Actually, There’s Quite a Bit of Research on Land Taxes

On Slate, Ashok Rao wrote a post titled, “Meet Economists’ Favorite Tax—The Unimproved Land Tax.” He opens:

For a long time the economics profession has quietly noted that a land value tax is economically efficient but, having sussed out its theoretical benefits, left the subject for more intellectually rewarding pursuits. The result is a frustrating dearth of scholarship on the subject.

I have four problems with this opening. One, there’s no such thing as “improved land”; land is land, and improvements on land are capital. Two, the economics profession only “quietly notes” the economic efficiency of a land tax because neoclassical economics dogmatically fuses land with capital; you can thank Henry George-hater John Bates Clark for that. (Marxism didn’t help much either.) Three, there’s more recent research on land taxes than the 1985 paper by Steven Cord that Rao found. Finally, the subject of land taxes is much more intellectually rewarding than many other pursuits (in economics) because it raises topics on social justice, the history of economics, and economics’ politicization and lack of intellectual clarity.

It’s surprising that Rao couldn’t find more studies on LVT. In fact, Steven Cord himself collected a list of no fewer than 237 such studies in February 2006. I’m probably being unfair and Rao wanted a dollar figure for the United States’ annual land rent. If so, point number one is that technically it doesn’t matter. Shifting taxes from labor and capital onto land logically cannot create a revenue shortfall (aside from crowding out) because the shift increases taxable land values. Mason Gaffney refers to this as the “ATCOR principle” (all taxes come out of rents). In truth, non-land taxes suppress production and commerce, so a land-tax shift would raise GDP (and counts it better too, e.g. not including land rents as a product when they’re spontaneously generated).

My current favorite example of a recent analysis of the effects of a land-tax shift is the essay collection, The Losses of Nations: Deadweight Politics Versus Public Rent Dividends. Published in 1998, the editor Fred Harrison writes, “[T]he wealth lost to nations is so large as to override all scholastic concerns for precision.” (Pages v-vi) Okay, I think some precision is warranted, but if Rao wants a more recent figure, then he should turn to chapter 6 of Losses of Nations. Authors Nicolaus Tideman and Florenz Plassmann calculate that U.S. current-dollar GDP in 1993 ($5.495 trillion) would have actually been $7.097 trillion with a land tax, a 23 percent deadweight loss. For Europe, due to its VATs, the deadweight loss is closer to 50 percent. Part of the reason it’s hard to argue for land taxes is that it’s hard to conceptualize the opportunity that’s been lost.

By the way, I’m incredulous about these numbers too, mainly because I think it’s too good to be true for Georgists, but I’m happy to be proven wrong.

One thing that land-taxers also hasten to point out is not just how government accounting reshuffles land rents into categories like “corporate profits” but how government under-assesses land values. For example, Michael Hudson wrote in 2001, “The Lies of Land: How and Why Land Gets Undervalued,” in which he noted that governments tend to use the land-residual rather than building-residual valuation methodology that low-balls land values.

According to Hudson, in 1993 the Federal Reserve found that all the land owned by nonfinancial corporations nationwide had a -$4.0 billion value! Soon after, the Fed stopped publishing national land statistics altogether. In chapter 2 of Losses of Nations, Hudson is quoted as finding that the nation’s land value in 1994 was not the $4.4 trillion the Fed reported but in fact $8.8 trillion.

And we’re told that economists don’t find this intellectually rewarding.

I’d roll my eyes if someone said Georgists sound paranoid when they take the “indifference” economists show to land taxes for political capture by the rentiers. However, so long as economists treat land taxes as a trivial supply and demand graphic in a textbook box insert instead of learning the academic and political work backing it, they won’t understand what’s at stake.

7 comments

  1. (Agree with your law school posts, part company with you on some of your macroeconomic/political economy posts)

    “political capture by the rentiers”

    Hmmm.

    1) Are those the Californian “rentiers” who have had their land-buying income *already* heavily assessed via a heavy state income tax – with a skewed progressivity designed to game majority rule (by placing the majority of the burden of funding government on a shrinking minority of the people)?

    Now, their *income* having *already* been subjected to decades of heavy taxation, these “rentiers” are to be assessed an increased property/wealth tax *on the residue of their savings, held in land*?

    2) Or perhaps the land/wealth tax incidence will fall upon non-Californian dollar savers who, seeking a safe harbor from systematic fiat currency dilution, invest in fixed-supply Californian land.

