wealthandwant theme: Tax Neutrality

Mason Gaffney: The Taxable Capacity of Land

"Let the market decide," some say. "No good can come from forcing land into use, against the owner's private judgment." Actually, the proposal to exempt buildings and focus property taxes on site values is premised on the market concept of consumer sovereignty; it's the present property tax that isn't. The case may be summed up like this: if the tax on a parcel varies with the use of the parcel, then the tax biases choices against the use more taxed. Economists call the land tax "neutral," for that very reason: it does not vary with use. It does not bias the choice of uses; the consumer sovereign prevails. "No other tax can make that statement." ... Read the whole article

Nic Tideman: The Case for Taxing Land

I. Taxing Land as Ethics and Efficiency
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. ...
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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. ...

Thus there is no excess burden of a tax on land. A tax on land is ‘neutral’. ...

To summarize: If land is subject to a tax or combination of taxes with a present value that is independent of how the land is used, and if potential investors are confident that the magnitude of the tax will not exceed the value of using the land over the life of potential investments, then a tax on land has no excess burden; it is neutral.

Taxing Land is Better Than Neutral

The analysis above explained how a tax on land can be ‘neutral’, that is, how such a tax can have no excess burden. In fact, taxing land is better than neutral; it improves economic efficiency compared to the no-tax situation. This section explains how. ...

Compensation for private activities that increase land values is more like a rebate of a land tax than a tax itself, but it nicely complements a system of taxes for activities that reduce land values. They belong together in a discussion of how a land tax can be better than neutral.

Another way in which a tax on land can be better than neutral is that it can ameliorate imperfections in lending markets. Because capital markets are not perfect, people vary with respect to the discount rate that they apply to future taxes. The lower the discount rate, the higher will be the present value that a person assigns to future land tax payments. This means that an increase in taxes on land will lower the bid prices of those with low discount rates by more than it lowers the bid prices of those with high discount rates. Thus an increase in taxes on land will tend to shift land from people with low discount rates to people with high discount rates. Since people with high discount rates get greater returns from their assets, this increases economic output.

The last way in which a tax on land can be better than neutral is that it can reduce inefficiency associated with land speculation. If everyone had the same view as to what the future held, then there would be no possibility of making speculative gains. But people differ in their views about the future, creating opportunities for people to engage in speculations that they believe will be profitable. For speculations in widely traded standardized commodities, it is not necessary to own the commodity to speculate; one can speculate through futures contracts. With land however, while there are some rudimentary futures contracts, these are available in only a few places and do not reflect the individual variations in land values that arise because of land’s locational fixity. Therefore most of the speculations that people might wish to make with respect to land require that the speculators own land for the duration of the speculation. ... Read the whole article

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894)

4. CONFORMITY TO GENERAL PRINCIPLES OF TAXATION

The single tax conforms most closely to the essential principles of Adam Smith's four classical maxims, which are stated best by Henry George 19 as follows:

The best tax by which public revenues can be raised is evidently that which will closest conform to the following conditions:

That it bear as lightly as possible upon production — so as least to check the increase of the general fund from which taxes must be paid and the community maintained. 20

That it be easily and cheaply collected, and fall as directly as may be upon the ultimate payers — so as to take from the people as little as possible in addition to what it yields the government. 21

That it be certain — so as to give the least opportunity for tyranny or corruption on the part of officials, and the least temptation to law-breaking and evasion on the part of the tax-payers. 22

That it bear equally — so as to give no citizen an advantage or put any at a disadvantage, as compared with others. 23 ... read the book

Bill Batt: Painless Taxation

Abstract
Real tax reform could do away with those taxes that are resented by the large proportion of our population. We could replace all taxes on wages and on interest by instead taxing economic rent. Rent is windfall income; it is income that arises not from the efforts of any person or corporation; it comes about as a surplus gain from common social enterprise. There is ample moral warrant for society to lay claim to that which it has created, as well as to that which no individual or party has earned. Analysis increasingly makes clear that economic rent in all its forms is far larger than official government figures indicate; in fact it is likely sufficient to supplant all current taxes on labor and capital (wages and interest) which are acknowledged to have so many negative effects. Recovering economic rent in all its manifestations by taxing its various bases actually can foster economic performance and yield other benefits that make it the natural source of revenue for governments. Such a tax is essentially painless. ...

