Alternatives to the Income Tax: The Land Value Tax
In the spirit of the excellent post on national sales tax, let me present the land value tax. This tax is upon the value of the land itself. It differs from traditional property taxes in that it does not include any improvements upon the land (e.g., office buildings, homes, etc.). It is literally on the value of the tract of earth. It was first proposed by Henry George in the nineteenth century and attracted a number of admirers, including William F. Buckley. Although some socialists attempted to appropriate George, he was an anti-socialist and radical individualist – he was seeking an economic arrangement that cleared the path to rewarding people based on what they produced (which an income tax discourages) or the value they created through commerce (which a sales tax or VAT discourages).
- When one taxes, one gets less of the thing taxed. But God is neither creating nor destroying land, so we won't get less land. If we tax productive work through income tax, we will reduce productive work. If we tax sales, we will have less commerce. None of this seems beneficial to society. Local property taxes generally set perverse incentives for landowners to refrain from improving, hence the well known phenomenon of people working on their homes without required local permits in order to avoid. This tax would actually provide the opposite incentive, for Land Value Taxes do not increase with improvements upon the land. To make money, I would actually have to put the land to profitable use (e.g., build apartments or homes on them and rent them out).
- If I purchased land in a real estate hotspot and did nothing to improve it, and sold it a year later at substantial profit, it's clear that I benefited from externalities that had nothing to do with my capital. Namely, I purchased land in an area where others did things (e.g., built hospitals, schools, luxury homes, etc.), and I was, in effect, a free rider, a renter benefiting from inefficient economic rent.
- A land value tax would have the effect of inhibiting the growth of real estate bubbles, such as the one of the last decade.
Yes, it's radical, probably more than Cain's "9-9-9" plan. Yes, there would be a lot to work out, like how this tax would be collected. (Some proposals require either states or municipalities collect the tax and send a portion on to the federal government – this would leave municipalities with latitude in determining how to implement.)
I'm not intending to provide a concrete proposal, more to suggest another way to think about tax reform, one that preserves incentives and does as little as possible to slow economic growth.
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Comments:
Oct '10
Re: Alternatives to the Income Tax: The Land Value Tax
Like you said, there's a lot of issues to work out. I disagree that it wouldn't result in "less land"; the supply of land accessible to infrastructure is controlled by government, and such a tax will raise property values.
My biggest concern is it would make the tax code more pro-cyclical. At the moment, the tax code acts as an automatic stabilizer; during recessions, people fall into lower tax brackets which cushions the shock. This is especially helpful for economic shocks that hit some states but not others.
Oct '10
Re: Alternatives to the Income Tax: The Land Value Tax
Joseph Eagar:
My biggest concern is it would make the tax code more pro-cyclical. At the moment, the tax code acts as an automatic stabilizer; during recessions, people fall into lower tax brackets which cushions the shock. This is especially helpful for economic shocks that hit some states but not others. · Nov 14 at 9:42am
Ah, I forget to add why that matters. Automatic stabilizers (in general) are tricky, since if you carelessly remove them you can mess up the economy (businesses expect the buisiness cycle to behave in a certain way, and unexpectedly changing that behavior without a lot of thought beforehand can result in distorted investment decisions).
Also (and I'm not sure if this applies here) but sometimes the government will create distortions (in the tax code, and in other places) to cancel out distortions created by foreign governments. You'd need to conduct a detailed study to figure out what those distortions are, negotiate with foreign governments to get rid of them, and design new offsetting distortions for those cases where a foreign government refuses to cooperate.
Edited on November 14, 2011 at 6:51pmSep '10
Re: Alternatives to the Income Tax: The Land Value Tax
Interesting idea. Would the tax in this case be levied purely by area? Would city land in Houston be taxed at the same rate as farmland near Amarillo? Do I only pay when I sell or do I pay every year? It seems like it might be difficult to collect enough without graduating the tax in some way.
Would people behave differently by buying less land?, some equivalent of "shotgun shacks" is New Orleans.
May '11
Re: Alternatives to the Income Tax: The Land Value Tax
The pure form of the idea would be to tax it based on the value of the land, so the tax per acreage would differ from state to state, town to town, neighborhood to neighborhood, possibly location to location.
There are also accommodations that can be made. Harrisburg, PA, for example taxes both land value and improvements, but rather than doing so equally (as a traditional property tax would do), they tax the underlying land value at a rate six times that of improvements, and the belief is that this has led to lower vacancy and abandonment rates.
