Tuesday, September 2, 2014

Land taxes, rent-seeking, boom and bust

I came across this video today. It's a fairly concise argument about the rent-seeking activities and incentives that perpetuate bad economic policy. Some great comments in there by Mason Gaffney, Ed Dodson and of all people Milton Freidman.

Friedman explains how a tax on the unimproved value of land is economically the best tax, but politically the worst, and he also takes some blame for personal income taxes which he helped introduce during his time in the US treasury in 1941. He says
The question is, which are the least bad taxes. And in my opinion, and this may come as a shock to some of you, the least bad tax is the property tax on the unimproved value of land - the Henry George argument from many many years ago. 
It's an interesting thing if you're talking about taxes about why it is that the property tax is so unpopular. It's not unpopular for good economics reasons. It's unpopular in my opinion for one good reason.  It's the only tax left on the books for which people have to write a big cheque. 
The income tax is a far worse tax. But, and I have to admit that I have some part of the guilt in this process, because during World War Two I worked at the Treasury and helped to design the withholding system (my wife has never forgiven me for it).  But with respect to the income tax we've arranged it so it's taken off bit by bit and it's almost painless. With respect to the sales tax we pay a little bit of it each time. With respect to the corporate tax and excise taxes, they're hidden in the price of things we buy - we don't even know we're paying them. 
But with respect to property tax that remains a tax that we as individuals have to pay, and then we have to write a big cheque for it. That's the fundamental reason in my opinion why it's so unpopular. 
But if you wanted to reduce the unpopularity of the property tax the way to do it would simply be to provide for an effective method whereby it could be withheld at source in small payments. 
For me Friedman's last comment could be the key to unlocking land taxes as the primary source of government revenue in many jurisdictions. People in general have intense loss-aversion - they hate getting something and having it taken away much more than never having it in the first place. The practicalities of implementing a withholding system for land taxes should be seriously considered by land tax advocates.

I could suggest that for residential property, each State's rental authority (the authority that holds rental bonds in trust) also operate as a rent intermediary, deducting estimated land taxes from periodic rental payments in the same way that income taxes are withheld. This would allow landlords to see only rents net of land tax, and make investment decisions on the basis of this new net rental amount.

But rentals are only about 30% of the housing stock. For owner occupiers, vacant and non-residential land owners, I currently see no practical alternative but collect State-level land taxes in the same manner as the already are.

In truth, this loss-aversion problem with land taxes might reflect Friedman's world view more than the real political problem. After all, in Australia most State's already have land taxes, but with extensive exceptions, particular for owner-occupied housing. Incrementing the tax rate is a costless exercise politically, as only a tiny fraction of voters pay it, compared with alternative sources of taxation. It seems to me the hinderance here is more a case of the political power of the wealthy, who would be on the hook for most land taxes, regardless of how they are disguised.

In any case, a good video.


  1. I'm not sure it its rent seeking, or inequities have turned it into "rent no other choice"

    When the property I'd increasingly priced out of the capacity of normal people and into the areas of the wealthy you either amble on pernicious leaverage or have such amounts of reserve that y are always in win win.

  2. I envisage local authorities auctioning land use permits annually, allowing ground rent to be discovered by those interested in occupying lots. The key is to define small localities estimated to have similar ground rent (the level of which is not being set hierarchically) and allow the bidding process to unfold. Perhaps this form of transaction feels less like a loss? Http://wealthoflabour.wordpress.com

  3. I know a bunch of land taxers. It's a bad argument.

    The taxation system evolves largely organically. Friedman was instituting an income tax in '41 due to war conditions. Try to completely rejig the whole tax system would be impossible. When land taxes are introduced -- see Ireland at the moment -- they are done so as additional taxes. But since their purpose is to shift the burden from income taxes etc. this defeats their purpose. Most of the time land taxers become the unwitting dupes for austerity and bad economic policy.

    1. Philip,

      Not really sure about your point. Friedman introduced income tax due to war conditions. He could have introduced land taxes, other transfer duties, at the time as well. So, sure, war might mean you want to suck some money out of the economy, but where and how you do it is a discretionary decision.

      Land taxes have been around in many countries for years. In Australia they were some of the first taxes introduced by States in the late 1800s.

      Further, no on wis calling for a complete rejigging of the tax system overnight. Simple shifting the tax base to land.

      Government make incrementally bad changes to the tax system all the time. So they can certainly make incrementally good changes too. For example, income taxes in a country with some inflation end up with a lot of bracket creep. You could sell a massive drop in income taxes (shift the brackets up) and compensate with a small increase to the rate of existing land taxes.

      The problem in Australia is that State's levy land taxes and the federal government levies income tax. So there are political barriers to striking a deal. These could be overcome if the will was there. The government introduced a GST in 2000 with the promise of phasing out other taxes.