Two quick comments on taxes
Matt Yglesias has a post on land taxes:
Subtract and we conclude that there’s $1.758 trillion* worth of land in the corporate sector.
Last we turn to noncorporate business, which owns $9.704 trillion in real estate and has a replacement cost of structures of $4.786 trillion, giving us $4.918 trillion in land.
Add it all up and you get $14.488 trillion in land value.*
. . .
So who cares? Well, you should care. This number is high enough that it tends to confirm that view that taxation of land and other natural resources, supplemented by pollution fees and things like congestion charges could replace all taxes on labor and investment and still fund an ample welfare state and public sector.
I am pretty sure that Yglesias is confusing stocks and flows, but I’d also like to hear your views. Let’s assume that total taxes in America are at least $5 trillion (Federal, state, local). That would imply a 35% land tax. But let’s assume the various environmental taxes cut that to something like 25%, the rest would be pollution and congestion charges. I don’t know that Matt had these figures in mind, but I’m just trying to get orders of magnitude here.
Now imagine a retired schoolteacher living in a $600,000 house in Pasadena, with a replacement value of $200,000. The land is worth $400,000. Her tax is $100,000. That’s a lot for a retired schoolteacher!
Perhaps the problem is that a 25% tax rate doesn’t sound that bad, until you consider that it must be paid every year, and it applies to the total capitalized value of the flow of services from the land. After all, the “guvment” doesn’t just need $5 trillion, they need $5 trillion every single year, year after year. The retired schoolteacher could probably pay $100,000 in taxes spread out over a lifetime, but not every year.
Alternatively, the tax would exceed the annual flow of rent on land (likely to be far below 25% of capitalized value) and thus landowners might just walk away from the land in disgust. The government ends up owning all the land, and then whom are they going to tax? I’ve never read Atlas Shrugged, but isn’t that the theme of the novel?
Having said that, I like all of these tax ideas. I am merely suggesting that Yglesias is too optimistic about the revenue one could collect. (Or too pessimistic if you are a starve the beast conservative.)
Here’s Greg Mankiw:
This NY Times story on the middle class’s struggle with the new healthcare law is generally pretty good, but this sentence struck me as comically meaningless:
Experts consider health insurance unaffordable once it exceeds 10 percent of annual income.
What the heck does this mean? The typical American spends more than a third of income on housing. Does that make housing unaffordable? Presumably not.
I agree with Mankiw, but see an additional implication as well. Health care is 18% of GDP in America. I believe that’s about 22% of national income, perhaps a bit more. So the sort of single-payer tax system supported by liberals would require taxes of about 22% of income on average, just for health care! This makes a single-payer system completely unaffordable, according to the NYT.
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21. December 2013 at 08:26
“That would imply a 35% land tax.”
Well, I think that rate is just the first iteration. What happens to the value of land if you place a 35 percent tax on the value of it?
(I think you said this in somewhat different terms when you mention that people would just walk away from it).
21. December 2013 at 08:28
I said same thing…
https://twitter.com/morganwarstler/status/414399246545477632
The trick is to use land taxes to capture as much revenue first, before we do any other taxes.
It’s a lever to answer this question:
Is Malibu developed like South Beach?
No? Increase land taxes. Repeat everywhere.
Land taxes are the FIRST AND CORE function of government.
The first thing govt. does is title property. The hegemons that own the property they have by force only agree to join because they will keep title.
Local Security, border, war is really about “my land!”
Witness in the future we will have plenty of very well to-do country-less value creators, who can move globally and feel no allegiance to a country past the bandwidth and personal luxuries and freedoms they have to offer.
When competent people say the concept of nations are outmoded, we don’t all mean let’s have global government.
We mean, most of the cost of keeping a country going needs to fall on those people trying to secure and keep the land they own, because thats what a country is – the land.
21. December 2013 at 08:36
Note, getting land taxes right (high enough to knock down restrictions that misprice land use) gets you the right approach to density for sure, but it also helps gets you the right approach to transportation, to energy policy, to safety net.
Most of our problems come from doing basic things wrong basic things: not taxing land more aggressively to reduce other taxes, using wages as a safety net, not targeting NGDPLT via futures,in place of Fed, not operating govt. as an open-source software platform in general.
Like a old company trying to survive, to regain its youthful agility, we need to redo some big steps we made early… and that’s tough, but necessary.
21. December 2013 at 08:38
‘…landowners might just walk away from the land in disgust.’
In NYC you couldn’t. As a famous episode of David Susskind’s television show demonstrated. A NYC apartment house owner offered to give Susskind his property, free of charge, so that he would be rid of his obligations under rent control.
The next week’s show opened with Susskind saying that he’d checked with his attorney and decided to decline the offer.
21. December 2013 at 09:14
“”Experts consider health insurance unaffordable once it exceeds 10 percent of annual income.”
What the heck does this mean?”
Aside from the point that you made, it also makes no sense because it refers only to “health insurance” and the context infers premiums only. What about the amount of the deductible/co-pays? The “Insurance premium” is only one element of the cost of health care. “Insurance” should also include the actuarial value (cost) of the self-insurance element.
But, Mankiw is right in one sense: The “experts” tend to look only at premiums and not the current or future taxes needed to fund “lower” premiums or other out of pocket costs.
And, who are these “experts”? Most likely the authors of the ACA. For purposes of the employer mandate and premiums subsidies “affordability” is generally defined as less than 9.5 percent of household income and 8 percent to avoid the individual mandate penalty.
21. December 2013 at 09:18
I don’t see that he is confusing stocks and flows as it appears this form of tax would replace all others – so it would be annual tax on stock. If we are in the business of talking a single-source tax, consumption tax is the way to go as there is no way around it.