Tax neutrality refers to the influence (or absence of such) that any particular design has on economic behavior. Typically taxes are perceived as a damp on economic activity — taxing income reduces the incentive to work, taxing sales discourages retail transactions, and taxing savings reduces the propensity to save. The more a tax is perceived to be neutral the less the identifiable distortions it imposes on the economy. The common assumption of most tax theorists is that all taxes impose distortions; it's simply a matter of which ones are least burdensome to economic health. A tax which imposes no distortions is ideally best. ... read the whole article

Bill Batt: The Merits of Site Value Taxation

One must begin a discussion by recognizing that governments, constitutionally speaking, have two means by which to effectuate public policy, conventionally known as tax powers and police powers.1 The primary purpose of taxing power historically has been to raise the necessary revenue to support government functions as defined by the electorate through its chosen representatives. Many students of government argue that this should be its only purpose. President Reagan, for example, reflected this view of taxation when he stated in 1981 that "the taxing power of the government must be used to provide for legitimate government purposes. It must not be used to regulate the economy or bring about social change."2 This view has within it the implicit view that there is a way to tax that is totally neutral in its influence on economic behavior, something which has not always been understood or agreed to. Taxes have always been used to facilitate socioeconomic policies, and in recent years have become a conscious tool of policy makers even more. One recent study notes that in the state of Washington, for example, 222 of the 378 identifiable tax breaks for special purposes have been enacted since 1970; the state of Oregon, similarly, has witnessed 288.3 But whether using taxing powers to facilitate other purposes is a wise and efficient approach needs to be more carefully considered, and there has been too little discussion of this issue in contemporary scholarship or political life. Furthermore, only recently has it been possible to understand the possibility of tax neutrality.

Debate about the influence of various tax designs on social and economic behavior is nowhere clearer than in attempts to describe and define the concept of tax expenditures.4 Tax expenditures are special provisions in the tax code, any tax code, that forgo the collection of certain revenues with the intent that their retention by taxpayers will foster public purposes better than through programs financed directly through the budgetary process. ... Taxes have generally come to be regarded as a necessary evil, but not all taxes are equally evil.5 Some taxes are more evil than others, and Milton Friedman once said that a tax on land value is the "least worst" tax.6

... Tax neutrality refers to the influence (or absence of such) that any particular design has on economic behavior. Typically taxes are perceived as a damp on economic activity -- taxing income reduces the incentive to work, taxing sales discourages retail transactions, and taxing savings reduces the propensity to save. The more neutral the tax, the less identifiable the distortions it imposes on the economy. The common assumption of most tax theorists is that all taxes impose distortions; it's simply a matter of which ones are least burdensome to economic health. A tax which imposes no distortions is theoretically best. ... Read the whole piece

Bill Batt: How Our Towns Got That Way (1996 speech)

Bill Batt: The Compatibility of Georgist Economics and Ecological Economics

A tax that is neutral is one that in no way alters the behavior of the markets by its imposition; that is people perform and make choices in the same way as if there was no tax at all.39 Because a tax on “land” broadly defined is inelastic, i.e., has a fixed supply, any tax on this base is completely capitalized in the market price of the land itself. It is, in effect, a tax on the land rent, or a recapture of the land rent by government in the name of society, just as the rent is a creation of that society.

39"The striking result is that a tax on rent will lead to no distortions or economic inefficiencies. Why not? Because a tax on pure economic rent does not change anyone's economic behavior. Demanders are unaffected because their price is unchanged. The behavior of suppliers is unaffected because the supply of land is fixed and cannot react. Hence, the economy operates after the tax exactly as it did before the tax--with no distortions or inefficiencies arising as a result of the land tax." P. Samuelson and W. D. Nordhaus, Economics, 16th ed., p. 250.