The tax would be paid every year. This flies in the face of the assumption that land ownership is good in itself, but it seems to me that this is indisputable. It would discourage people from buying land as speculation, but would encourage development.
May '11
Re: Alternatives to the Income Tax: The Land Value Tax
Joseph,
It might make the tax code less counter-cyclical, but it's not certain that the tax code would necessarily be pro-cyclical. In recessions, land values often fall as well. I doubt that they tend to rise, which would be necessary for it to be pro-cyclical.
Aug '10
Re: Alternatives to the Income Tax: The Land Value Tax
Playing some devil's advocate here...
Is it possible that land speculation serves a useful purpose? Is it possible that it's more than just rent collection?
Commodity speculation has a long history of being decried as useless, but is in fact useful, ameliorating gluts and shortages. Moreover, commodity speculators aren't so much rentiers as merchants in a specific kind of knowledge which is nontrivial to gather. Could land speculators play a similar role?
Although land itself isn't created or destroyed, the desirability of land shifts over time, so in a sense, human wants can create and destroy desirable land. It's not clear to me that people who make a living selling their special knowledge of which land is most desirable are merely passive rentiers.
Moreover, land improvement isn't an absolute good. For people who want to build something themselves, undeveloped land could more useful than already developed land -- saving teardown costs and so on. Maybe it's not such a bad thing to have some folks making a living by keeping land undeveloped for later use?
Just stuff to think about...
Dec '10
Re: Alternatives to the Income Tax: The Land Value Tax
Who determines value?
Jul '11
Re: Alternatives to the Income Tax: The Land Value Tax
This idea was championed by Henry George in the book Progress and Poverty written in the 1800's and was in fact the best selling non bible book of that century. The philosophy known as Georgism was quite popular and actually inspired a board game which later became Monopoly. Of course some grubby SOB gets all the good property and players circle hopelessly until their luck runs out.
I have a friend who has a century plus old copy of this book and is a devout Land Value tax proponent.
Aug '10
Re: Alternatives to the Income Tax: The Land Value Tax
Good question. The price of land includes the value of the improvements on the land. How could those improvements be factored out of the price of the land itself? Or more to the point, who could you trust to do that?
Dec '10
Re: Alternatives to the Income Tax: The Land Value Tax
Midget Faded Rattlesnake
Good question. The price of land includes the value of the improvements on the land. How could those improvements be factored out of the price of the land itself? Or more to the point, who could you trust to do that? · Nov 14 at 2:42pm
I ask because my state once based vehicle property values for annual taxation (vehicle registration) on some crazy scheme that had vehicles being taxed significantly above real market value. When the people rose up and voted themselves $30 car tabs the amount of derelict vehicles on the side of the road fell the very next day because people could afford to buy new cars again. If government gets to set the value and then tax that value they will overestimate.
Mar '11
Re: Alternatives to the Income Tax: The Land Value Tax
I've worked at companies that kept land nearby for future expansion. This might make that scheme unworkable, in which case the company would have to just pack up and move, and the jobs will move with it.
Also, I assume that square footage would be used to assess condos and the like, where "land" is stacked. Or, all current residents could end up paying based on the footprint of what is owned. Is the acreage covered by retention ponds mandated by the building codes part of the taxable land?
May '11
Re: Alternatives to the Income Tax: The Land Value Tax
Municipalities today assess home values based on comparable sales in the same neighborhood. This would require modifying those assessments to remove the value of the home. In my town, the assessments include a breakout of an assessment of the value of the land and the value of the structures on the land. These seem to me to be roughly correct.
That said, there will be a tendency to play politically motivated games with land value assessments. The breakdowns today are relatively accurate because there's little incentive for fraud. Still, I'd love to see a system where the local government sets and collects taxes, and money flows only indirectly to Washington. I don't know that this is an insurmountable task, however -- I think it's worth further thought. Certainly it's at least as appealing to me as trying to figure out how to make a national sales tax work.
In an interview with Human Events in the 70's, Milton Friedman stated, “the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.”
Dec '10
Re: Alternatives to the Income Tax: The Land Value Tax
We called that the Articles of Confederation...it didn't work out so hot.
