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Sin Taxes
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 in St. Petersburg. Wages will be higher, and the rent of land, collected by the government, will be higher. The least damaging tax on corporations is one that provides a complete write-off of investments, with a carry-over of tax credits to future years. Such a tax has the effect of making the government a partner in all new investments. With such a tax the government provides, through tax credits, the same share of costs that it later receives in revenues. However, the tax does diminish the incentive for entrepreneurial activity, and it raises no revenue when investment is expanding rapidly. Furthermore, the efficiency of such a tax requires that everyone believe that the tax rate will never change. Thus it is best not to tax the profits of corporations at all. If the people of St. Petersburg want to share in the profits of corporations, then they should invest directly in the corporations, either privately or publicly. The residents of St. Petersburg would be best served by refraining from taxing the profits of corporations. Creating a place where profits are not taxed can be expected to attract so much capital that the resulting rises in wages and in government-collected rents will more than offset what might have been collected by taxing profits.

The taxes that promote urban growth have at least one of two features.

  • The first feature that a growth-promoting tax can have is that it can serve to allocate a naturally occurring resource among competing potential users. Charges for the use of land, for the use of the frequency spectrum and for depleting natural resources share this feature.
  • The second feature that a growth-promoting tax can have is that of being a charge for the costs imposed on the city by the person who pays the tax. This feature is shared by taxes on pollution, taxes on other activities that reduce the value of surrounding land, taxes on imposing congestion and other costs on other residents of the city, charges for the marginal cost of publicly provided services, and a self-assessed tax on property, reflecting the hindrance to future growth represented by existing development.
A city that confines itself to these taxes can expect to attract capital rapidly, and therefore to experience rapid growth, raising the wages of its citizens and the publicly-collected rent of its land.
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper