Why are land value taxes so popular, yet so rare? The big barrier is political says The Economist. Do you agree? Read more…
Why Land Value Taxes Are So Popular, Yet So Rare?
The Economist
11 October 2014
HOW should you tax wealthy homeowners? Britain’s opposition Labour party thinks it has an answer: an annual mansion tax on homes worth over £2m. Meanwhile the Scottish government plans to reform taxes on house sales. Yet in the discussion over property taxes a favourite proposal of economists—a tax on the unimproved value of land—has been absent from the debate. Throughout history, economists have advocated such a tax. Adam Smith said “nothing [could] be more reasonable”. Milton Friedman said it was “least bad tax”. Yet there are only a handful of real-world examples of land value taxes (LVT). Why are they so popular yet so rare?
When thinking about any tax, economists focus on how it affects decision-making. Income tax reduces the incentive to work. Corporation tax reduces the incentive to invest. Stamp duty deters some marginal house sales. Such prevention of mutually beneficial transactions is generally considered bad. Land value taxation is so beloved of economists because, in theory, it does not distort decision making. Suppose a land value tax of one per cent on land value is introduced tomorrow. There can be no supply response: there would still be as much land as there is today. Neither would consumers’ preferences change. No transactions would be deterred or encouraged. All that changes is the price, which falls…Landlords are unable to pass the tax on to tenants, because the supply and demand of rented land is unchanged too. Furthermore, if LVTs replaced property taxes, incentives against improving homes and
developing land would be removed. LVT would continue to account for “undeserved” gains landowners make on the investment of others, such as the government improving nearby transport links (this feature of the tax appealed to Winston Churchill).But if LVTs are so great, why are they so rare? One explanation is that it is too difficult to value land separately from what sits on it. There is not much of a market, for example, for undeveloped land in central London. However, some think this can be overcome. In any case, the efficiency of the tax does not depend on accurate valuations.
The bigger barrier is political. LVTs would impose concentrated costs on today’s landowners, who face a new tax bill and a reduced sale price. The benefit, by contrast, is spread equally over today’s population and future generations. This problem is unlikely to be overcome. Economists will continue to advocate LVTs, and politicians will continue to ignore them. Let’s live on the planet as if we intend to stay.
Comment:
Will politicians continue to ignore the broad and lasting benefits of LVT? Let’s hope our own legislators will muster up the courage to face directly the task of reforming Oregon’s broken property tax system. And by the way, assessing land values separately is not too difficult; computerized mass appraisal methods are now easily accessible. Furthermore, the efficiency of the land-based tax – in terms of its incentive effects (how it affects decision-making) DOES depend upon accurate valuations. False assessments will diminish the incentives to utilize land more wisely.