May '11
Re: Alternatives to the Income Tax: The Land Value Tax
I've found another excellent article on Henry George from the Library of Economics and Liberty from The Liberty Fund, which promotes classical free-market liberalism. The author tries to give some of the possible difficulties as well (e.g., the case where improvements on one piece of land impacts the value of a different piece of land from the same owner).
May '11
Re: Alternatives to the Income Tax: The Land Value Tax
The King Prawn
We called that the Articles of Confederation...it didn't work out so hot. · Nov 14 at 2:54pm
Congress retains taxing authority. The local government would not be free to determine how much (or whether!) to give money to the state and federal. The federal government would levy taxes upon the states (as it is empowered to do by the Constitution and was not empowered to do under the Articles). It would be up to states to carry this out, who would further devolve it to municipalities to actually collect to meet these levies. This would also give states motivation to more zealously defend federalism, since they would see the federal government more directly as a nuisance rather than a sugar daddy (the current dynamic, which plays out all too often, regardless of the ideology or party of the governors and legislatures involved).
The 9-9-9 plan, which still has flaws, had much more work put into it. Is this something worth developing?
Dec '10
Re: Alternatives to the Income Tax: The Land Value Tax
bagodonuts
Congress retains taxing authority. The local government would not be free to determine how much (or whether!) to give money to the state and federal. The federal government would levy taxes upon the states (as it is empowered to do by the Constitution and was not empowered to do under the Articles). It would be up to states to carry this out, who would further devolve it to municipalities to actually collect to meet these levies. This would also give states motivation to more zealously defend federalism, since they would see the federal government more directly as a nuisance rather than a sugar daddy (the current dynamic, which plays out all too often, regardless of the ideology or party of the governors and legislatures involved).
It makes the states even more subservient to the national government. It puts the states and the feds on the same side of the issue, and that is something the founders (especially the Anti-Federalists) specifically feared. Conversely, if it goes the other way, imagine the first time the feds tell the states to fetch. I'd support it for entertainment value if it went that way.
Mar '11
Re: Alternatives to the Income Tax: The Land Value Tax
I've always found property taxes of all kinds to be the most pernicious of taxes. We believe in private property but, in reality, no one can really own anything that is subject to property tax. I may have paid off my mortgage but the local governing bodies will come calling every year for their pound of flesh. In reality I'm simply renting from the government. No, I would much prefer a robust income tax. Once I've earned my money and paid my tax then let me spend or invest it like I wish and leave me alone.
Oct '10
Re: Alternatives to the Income Tax: The Land Value Tax
On the subject of taxes... isn't the issue we need to contend with the size of government? No tax mechanism means squat when the government is a a leviathan, thumping around and trampling the citizen. Unless we bring the beast down to size, tax policy is meaningless except as a mechanism to subdue the beast.
Your ideas about a land tax are worthy of serious consideration in a rational society. But with what we are now cursed with, they offer only an academic exercise.
Feb '11
Re: Alternatives to the Income Tax: The Land Value Tax
Do any of you actually live in a rural area? Out here, PEOPLE own land, not speculators. Most of those land owners have the vast bulk of their net worth tied up in land, land that in many cases has been in the family, usually farmed, for generations. In most rural areas, excepting those that have had the misfortune to be infested with overpaid yuppie types and their country dachas, land owners may be land 'rich' but they are very definitely cash poor. Rural economies are not exactly vibrant. A 'Land Value Tax' would be a catastrophe for them. The result would be to drive the land at fire sale prices into the hands of the very speculators and corporate vultures being decried above.
Jun '10
Re: Alternatives to the Income Tax: The Land Value Tax
Market value is the most commonly accepted definition of value. These values are determined by buyers and sellers. Fundamentally a thing is worth what you can sell it for in a reasonable amount of time. In a healthy market this can be measured and reported - i.e. appraised. Add this tax and the desirability of land goes down, which reduces the number of buyers, so value goes down. Obviously lowering value would have the effect of reducing tax revenue (not to mention a host of other negative effects on agricultural commodities, etc). I believe that a sales tax is the ultimate best bet because every citizen is reminded (almost) daily of the cost of government. This is a great way to create a feedback loop to elected representatives to restrain spending. The Fair Tax offers the “prebate” to eliminate adverse effects on the poor. There is a motivated constituency of accountants, tax lawyers, and lobbyists who have become a fount of disinformation about the Fair Tax. It remains a terrific idea if increased personal savings, increased investment, and reduced government are desirable outcomes.