A land tax is efficient because there is no economic distortion of market choices as a consequence of its neutrality. This means that there is no wasted economic behavior in the form of excess burden or deadweight loss typically associated with other tax designs. As an example of the inefficiencies of other taxes, for example, one might consider the altered behavior that occurs in consequence of the presence of the income tax or the sales tax. This deadweight loss in American and British economies has been estimated to be roughly 20% of the national domestic product in each nation. Put differently, were there no deadweight loss as a result of the tax structure, the society would essentially be 20% more productive — and 20% richer in the aggregate.40

40Fred Harrison (Ed.), The Losses of Nations: Deadweight Politics versus Public Rent Dividends, London: Othila, 1998, and Dale Jorgenson and Kun-Young Yun, “The Excess Burden of Taxation in the United States,” Journal of Accounting, Auditing, and Finance, fall, 1991. Harrison, et al. calculate that the deadweight loss of the current tax system of United States is a trillion dollars annually. Nicolaus Tideman et al. have modeled “The Avoidable Excess Burden of U.S. Broadbased Taxes,” in Public Finance Review (September, 2002), showing a “net gain of about $10,000 per worker (16% of NDP) in the first year, rising to $17,800 (23.7% of NDP) after 20 years for the most productive tax reform, which involves collecting 90% of the rent of land and using the income tax as a residual tax. When the sales tax is used as the residual tax, the gain per worker is about $3,300 less.” This and other work is summarized in “The Gains from Taxing Land,” in Geophilos, No.03(1) (Spring, 2003), pp. 56-60. See also Alan Durning notes that “Complying [with the personal income tax alone] takes Americans 5 billion hours each year. For every dollar raised, U.S. taxpayers spend nine cents obeying the law. Cheating is widespread; roughly one-fifth of income goes unreported.” Alan Durning and Yoram Bauman, Tax Shift: How to Help the Economy, Improve the Environment, and Get the Tax Man Off Our Backs, Seattle: Northwest Environment Watch, April, 1998. p. 17. This is further corroborated in Donald L. Barlett & James B. Steele, The Great American Tax Dodge (Boston: Little, Brown & Co., 2000), where the authors note (p. 23) that the proportion of U.S. taxpayers deliberately engaged in cheating on their income taxes now approaches “between one -third and one-half of the tax-paying population.”... read the whole article

Mason Gaffney: The Taxable Surplus of Land: Measuring, Guarding and Gathering It

Taxable surplus is also what you can tax without driving land into the wrong use. It is not enough that the land supply is fixed: a tax must not force underuse or other misuse of the fixed supply.

A great advantage of taxing rent is that it does not change the ranking of land uses in the eyes of the landowner. Let me explain.

In a free market, the function of rent is to sort and arrange land uses: landowners allocate land to those uses yielding the most net product, or rent. Economists have shown (and you can easily see) that this is socially advantageous: the net product is the excess of revenue over all costs, so land yielding the highest rent is adding its utmost to the national product.

When you base your tax on the net product (or rent), the ranking of rival land uses remains the same after-tax as it was before-tax. That is, if use "A" yields 20% more rent than use "B", and a tax takes 50% of the rent, then use A still yields the owner 20% more after-tax than use B, and the owner still prefers use A. We will see below, (Section D), that when you tax something other than rent (say the Gross Revenue, G), you will drive the land into less intensive uses, or out of use altogether.

A related advantage of taxing rent is that you can often levy the tax on the land's potential to yield rent, regardless of what use the owner actually chooses. This is, indeed, a standard way of taxing rent in most capitalist nations. It is possible because buyers and sellers trade land based on their careful estimates of its maximum rent-yielding capability. The tax valuer observes and records these value data, and uses them to place a value on all comparable lands. Many books and manuals and professional journals have been published on the techniques used: it is a well established art, with its own professional associations, of which our speaker Mr. Gwartney is a leading member.

Such a tax is limited to the maximum possible rent, and so will not exceed a landowner's ability to pay - provided he uses the land in the most economical manner (which is not always the most intensive manner). It will surely not interfere with his using the land in the best way, but will discourage using it any other way. ... read the whole article

Bill Batt: Who Says Cities are Poor? They Just Don't Know How to Tax Their Wealth!

Wealth and Want
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