Just Tax the Land
Taxes are a subject that few dare discuss. When the topic is broached, the discussion typically centers around the tax rate, whether it should be lower, or higher, and for whom. Usually absent 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 Do 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:
Taxes on what you earn (income, corporate income, business…etc)
Taxes on what you buy (VAT, sales, or excise) and
Taxes on what you own (commonly, property taxes)
Now, 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 and collect
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 and the resources within it. Land and resources (with rare exceptions) are not created by humankind; they were 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 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, on the contrary, it encourages it. With an LVT, it would no longer be rational 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.
Side note: Land Taxes can also make housing much more affordable. See my discussion on LVT+Zoning reform here:
Lastly, because the supply of land is fixed, taxing it doesn’t alter the supply. Thus, there is negligible economic deadweight loss from an LVT. This means we can raise revenue without negatively impacting economic growth as most other taxes do.
An LVT is as close to a “free lunch” as policymakers will ever get.
But How Much Revenue Can an LVT Raise?
It seems too good to be true, a tax that can raise revenue without hurting the economy? 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 is unworkable. Like property taxes, the science of valuation is fuzzy and imperfect. At a 100 percent rate, we risk unintentionally overshooting rent capture, causing economic harm. For this reason, a 50-80 percent tax seems appropriate. This lower rate could also reduce concerns about “searching costs” or the costs incurred by landowners for finding better uses of land. Some argue that a high LVT may disincentivize searching costs, slowing growth.
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. Even a 50 percent LVT could raise enough revenue to fund a large portion of government expenditures.
More importantly though, because LVT engenders no deadweight loss, it can replace less efficient sources of revenue, such as income/corporate income taxes, while accelerating overall economic growth and prosperity. Indeed one 2002 study found that the elimination of taxes on production in the US could raise national output by some $1 Trillion a year.
An Elegant Solution
Land is not human-made, there is no reason that any individual or corporation should privately benefit from it. 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.
Going further, we could actually redistribute some of this revenue in the form of a Negative Income Tax. This idea, outlined in greater detail here, would establish a UBI system to replace the clunky and ineffective welfare schemes we have today. The NIT, funded solely by an LVT could form 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 inclusive society.