    It seems to me the statist, spending Political Class has captured the political system much more so than any savers labelled “rentiers”.

    Under your definition, do land-owning “rentiers” even have to collect, you know, *rent*?

    Or is “imputed rent” (of Federal infamy) enough?

    1. cas127,

      California’s tax system favors high earners and the wealthy. For example, the Institute on Taxation and Economic Policy’s “Who Pays?” report found that the lowest 20 percent of California families by income pay 10.6 percent of their income in state taxes while the top five percent of families pay at most 8.8 percent. (Page 33, PDF page 37) The bottom 20 percent of families also pay 4.0 percent of their income in property taxes while the top five percent pay less than 2.8 percent.

      Bolstering my post’s argument, on page 13 the ITEP writes:

      Today, a state’s property tax base typically includes only a subset of total wealth: primarily homes and business real estate and, in some states, cars and business property other than real estate. Our analysis shows that, overall, the property tax is a regressive tax — albeit far less regressive than sales and excise taxes. There are several reasons for this:

      • For average families, a home represents the lion’s share of their total wealth. At high income levels, however, homes are only a small share of total wealth. Because the property tax usually applies mainly to homes and exempts most other forms of wealth, the tax applies to most of the wealth of middle-income families, and hits a smaller share of the wealth of high-income families. [Emphasis LSTB]

      As Mason Gaffney wrote of the alleged regressiveness of the property tax, “To own property is to be rich, in the measure that one owns, and to tax the quality of richness should not be presumed to burden the poor more than the rich.” (Page 408, PDF page 1) Indeed, the emphasized clause in the quote raises the question: What is the “total wealth” of which homes are only a small share? To the extent “total wealth” is equity, that too is subject to the property tax, and therefore the property tax is progressive, if passed-through to the actual wealthy stockholders.

      Moreover, the land-to-capital (building) ratio of wealthy people’s homes is usually much higher than your typical owner-occupier’s. This means that wealthy people would pay more in land tax both in dollar amount and proportion than middle-income homeowners, who in fact would probably pay less overall than under the current system since their buildings usually comprise most of their real estate’s value.

      Don’t tell that to the ITEP, though. As far as it’s concerned income taxes are the only progressive taxes. Period. So much for Ashok Rao’s “unimproved land tax” being popular among economists: Even progressive tax organizations dogmatically believe otherwise.

  2. ML,

    “California’s tax system favors high earners”

    I *might* buy that CA “favors” wealthy *land* owners (Prop 13) – if one ignores the income tax gauntlet run to acquire the wealth necessary to buy the land – but you lose me with the preceding quote.

    I would *really* like to see ITEP reconcile its claims with the rapidly “progressive” income tax regime in CA.

    My guess?

    The “regressive” post-Prop 13 effects in land-speculator heaven California (thanks Fed ZIRP) marginally overwhelm the significant “progressivity” of the CA income tax.

    The result?

    The bottom *20%* pay a slightly higher *percentage* of their income in sales, *income*, and property taxes than the richest *5% * do. (Note we are talking percentages, not absolute dollars here).

    This is precisely because income tax payers get comparatively screwed relative to land holders. (Income tax regime vs. Prop 13).

    (Btw, what happened to the richest 20%? Violations of symmetry put me on alert…)

    1. cas127,

      The ITEP report speaks for itself, I trust its methodology if not its ideology. The breakdown for California is on page 24 in the PDF in the link, and generally what the wealthy pay more in income taxes is offset by less in sales and excise taxes while the opposite is true for poor families. Overall they pay a little less of their vast incomes in taxes than poor people.

  3. “It seems to me the statist, spending Political Class has captured the political system much more so than any savers labelled “rentiers”.”

    To wit,

    http://www.huffingtonpost.com/2013/09/24/census-bureau-wealthiest-counties_n_3984149.html

    http://www.theatlantic.com/business/archive/2011/10/report-washington-dc-is-now-the-richest-us-city/246993/

    http://www.bloomberg.com/news/2011-10-19/beltway-earnings-make-u-s-capital-richer-than-silicon-valley.html

    I know, I know – HuffPo, the Atlantic, and da Mayor’s Daily are notorious organs of the paleo-Right (cough, cough, HACK!) but still…I think the census data should be taken into account when determining who exactly is profiting from the current regime of the State.

    For my rapidly diluting dollar, I think as much an eye needs to be kept on the Political Courtiers of DC as the ostensible Rentiers (often sans cash-rent…) of everywhere else.

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