Just Tax the Land
Taxes are a subject that few enjoy discussing. When the topic is broached, the discussion typically centers around the tax rate, whether it should be lower, or higher, and for whom. What usually missing from this conversation are what kinds of taxes we ought to have. With the proper tax design, the economy will grow faster and prosperity spread more evenly. I argue that a Land Value Tax offers a transformational opportunity for future growth.
Why We Have Taxes
We levy taxes for two basic purposes. First, to raise revenue for public services like roads, bridges, schools, and police. Second, to encourage or discourage certain types of economic or social behavior. To do this, governments levy three basic types of taxes 1) taxes on what you earn, 2) taxes on what you buy, and 3) taxes on what you own.
Not all taxes have an equivalent impact on the economy. So what makes a good tax? Adam Smith, the “father of capitalism” outlined the four canons of good taxation centuries ago. These canons hold true today:
Canon of Equity: Taxes should be progressive (proportional to income)
Canon of Certainty: Taxes should be clear, not arbitrary or hidden
Canon of Convenience: It should be easy to pay taxes; i.e. no filing fees
Canon of Economy: It should be cheap to administer collection
Today, we also recognize a fifth canon: taxes should minimize “dead-weight loss.” Dead-weight loss is the loss of economic activity beyond the tax itself, a hidden tax on the tax that depresses productivity without raising any additional corresponding income.
Tax the Land
There is one tax that meets all five Canons, the Land Value Tax, or LVT. An LVT is a tax on the unimproved rental value of land. That is, a tax imposed on the land itself, not the property built upon it. Some don’t consider an LVT to be a true tax at all, because rather than arbitrarily extracting wealth, it’s a payment system for the use of a location.
An LVT makes intuitive sense when contrasted with other kinds of taxes. Income taxes, for example, tax your labor, placing some of your time and effort into government coffers. Most of us agree, earning money is a good thing, and taxing it almost feels like a punishment.
In contrast, an LVT taxes only land. Land (with rare exceptions) is not created by humankind; it was already there. When someone owns land, they reap the benefits of something that they did not create, in economic terms, an unearned “rent.” An LVT places a tax on those rents, recouping them to be redistributed for the betterment of society.
As land is disproportionately owned by the wealthy, an LVT is progressive. It’s a stealth wealth tax that doesn’t punish the wealthy for success but levels the playing field by eliminating the home-court advantage. Also, unlike wealth or income taxes, it’s impossible to evade; land cannot be hidden or moved overseas.
Like property taxes, the calculation methodology and tax rates would be public. Unlike property taxes, however, an LVT does not need to account for the nuances of the building that sits on top of it, so there is no need to individually assess each property. Adjacent lots would have virtually identical tax rates, making calculation and collection faster, easier, and more transparent.
Most importantly, however, an LVT doesn’t punish development, it encourages it. With an LVT it would no longer be profitable to hold land in idle speculation. On the flip side, developers who make productive use of land would not see their tax bills rise because they built a high rise or shop upon it.
Lastly, because the supply of land is fixed (again with rare exceptions), taxing it doesn’t alter the supply. Thus, there is negligible economic deadweight loss from a LVT. This means we can raise revenue without negatively impacting economic growth as most other taxes do.
How Much Revenue?
Purist advocates of the LVT argue that we should set the tax rate at 100 percent to fully capture economic rents. To be clear, this is not a 100 percent tax on the land value (despite the name), but rather a 100 percent tax on the rental value of land.
As a practical matter, this seems unworkable. Like property taxes, the science of valuation is fuzzy and imperfect. At a 100 percent rate, we risk unintentionally overshooting rent capture. Overshooting would cause more harm than leaving a buffer in place. For this reason, an 80-90 percent tax seems appropriate.
This lower rate could also reduce concerns about “searching costs” or the cost for landowners to find new and better uses of land. Some argue that an LVT might dampen this drive, slowing growth. Indeed, searching cost concerns are the only valid criticism of LVT that I have thus far found.
Even at this rate, an LVT could generate enough revenue to replace income taxes. Studies done in the US in the 80s and 90s, estimated that land rent accounted for about 20 percent of GDP, or roughly 60 percent of the current state, federal, and local revenue.
This is profound because an LVT could generate sufficient revenue to replace less efficient sources of income, such as income taxes or corporate taxes. One 2002 study found that the elimination of taxes on production in the US alone, could raise national output by some $1 Trillion.
An Elegant Solution
Land is not human-made, as such, there is no reason that any individual or corporation should privately benefit. This unearned rent can, and should, be captured and redistributed for societal good. Using this revenue, at the very least, we can eliminate income taxes, allowing workers to retain the full fruits of their labor.
But we can take this further and adopt a Negative Income Tax as well. This idea, outlined in greater detail here, would establish a UBI system to replace the clunky, expensive, and ineffective welfare schemes we have today. The NIT, funded solely by an LVT would become the backbone of a new childcare benefit, unemployment, and retirement system. Land value capture would also be ideal for funding public infrastructure.
Therein lies the beauty of the LVT, it captures the Earth’s natural bounty, that which no human created, and spreads it for all to benefit. Taxes shouldn’t be a punishment, they should be an opportunity to build a more equal, just, and prosperous society.