While I generally like the idea that land-taxes target the root of all production / consumption, the reality is that outsourcing would skyrocket as producers prefer to use cheap foreign land; plainly, in such a scenario, imported goods/services would be essentially tax free for US consumers. Not to mention our exports would increase in price
And then all the other implications follow … less demand for land -> reduced cost -> reduced tax revenue
Am I thinking about this incorrectly?? Perhaps there are some equilibria that aren’t apparent to me where we would suffer no long-term ill-effect of reduced global competitiveness.
21. December 2013 at 09:49
Dustin, You said;
“I don’t see that he is confusing stocks and flows as it appears this form of tax would replace all others – so it would be annual tax on stock.”
This doesn’t address my post. I claimed the tax would have to be far more than 100% of the flow of rent from the land. So why would anyone pay? They’d be better off giving the land away. Of course as Vivian pointed out the value of land would then fall to zero. So what would you tax?
In Europe wealth taxes are typically around 1%.
21. December 2013 at 09:53
Land is a stock; land *rents* are a flow. The Henry George Theorem ( it’s a bit less than a theorem but that’s what it’s called ) claims that 20% of GDP should be adequate to fund all of government, and that land rents are about 20% of GDP. “Land rents” are land-based “returns in excess of opportunity cost.” (Wikipedia). Please note that all rents are “profits” but not all profits are rents…
The retired school teacher can’t actually afford to live there; so by allowing her to live there, we’re in effect subsidizing her. Or so the theory goes…
There are actual historical examples of land taxes being part of a system creating massive increases in production – Japan in the Meiji period, Hong Kong… the story is that eventually, landowners capture the tax system and land taxes decline.
Henry George felt that land rent taxes were *morally* superior to taxing labor. One initial justification for income taxes was that very high income is a rough analog of rents. Of course, bracket creep happened…
Lastly, I feel funny bringing up Henry George to a very eminent and high-stature economist. Apologies if that’s inappropriate somehow.
21. December 2013 at 09:54
Off topic (I’m joining the tradition of linking to other articles)
http://www.economonitor.com/dolanecon/2013/12/21/latest-economic-growth-data-give-cheer-to-market-monetarists-or-what-is-the-ngdp-gap-and-why-do-we-care/
21. December 2013 at 10:10
‘But, Mankiw is right in one sense: The “experts” tend to look only at premiums and not the current or future taxes needed to fund “lower” premiums or other out of pocket costs.’
Casey Mulligan also had an Economix column in the NY Times addressing this. Which can be read on his blog;
http://caseymulligan.blogspot.com/2013/12/doctor-shortage.html
‘The supply and demand for health services will experience a variety of changes in the near future, especially those from the Affordable Care Act. But nobody has quantified their net impact on the market for doctors. The new law pushes demand for physicians in both directions, making it is easy for advocates on either side of the law to cherry-pick provisions they support.
‘The law is beginning to build new markets for individual insurance policies that in some ways can reduce the demand for health care and doctors.’
21. December 2013 at 10:33
Yglesias supported a tax on land without realizing all of the complications and unfairness it would involve, as Scott’s example of the schoolteacher demonstrated.
Therefore, “land” is a meaningless concept and economists should drop it from their lexicon…
21. December 2013 at 10:50
Instead of proposing what would presumably be a federal tax on “land”, perhaps a more sensible goal for a “public intellectual” would be to propose, as a first step, eliminating the federal tax *subsidy* for “land” (and improvements thereon).
Per the Joint Committee on Taxation, the federal revenue loss from the mortgage interest deduction is about $70 billion and for the deduction for state real estate taxes about $30 billion in 2014.
He’d have my support.
21. December 2013 at 11:24
Les, I am aware of that argument and as I said I support land taxes. But they cannot come close to raising the amount of revenue that Yglesias or Henry George suggest.
Thanks Pietro.
Bob, I certainly did not do what you suggest. Indeed I strongly support land taxes.
21. December 2013 at 11:27
Again, we’re missing the bigger issue.
If there is enough demand to live on the school teachers land to drive her out….
that’s the level of taxes you want – once her property is sought after, taxes should keep her from holding it, as demand (value) of her property increases.
That painful yearly tax bill should make everyone in the market with growing population and free borders FEEL THE BITE more than any other tax.
So yes, govt. shouldn’t be more than 20%, yada yada, we can argue that with left later, the point is conservatives should all say “Let’s maximize the land tax first, then figure out the rest.”
And Bob Murphy, if you aren’t doing geo-libertarianism you aren’t doing it right.
21. December 2013 at 12:09
It makes no sense to me. What makes land any different than any other worldly possession…people own land because they like the utility and enjoy of the pride of ownership relative to other items they could own. It is no different than owning a SUV.
The best tax is the one that creates the least distortion of the private economy. Tax land heavily, its value will collapse, other items that require land will go up (like food).
If one was to be fair, all consumption should be taxed evenly to create the least distortion. But the fairest is to leave the tax code alone…people made big decisions, like buying a house, based on the tax code…pulling the rug out from under them to satisfy some ideological ideal accomplishes nothing….
21. December 2013 at 12:10
“””Now imagine a retired schoolteacher living in a $600,000 house in Pasadena, with a replacement value of $200,000. The land is worth $400,000. Her tax is $100,000. That’s a lot for a retired schoolteacher!”””
If taxes are 35%, her land is not worth that much. Also, because she wasn’t taxed otherwise through her lifetime, she can afford it.
I mean, doesn’t your second comment sort of answer your first?
If people can afford taxes now, they would be able to afford them if the same revenue is raised by another form of taxation. There is not even much reason to expect incidence to change too much (once you reach the new equilibrium, which may actually take decades).
*
The real problem with land/wealth taxes is that it is much harder to hide them. With income/sales taxes; people are not aware of them too much.
I regularly have left-wing civilians (ie, the people who are not wonks/connected to parties) be shocked when I point out how big the difference is between what they get at the end of the month and what their employer spent. They think they pay ~20% in tax when they’re actually paying ~50% or more.
It’d be hard to pull this off if they were writing checks.
*
“People cannot afford X” is code for “people need to be forced to pay or they will choose to not spend so much money on X”.
21. December 2013 at 12:27
I find Yglesias’ post to be brain dead. To read it, you might think he had found the goose that lay the golden egg. So what that we could tax assets (or one category of asset) rather than income? Moreover, real property traditionally is taxed to finance local government (in particular, schools), and where I live real property taxes are thought (correctly, I believe) to be less progressive than the income tax. In a world in which people buy houses with only 20% equity (or less in the liar loan era), it is pretty clear that real propert is a poor proxy for ability to pay. Here is another ilustration for you. I believe that Warren Buffett owns a home in Nebraska that is worth considerably less than $1 million. Assume that is his only real property (I doubt it is). Should he pay less taxes (in absolute terms and note merely marginal rate) than someone who owns a modest apartment in NYC?
In the end, the objective of a tax system should be to apportion the cost of government fairly. A tax on real estate assets strikes me as a uniquely horrible way in which to do that.
21. December 2013 at 12:28
Mike, The whole point is that the QUANTITY of land doesn’t collapse, that’s why a land tax is efficient.
Luis, You missed the point. We could try to collect all taxes with a single tax on bubble gum. Americans could “afford” the tax, but it would collect zero revenue because no one would buy bubble gum.
But that’s no reason not to tax bubble gum, just don’t expect to collect an unreasonable amount of revenue.
21. December 2013 at 12:28
Morgan, Yes, I favor a land tax.
21. December 2013 at 12:40
“We could try to collect all taxes with a single tax on bubble gum.” That gave me the mental image of a Discovery Channel program that documents the world of illicit bubble gum makers who do their work out in the woods under the moonlight.
21. December 2013 at 12:43
Mike F wrote:
“It makes no sense to me. What makes land any different than any other worldly possession…people own land because they like the utility and enjoy of the pride of ownership relative to other items they could own. It is no different than owning a SUV.”
I think the key difference is that land is there and its supply is fixed. If we put a tax on SUVs, it will disincentivize the production of SUVs. A tax on land would not have the same effect because we aren’t “producing” land – it’s just there.
Under the current tax system, if you own a skyscraper in NYC, you will be taxed on the value of the land *and* the value of your skyscraper. If you implode your skyscraper and put in a parking lot, you’ll be taxed far less, since a skyscraper is worth a whole lot more than a parking lot. Under a land value tax, your tax would be the same regardless of what you put on the property. So you would have a strong incentive to use your land productively, or sell to someone who would do so.
21. December 2013 at 12:56
That post by Yglesias seems really dumb. A piece of land worth $300,000 doesn’t produce $300,000 every year that you can collect taxes on. That seems to be what Yglesias is assuming here.
21. December 2013 at 13:04
I agree that the value of land would drop until the yield of land, net of taxes gave a p/e ratio in-line with a low-risk asset.
But the government’s response would then be to raise the tax-rate, and you’d get some kind of laffer curve response as land holders default and surrender the land to the government.
Of course the government wants its 5 trillion and is run by people who don’t believe in the laffer curve, so it raises taxes above 100% of the value. Now the government owns all of the land. (Although most claim they have no idea why. Its just those animal spirits of capitalism gone nuts.)
The land was worth about 15 trillion so lets say it gives an after tax, constant dollar return of 2% befitting a near riskless asset. So the government takes in about 300B/yr.
If it charges leaseholders more, everyone leaves the country.
So we then get a world-wide tax-treaty and all the governments levy the same rate on leaseholders. (BTW the government does this very poorly by charging the same price everywhere, so misery goes way up).
Now we have a tax on everyone in proportion to their land consumption–direct and indirect. I have no idea what the distributional effect is, but I’m pretty certain it does not look like a progress consumption tax.
Eventually, people get annoyed at the one-price and an administration is formed to set land lease-rates. The politically savvy and favored escape taxation.
Well at least the government managed to remove a disincentive to work. I’m sure that first order effect is worth not thinking about the secondary ones. Go Yglesias.
21. December 2013 at 13:06
mikef,
Land is not the same. It is atoms locked by gravity.
It favors he who got here first. And that’s why HE should bear the costs of govt. more than anyone else OR he should have to sell.
We want a system that always favors he who is creating the most value, as judged by everyone else with the value they create.
And the guy with land who came before is not creating value, and he’s using the govt. more than a guy who roams the earth with bitcoin planting ideas in the ether and sucking up experiences.
Everybody always gets a sour look on their face when they read me (I can tell) talking about accepting the dominant role of the hegemony in our political economy.
But along with that is a big caveat that we ought to have land taxes so high, that Malibu is South Beach.
The other one, is that you can only “own” the atomic, and not the digital. And pretty soon, when you can literally print almost anything, the plans will be free, and oyu will own the atoms.
But you won’t be able to print land.
21. December 2013 at 14:36
There is an incentive problem with Yglesias’s idea–it is the Zoned Zone problem. Government has the ability to regulate land use. By restricting land use, one can drive up the value of the land and, thus, the tax derived from it.
This is not a theoretical point, it is exactly what Australian State Governments do.
Apart from the effect that has on approved-for-housing land prices and rents, and on the stability of approved-for-housing land prices, it massively undermines infrastructure provision.
Governments provide infrastructure because they can capture some of the increased value of serviced land via taxes. Restricting land use does so much cheaper, thereby raising the cost of infrastructure and reducing the tax benefit of providing it. It also increases the resident resistance, since they are worried about losing their capital gains (being serviced by infrastructure is one thing; being right next to it, or displaced by it, quite another).
Again, this is not a theoretical point, it has been a serious problem for Australian cities since land use controls began to be seriously implemented in the 1970s.
So, you are left with expensive land, with unstable asset prices and under-provision of infrastructure. So, don’t even think about it unless a constitutional right-to-build provision, a la the German model, is adopted first.
A nice contrast of Britain and the UK on land use and housing is provided here:
http://www.macrobusiness.com.au/2011/06/how-germany-achieved-stable-affordable-housing/
21. December 2013 at 15:02
OK, first off, just because you own 200 acres of swamp land and the 20 million mosquitoes that live on it does not mean that you need to pay more for my government services.
The money I pay to the government to “protect” my land is a very small amount compared to the money I pay the government to: educate my children, fund my retirement and medical expense in retirement, build roads, pay for national defense, pay for police protection none of which have anything to do how much land I own. Most of the money I pay for Nation Defense is not about protecting my land from the North Koreans…it is about protecting the sea lanes to protect corporate interest and jobs and wealth. It’s about protecting the environment from legal doses of radiation that will kill millions of people. Wars about land…yes that Romans fought about land…some wars in Africa is about land…and those are about land for ethnic homelands not about personal property.
In reality most land owners use much fewer government services than people living in apartments in the inner city…
21. December 2013 at 15:19
Here are a few back-of-the-envelope calculations on land rent.
I might expect the equilibrium ratio of land rent to value to be approximately equal to interest rate. For example, that’s what you get if you apply the present value formula to a constant stream of rents. For the interest rate, I’ll use 4 percent (which is a little higher than the 15-year mortgage rate and a little lower than the 30-year rate).
Taking 4 percent of $14.488 trillion, I get $580 billion as an estimate of the annual rent of the privately owned land in the US. In comparison, according to BEA tables, total federal, state & local individual income taxes for 2012 were $1,466.5 billion; corporate income taxes were $402.4, and property taxes were $440 billion. So a 100% tax on land rent would replace only 25 percent of these taxes (and that doesn’t include payroll taxes). I agree that Yglesias must be confusing stocks and flows.
In practice, of course it would be very difficult to implement a pure tax on land rent, for the simple reason that-with the possible exception of agricultural land-we essentially never observe land rents separately from the rentals on the structures and improvements to the land. In practice, an appraiser would have to use rules of thumb which would inevitably lead to errors and result in some of the tax inadvertently accruing to the capital structures on the land. For that reason, I think in practice any attempt to tax a larger proportion of land rents would need to aim for less than a 100 percent tax rate – my guess is that any tax rate higher than 70 percent would lead to significant distortions.
21. December 2013 at 17:18
Scott is right about stocks vs flows, and the size of the tax, unless we can expect great GDP increases from the tax shift itself.
But Morgan is right that maximizing that land tax revenue is a (the?) core function of the state. Politically, raising tax on the retired school-teacher may be off the table. But morally, it is pretty absurd to try to protect the windfall that is the increase in the price of the unimproved value of land that so many people experience over their life cycle.
If the schoolteacher’s land increases in value beyond her ability to pay what the market will bear, it isn’t fair to guarantee her maintain title to it in perpetuity — she didn’t create that land (nor did anybody else), and most likely didn’t improve the land itself. So there is no source from which any allodial rights to it could have derived, unlike proper capital.
There are transitional costs in Georgism, but I think the end state is pretty clearly more fair than the status quo.
21. December 2013 at 19:29
A land tax would absolutely work. If we collect 5 trillion from income and capital gains, we can collect the same from the ownership in land. As has previously been pointed out, there is a fixed supply of land in the United States which greatly reduces the dead weight loss you see with other taxes.
Someone said companies would outsource production overseas. Maybe. Is that a bad thing? If we are consuming physical goods, they will be sold in stores (or shipped from) facilities in the US. The owner of the land under those facilities will pay taxes.
Additionally, US capital will no longer be left overseas because it can be repatriated for free. Not to mention the fact that now that no one has to pay other taxes, they have a lot more money to drive up the price of land. Which means a lower tax rate.
Have some vision guys. It will definitely work and be much more efficient.
21. December 2013 at 19:47
I don’t understand the obsession with taxing land. That seems like thinking from the 1700’s. I don’t have data, but I bet the US has more value in intellectual property than real property.
The value derived by government (rule of law, national defense) is proportional to total wealth and not acreage. The value of the protections on the image of Mickey Mouse and name “Coke” is tremendous. That should be taxed. How much land does Google have or need in the US?
I love, love, love the idea of a 1% tax on wealth with a 10% tax on spending. Keep it simple and everyone has skin in the game.
Happy Holidays! I am hoping that Santa brings me an aggressively dovish Janet Yellen.
21. December 2013 at 20:21
Don,
The idea is that the supply of land is perfectly inelastic (or close enough Holland notwithstanding) so therefore land taxes are not distortionary in the the way that taxes on consumption, income, etc are.
There is of course a significant issue in terms of local government zoning regulations. While the supply of land as a whole is inelastic, it’s entirely feasible that governments may change how much land they open up for development or for specific purposes depending on how much demand they perceive. In that situation, a land tax WOULD be distortionary.
I strongly support land taxes, but it important that they be accompanied by a big windback of zoning regulations.
21. December 2013 at 21:05
Instead of a “schoolteacher in Pasadena” you should have gone with the following example:
A progressive blogger living in a $1.2 million condo in Washington DC, with a replacement value of $600k. This progressive blogger just proposed taxing his property at $210,000 per year.
21. December 2013 at 21:18
Commenter Brent is one of the few people who is thinking about this issue correctly.
Land values are currently have a capitalization rate of about 5%. If you imposed a 35% land tax, the land would have to be recapitalized at about 40% pre-tax, which would imply an instantaneous 87.5% decline in land value (and a commensurate percentage revenue shortfall).
Brent’s estimate of $580 billion in annual rent attributable to unimproved land value is the upper limit of what could be obtained by a land tax in a policy approaching full land socialization, and that ignores the additional costs of land socialization.
21. December 2013 at 21:33
Consider the following agricultural example:
Prime farm land:
$10,000 per acre
$1,000 in annual crop harvest (200 bushels at $5/bushel)
$500 in costs (fertilizer, seed, machinery, labor, crop insurance)
35% land tax??? That’s $3,500 per year on land only producing $500 per year in profit.
If the land is revalued to $1,250, the land tax falls to $437.50 per year, and the profit falls to $62.50, or 5% of the land value.
And the additional costs? At this point, the land is effectively nationalized, so there’s no incentive to engage in sound long-term agricultural practices. Better to rent the land, rape the land, then abandon it, and move on.
22. December 2013 at 00:16
Transitioning to a georgist tax regime is definitely not easy. But if the political will were ever mustered, the journey should be worth it.
The simplest way to deal with the old lady with a lot of land issue is assessing, very realistically , the approximate tax burdens faced by people in their lifetimes and giving them vouchers to offset against the newly raised land taxes. This will result in the tax not bringing in enough in the first few years of the transition. But my guess is it will more than compensate in the time after that.
Land taxes are publicly assesed, cannot be hidden and are fair. People who do not have the ability to pay high taxes have the option of moving into high rises in a highly valued area or moving to lower valued areas. Different people may choose differently.
Land taxes have not lost their relevance in the information age. Personal contact and colocation is still preferred for many processes.
22. December 2013 at 06:29
Rick, Maximizing total tax revenue for a tax is almost NEVER optimal, as the marginal efficiency cost of the tax approaches infinity on the last dollar collected.
Joe, I suggest you might want to dial back your confidence in your own opinions. You are in way over your head on this issue.
Don, The quantity of land is fixed, not so for intellectual capital.
22. December 2013 at 06:32
If you have a mortgage on the land…do you really own it? Or does Freddy, Fanny, and the Banks really own the land? In reality no one really owns the land..we are given the illusion of ownership so that we will spend our lives improving it and utilizing it to produce needed products. Without the pride of ownership everything falls apart, most of the land would quickly become government property. It made some sense in terms of distribution of income when 99% of the population made their living from farming..but I don’t see the relevence today. It is a brick and mortar concept. I currently pay a real estate tax over 3%..one of the highest in the country in upstate NY. I’m sure this is partially responsible for the region missing the boom cycle in real estate..but price of a house in the city of syracuse is about the same price as 1970 and half the properties are abandoned. Most of the properties in the city are exempted from real estate tax..hospitals, charities, etc…
22. December 2013 at 11:29
Yglesias is incorrectly holding the monetary value of land as constant before and after land taxes.
If land is taxed more, then the discounted net, after tax cash flows from owning land would be less, which would mean the land would be sold for less.
22. December 2013 at 13:16
Land tax empirical facts:
* In 2010 the Fed estimated all land value in the USA at $4.5 trillion, a rather smaller number than Yglesias comes up with. (_Commercial and Residential Land Prices Across the United States_, Nichols, Oliner and Michael Mulhall, FRB)
* Agricultural land, which is the great bulk of land by area, is valued in total at about $2 trillion (according to the USDA, Shiller, Buffett, etc.)
* Rent on agricultural land averages 3%, as per USDA. Rent on urban land is impossible to separate out from structures and improvements (itself making land tax impossible, as proven by the disastrous failed attempt at it in Pittsburgh, but I digress…) however logic indicates it can’t be too much different because of arbitrage — if city land produced much more rent it would be bought and farmland sold, shifting prices to equalize rental returns.
* As per above, if we assume urban rent of 6% on $2.5 trillion and 3% rent on $2 trillion, full rental value of all land in the US is $210 billion annually.
* As land derives its value from its rent — market value is the future rental stream discounted to current value — you can’t tax its value, you can only tax the rent from it.
E.g.: If a perpetual bond that pays 5% has a market value of $1,000, you *cannot* tax it at the rate of $350 annually, after 3 years it is all gone! You only can tax it in an amount equal to a portion of the interest earned from it, if it is to retain value — and it will plunge in value accordingly. Tax the bond $10 annually, now it produces only 4% interest and its value falls by 20% to $800 — the $10 tax reduces its value by $200.
Um, same with land. If agricultural land produces 3% rent, and you annually tax it by 35% of its full capitalized value, ummm…. ummmm…
* The $210 billion of total real and imputed land rent above is somewhat less than $5 trillion+ plus expenditure level of government in the USA. And one could tax only a minority portion of it, of course. Tax that $210 billion by 25% and you get about 1% of the target $5 trillion.
* One can quibble about the exact valuations above, but that is the order of magnitude we are dealing with. Multiply land value by 10-fold and you are still so far from being in the ballpark of making the Georgist-Yglesias model land tax feasible that you aren’t even on the same side of the Mississippi river as the ballpark. Yglesias’s mere 3x larger number doesn’t even do that.
* All this is old, old, old news. Henry George was in the 1890s. We have been around this mulberry bush countless times before.
* That Ygelsias should be so totally clueless about *both* the facts of this old, old story **and** the most basic realities of how taxes and asset values work — tax an income-producing asset by 10x the income it produces annually forever ????? — shows he is an
idiotutter naif … and worse, one who is uninterested in learning even the most basic facts about reality before running off on his utopian crusades.Remember, this is the guy who was so stricken with surprise by the fact that “it is hard to start a business” when he tried no more than to rent out his own apartment, that he wrote at length about the shock of it.
But he wants to re-work the entire tax and capital structure of the entire economy!!!!
Why does anybody think he is worth reading? About anything??
Some logic for Matty: Politicians try to tax *everything*, to fault and well beyond. If they aren’t taxing as something as obvious as land, it isn’t because the idea never occurred to them because none of them are as smart as you, Matty.
Land tax is the *oldest* of taxes. If it is so hugely beneficial, easy to implement, and provides such big benefits that would give the community and its politicians a real competitive edge, then … why isn’t this tax already being used anywhere (or everywhere!) today?
The answer that land tax — like all such purported great “new” utopian tax ideas — really is an old tax that was tried and abandoned for good reason.
Appraisal-based taxes are the worst” — least efficient, most costly to apply, most inequitable and thus most litigated kind of tax **by far** — facts of tax policy 101 that Matty hasn’t bothered to learn, any more than he has the econ 101 facts for how assets get their capitalized value — and the Georgist-Yglesis land value tax scheme is the most extreme possible implementation of this worst kind of tax. Pittsburgh tried it and it was a disaster.
So much for land tax — until the next time Matty and the tax Utopians, undeterred by reality as ever, go one about it.
22. December 2013 at 13:51
Jim Glass: if city land produced much more rent it would be bought and farmland sold, shifting prices to equalize rental returns. Not if government regulates land use it won’t. See the land markets in Japan, UK, Australia, California …
22. December 2013 at 13:55
And my first comment should read “a nice contrast of Germany and the UK”.
22. December 2013 at 14:23
Jim Glass,
I’ll take a wild guess and say that you’ve thought about this topic before.
Great facts and points!
22. December 2013 at 20:06
Jim Glass,
The 2010 Fed study estimate of land value of $4.5 trillion was based on the same flow of funds data as used by Matt Yglesias for his recent estimate of $14.5 trillion. The differences are that the 2010 Fed study was using data from 2009 at the bottom of the market, thus missing the recent upturn in real estate prices, whereas Yglesias was looking at data for Q3 2013, and also the 2010 Fed study doesn’t include the latest revisions to the value of residential structures, which were revised down substantially in BEA’s recent comprehensive revision.
22. December 2013 at 23:53
Jim Glass, The 2010 Fed study estimate of land value of $4.5 trillion was based on the same flow of funds data as used by Matt Yglesias for his recent estimate of $14.5 trillion. The differences are that the 2010 Fed study was using data from 2009…
Brent, land value in the USA has not tripled since Q3 2009.
Now, to be fair to Matty I’ll admit here that the NO&M/FRB paper says the $4.5 trillion valuation “covers land held by households, nonprofit organizations, and businesses other than farms” — and that, in carelessly commenting while intoxicated by the joys of visiting family in this holiday season, I mistakenly included the $2 trillion for farm land (current valuation) in that, instead of adding it to make the total $6.5 trillion.
But it makes no difference, nor does Matty’s claim of $14 trillion — as I said, disputes about valuation are irrelevant when all credible numbers are off by orders of magnitude.
Feel free to more than double the $6.5T to get Yglesias’s $14 trillion, and double the real documented rent on land from 3% to 6%. Now impose Yglesias’s 35% tax on that rent … revenue is $294 billion, still rather short of $5 trillion (by a mere 94%.)
This still isn’t even on the same side of the river as the parking lot of the ballpark Ygelsias want to play in.
Now, unlike Ygelsias and the other utopian land taxers, let’s consider the costs of raising this $294 billion, something they never do…
[] The asset side of the nation’s balance sheets is knocked down by $4.9 trillion dolllars — by $16 for every *one* dollar of revenue collected annually. Does that sound like a good deal?
How does that help everybody with a loan against real estate, every lender using it as security, every business using it as a balance sheet asset? How are the nation’s farmers going to feel about that?
Yes, how is Matty himself going to feel about knocking down the value of his own apartment that he rented out by maybe $200k? Is he proposing to make the bank give him a corresponding reduction of his mortgage on it? Then how does he make up the bank’s loss? (Did the economy recently have an experience with something along these lines?)
[] The tax is regressive. Rich people live on land in properties with expensive improvements (often with very narrow land footprints, luxury apartment buildings). Poor people live on land with cheap old run-down impovements. Eliminate taxes on the improvements of the rich — and in a true ‘single tax’ system eliminate progressive income taxes, etc. — and the tax burden is correspondingly shifted to the poor. This was documented by the Pittsurgh department of finance as its land tax system was collapsing.
(This is poor politics for progressives, and certainly was there when all those new appraisals landed, but it is hardly obscure, and it’s odd he hasn’t noticed it.)
[] The tax system becomes is hugely inefficient and subject to high costs ranging from administration to litigation to corruption, as it is appraisal based — since *all* appraisals require labor and can be challenged and litigated, because all properties are unique. Such problems simply don’t exist with payroll, sales, even income taxes.
As one example, the Massachusetts Appellate Tax Board hears protests of the state’s personal income tax, business taxes, sales tax, use tax, excise taxes, etc — and 90% of the protests it gets are of local property tax appraisals. Immensely out-of-proportion to the kinds of revenue collected.
This is worst of all with pure land tax because you need iterated appraisals to separate land from appraised value of improvements … *and* land value is far more volatile than the value of improvements, due to the elasticities … so with tax far more concentrated on land, as a matter of both equity and effectiveness you really need continuous, labor-intensive re-assessments from a system designed currently to produce them only once every several years (on much less volatile properties).
The Pittsburgh system collapsed when such a belated assessment in one year produced 170,000+ land valuation appeals in a city of 500,000 properties. They promptly repealed the law — but the resulting litigation went on for years to come.
[] I won’t dwell on corruption, but in an appraisal-based system “consideration” can produce highly-leveraged results in property valuation, with both sides having ample incentive to engage in such. (NYC a little while back discovered a *billion dollar* assessment corruption scandal that went back decades, they don’t know how far. With what other kind of tax do you get *that*?)
And, oh, not to get wonky, but concentrating all your revenue collection on a single tax base that is highly, volatilely pro-cyclical is really bad fiscal policy as a matter of basic principle.
All this to get 6% of what he wants. Well, more likely 1% to 2%. A good deal?
When Yglesias decides to consider any of these issues let us know, otherwise I never will, as I don’t waste time reading him.
23. December 2013 at 00:22
@ W. Peden
Jim Glass, I’ll take a wild guess and say that you’ve thought about this topic before.
Well, taxes are my business. They’re so interesting!
Also, back in pre-blog usenet days I spent a lot of time in on sci.econ, and there it was Mosler and the Chartalists (now MMTers) on one side and the Georgists on the other. Both claiming to possess far more economic knowledge than was to be found in any mere textbook.
Ask Patrick Sullivan, he was there, and can tell you. Plenty of flame war stories to relate. I still keep my old asbestos suit in the closet, for old-times’ sake.
The thing is, the decades pass, but so little changes. The Chartalists at least have evolved a little, adopted a much better sounding name to which I attribute a great deal of their success at attracting adherents. But the land taxers are like they are in amber.
23. December 2013 at 03:51
“[] The tax is regressive.”
Yes, and to further illustrate that point, one should consider not only the taxation of land on which dwellings are built but what the “incidence” of such a tax would be for other types of productive land (non-productive land would be a liability and nobody would want to own it because those very objective and accurate appraisers we’d entrust to do valuations would be slow or reluctant to catch on to that).
Figuring out who ultimately bears the burden of various forms of “upstream” taxes is tricky business and economists are constantly shifting their views on this. Nonetheless, it’s likely that the majority of that land tax would end up being borne by consumers through higher food prices, etc. (This has effect on the back of the envelope calculations, but I think the overall conclusion Jim has drawn is the correct one). So, in this respect, a “land tax” in addition to all its other negative features, strikes me as a very distorting and inefficient form of partial consumption tax (much like the current system). If you want to tax consumption, isn’t it better and more efficient to just do so directly?
Jim Glass correctly observed that politicians will tax just about anything that moves (and doesn’t move!) and it has always amazed me how many things do end up getting taxed. I think there are a couple of reasons for that.
First, who and what gets taxed is a result not of economics but of politics and the complex interaction of various interest groups. Most of those groups don’t want to be taxed and others have strong views as to others who should be (e.g., Pigovian taxes). All these groups need to be satisfied a bit.
Second, politicians are also pragmatists. They know that if you want less of something you tax it (and vice versa) and, as observed very early in the history of taxation in the Republic, “the power to tax involves the power to destroy” (correctly attributed to Justice Marshall but almost always ignoring the fact that he got it from the argument of Daniel Webster in that case, McCullough v. Maryland (1819)). Better to spread the pain, distortion and extortion around so as to maim most of the geese but not kill more than a few of them.
It is partly because we are relatively ignorant of the incidence and effect of upstream taxes that is would be dangerous to do large scale “natural experiments” such as a land tax designed to replace all existing taxes. Better not risk blowing up the whole laboratory and all the geese in it (draw your parallel to ObamaCare here).
If we can’t agree on something simple like eliminating the deduction for interest on home equity loans (a no-brainer in my book) then how the heck does Yglesias think we’re going to turn the entire tax system upside down? He’s not only confusing stocks with flows, he’s confusing his own personal fantasy with reality.
With all its current faults and distortions, this current tax system that is the result of an organic development is probably better and less risky than the utopian fantasy schemes that would replace it. Those who want to improve it would better spend their time (and ours) by working to contribute to that organic process by suggesting more rational and less “ambitious” improvements.
And, for a fascinating take on the negative effect of grand schemes on knowledge, I highly recommend this interview of George Gilder:
http://live.wsj.com/video/george-gilder-wealth-is-essentially-knowledge/FB6EB7EC-EC4A-45D4-98CA-33116E7B0366.html?mod=WSJ_Opinion_VideoCarousel_1#!FB6EB7EC-EC4A-45D4-98CA-33116E7B0366
23. December 2013 at 05:53
Vivian wrote:
“If we can’t agree on something simple like eliminating the deduction for interest on home equity loans (a no-brainer in my book) then how the heck does Yglesias think we’re going to turn the entire tax system upside down? ”
A very good question indeed.
What about a more modest objective – replacing property taxes with land taxes?
23. December 2013 at 06:07
Jim Glass,
slow clap. Does it end here in a corner of the Internet, or should Matty be called on the carpet somehow?
23. December 2013 at 06:10
“What about a more modest objective – replacing property taxes with land taxes?”
Yeah, how about convincing the governments of all 50 states and nearly every municipality to do that. Also, see above Jim Glass’s remark about the “Pittsburgh experiment”. Good luck to you. Nevertheless, I’ve no problem with small-scale experiments. Why don’t we start in your community?
I’m not sure this is more modest, but it appears much more rational to me:
Why not first phase out and eventually eliminate the federal deduction for real estate taxes and mortgage interest—that’s $100 billion per year.
Good luck, even with that.
23. December 2013 at 06:32
Jim, So tell us what you like about land taxes. 🙂
23. December 2013 at 07:33
The power to tax land is the power to confiscate it. No need to worry about eminent domain. No need to worry about private property laws. All government must do to take ownership of land is to tax it at a sufficiently high rate until the land’s after-tax value is zero.
Some taxation of land is useful, both to raise government revenue and to discourage hoarding of it. But privately held land should be respected as such. If one is going to tax land at 25% then one should also tax all wealth at 25%. In just a few years government would own everything. I suppose for some that would be mission accomplished.
23. December 2013 at 08:23
‘Remember, this is the guy who was so stricken with surprise by the fact that “it is hard to start a business” when he tried no more than to rent out his own apartment, that he wrote at length about the shock of it.
‘But he wants to re-work the entire tax and capital structure of the entire economy!!!!’
Yeah, who does he think he is, Barack Obama (who has a few knowledge gaps too)?
23. December 2013 at 12:10
@ssumner
Jim, So tell us what you like about land taxes.
I think they are wonderful because they are so efficient and distortion-free as to resource allocation. In theory.
But as Homer said: “In theory Communism works, in theory”.
Falling blindly in love with theory is toxic.
Yglesias is a naif and his being blinded by the beauty of Henry George 130 years after the fact is amusing, in our world where the count of others like him amounts to zilch and falling. But such naifs who fell in love with the theory of communism did no little harm to the world. And my home town is run by naifs in love with the theory of rent control, and so on.
Thus, I really dislike persons who combine naif-hood with self-righteousness as to social policy. I much prefer greedy sophisticated cynics.
Or it could just be that I carry forward much in the way of bitter unresolved anger and personal grudges from usenet days. Yeah, probably that. 🙁
~~~~
@ Dan W
The power to tax land is the power to confiscate it … All government must do to take ownership of land is to tax it at a sufficiently high rate until the land’s after-tax value is zero … In just a few years government would own everything. I suppose for some that would be mission accomplished.
Ah, interestingly, that was exactly the consensus arrived at by the “land tax” sci.econ useneteers: Because it is in practice impossible to fund govt by taxing real and imputed rents of private land owners, the govt simply should own all land and collect 100% of all rent outright, while it provides a most efficient land-leasing market to bidding land users that allocates all resources optimally. Thus the Georgist ideal would be achieved. Mission accomplished, in theory. Because, as we all know, that is just what the many govts around the world thru history until today that have owned all land and selected who used it have always done.
Strangely, many of these land taxers called themselves “libertarians” or “geo-libertarians” or some such. As per, yes it’s still there…
https://sites.google.com/site/justindkeith/home/geolibertarian-faq
Ah, memories. 🙂
23. December 2013 at 13:04
“Because it is in practice impossible to fund govt by taxing real and imputed rents of private land owners, the govt simply should own all land and collect 100% of all rent outright, while it provides a most efficient land-leasing market to bidding land users that allocates all resources optimally. Thus the Georgist ideal would be achieved. Mission accomplished, in theory.”
Theory, meet practice:
“Venezuelan Government Announces ‘Massive’ Food Imports to Combat Shortages”
http://venezuelanalysis.com/news/10122
Just think how much better it will be when they succeed in controlling all the land. And, in practice, the bidding element is optional. All of this made possible by a 2001 Land Law that either taxed or seized (with compensation, of course) “idle land”. The combination of tax and then seizure would actually be a pretty clever technique (a technique similar to using family limited partnerships to depress the value of “land” for gift and estate tax purposes)—you tax the land first, depress its value, and then exercise eminent domain.
23. December 2013 at 13:36
“Maybe I’ll be there to shake your hand…”
C’mon Scott, sing with me you old hippy!
23. December 2013 at 17:04
A way around taxing someone like the school teacher would be to create allodial land titles for individuals thus making corporations the only ones that have to pay taxes on land. It wouldn’t raise enough revenue, but it’s probably something states, especially the big western ones, could do since it’s not possible for the Federal government to tax land anyway as it would be a direct tax. Nevada already experimented with an allodial title system back in the late 90’s and early 2000’s so maybe a state like that could successfully switch over to a land value tax.
24. December 2013 at 02:51
@Jim
Just because Matt Y made a big mistake with the valuation doesn’t mean that there isn’t a case for a decently sized land tax.
Currently the 4 trillion that the federal government is taking is coming from somewhere, right? Assume the government radically reduces its size and taxation. How much of that gain do you think will go into rising wages and how much into rising rent? Theory predicts that it will be greatly towards rent.
Assessment issues can be dealt with self-assessment + compulsory structural insurance (to isolate building value) + mandatory sale at 103% of the self assessed price.
The full land tax effect you’re describing is a shock therapy – 100% rent collection by government. Obviously this will start a huge crisis. People have made economic decisions taking the tax structure into account and this will have to be taken into account.
Almost every georgist seeks a gradual movement towards larger and larger sums being obtained from the land tax and smaller sums from other distortionary taxes, for polities that already have high taxes.
A lot of measures need to be taken for any tax shift to be successful
1. clear communication about the future path of taxation, giving people and companies the time to adjust to the new regime.
2. vouchers for those with the least ability to pay in the new regime who have paid into the old regime.
@lorenzo
The linked article on the german market was very interesting.
24. December 2013 at 10:58
Kmag, Yes the Feds should probably stay away from land taxes.
24. December 2013 at 15:38
“…it’s not possible for the Federal government to tax land anyway as it would be a direct tax.”
That depends on what you mean by “not possible”. Article I, Section 9, Clause 4 provides:
“No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.”
So, while federal land taxes would almost certainly be viewed as “direct taxes”, the consequence of this is not literally that a land tax is “not possible”, but that such a direct tax would have to be apportioned. In fact, the US had an apportioned land tax as early as 1861.
But, I’d agree that apportioning a land tax would make it so administratively cumbersome that it would be be highly impractical to the extent that it would *almost* literally be “not possible”.
26. December 2013 at 10:22
Now imagine a retired schoolteacher living in a $600,000 house in Pasadena, with a replacement value of $200,000. The land is worth $400,000. Her tax is $100,000. That’s a lot for a retired schoolteacher!
The value of her land would drop like a rock but it might find equilibrium at a level that she might have to move. Never the less to hard to get there.
26. December 2013 at 10:30
The words afford and affordable are meaningless. People should always use concrete numbers. For example one might say that $x/month premium is to much for someone making $y/week.
27. December 2013 at 15:40
Scott,
You said: “Now imagine a retired schoolteacher living in a $600,000 house in Pasadena, with a replacement value of $200,000. The land is worth $400,000. Her tax is $100,000. That’s a lot for a retired schoolteacher!”
I’m with you here, but this is running into a circular problem. If the land carries a per annum tax cost of 100,000 it will not be worth 400,000 for long. Real estate prices would need to massively readjust to incorporate a LVT, which makes the tax extremely difficult to implement on anything larger than a county scale at a time. Fundamentally you’re adding much more weight to opportunity cost as a determinant for land prices than we see today.
This doesn’t mean that an LVT is impossible, just that the implementation would need to be very gradual.