Tax me, please

People hate taxes. But they are necessary, and some are better than others.

Henry George’s arguments in his 1879 book Progress and Poverty are that all benefits from progress accumulate to land owners. He proposed a single tax on land because the value of the unimproved land is unearned, neither the land’s value nor a tax on the land’s value can affect productive behavior. If land were taxed more heavily, the quantity available would not decline, as with other goods; nor would demand decline because of land’s productive uses.

I agree. A land tax is by far the least bad tax. Milton Friedman even agreed – “In my opinion, the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.”

There are many reasons to prefer land taxes.

First, they discourage speculation. They provide a disincentive for land ownership without immediate prospects of productive use. This idea relates closely to the current (and let’s be honest, old and ongoing) debate about housing affordability and housing supply. A land tax would hinder the ability for developers to ‘land bank’ - artificially stifling supply of new dwellings. It will increase competitiveness of supply in the land market. This is one reason even the proponents of a housing shortage should embrace this tax.

Indeed, they may even encourage planning changes by governments (maybe through pressure on local governments by the federal government) to allow greater density to increase their tax base.

Second, a land tax has the effect of encouraging efficient use of land and investment in buildings. Those wishing to increase density in the cities to reduce urban sprawl should also see benefits here. Owners of land in urban areas would have more incentive for subdivision, and increasing density, to avoid this tax.  In fact the economic success of Hong Kong, Taiwan and Singapore has been attributed to high land taxes - a path that Korea is keen to follow.

Third, they are a difficult tax to avoid, and administratively simple (indeed small land taxes are currently enforced in all States for owners with land holdings above a threshold value). Land ownership is well documented, and tax evaders could have their land compulsorily acquired.

What about arguments against such a tax?

One of the main arguments against land taxes is that they discourage investment. For example, when developing a large estate, improving the amenity of the area from the first stage (think of the lake and shopping areas at Forest Lake) will increase the value of surrounding land still held by the developer and increase their tax liability until they can sell. This, it is argued, discourages investment in housing and buildings.

My response to this argument is that it will not, and for an obvious reason. First, the tax liability from these parcels can be fairly accurately known is advance and factored into the original decision to purchase the undeveloped site. The table below shows a stylised development feasibility in the ‘with’ and ‘without’ land tax scenario. Assuming people are willing to pay the same price for the final dwelling (because their tax reduction elsewhere offset their increased land tax liability - although that may not be entirely true, but is unimportant to this particular argument) the developer can still make a profit and has incentives to do so under the ‘with’ scenario. He makes the same profit, has the same total cost, and same revenue – the tax incidence is on the seller of the development site the original landholder, not the developer.

The only problem is harnessing public support for the transition to a higher land tax society. One of the main problems is that the tax falls solely on land owners – generally the wealthier sector of society with the greatest political clout. They can always popularise the argument that land taxes will add costs that will crush land ownership aspirations.

Another problem is that the development lobby will argue that such a tax will sent them broke because they have already committed to a number of projects without factoring in these increased costs. From the perspective of the public, that is perfectly fine – if they go broke their land holdings will make it to the market in a hurry. But I see no reason that a progressing increase in land taxes over a number of years should tip many big developers over the edge.

As a final comment I want to note why land taxes run counter to intuitive logic.  As a rule of thumb, if you increase taxes on a good, you get less of it. If you increase subsidies, you get more of it.  This was demonstrated recently by Andrew Leigh, where he showed that higher stamp duties decrease the number of sales of homes.  Tax selling, and you get less selling.

But a land tax is a holding tax.  To avoid this tax you get less land holding.  Which would encourage selling land to others who may use it more productively.  As the table above shows, the incentive to produce homes and buildings will not deteriorate.

I would appreciate any thoughts.