed. That was all part of the Regional Plan developed early in the 20th century.
Many sites are worth more when they can be delivered vacant, any buildings are torn down, so that developers can start with a bare site. Buildings left standing are given new uses; most people would not want to reproduce these buildings as they are. For instance, Manhattan's highest-rent district until the World Trade Center bombing of September 11, 2001, was Tribeca, the downtown TRIangle BElow CAnal Street into which artists and other individuals (including myself) seeking large roomy spaces at low prices moved in the late 1980s. These buildings had lost their value after New York City almost went bankrupt and industry began to migrate. Many landlords simply walked away from their properties and let them revert to the City, which auctioned them off at distress prices. ... read the entire article
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper