I have long been in favor of levying a tax on the value of land. Such a tax would be economically efficient and morally just. But this has been politically impossible: land-owning interests, which now comprise a large part of the population as owner-occupiers, have been too strong. This is a tragedy. Now that Western politicians are grappling with low growth, strained public finances, high inequality, inter-generational tensions and an unstable financial system, they need to consider the kind of fundamental change that is taxed.
The idea of taxing the rental value of land is most closely associated with 19th-century American Henry George. But Adam Smith, David Ricardo, James Mill and his son, John Stuart Mill, all shared the same idea. Thereafter, foolishly, economists began to include land (which includes all non-produced natural assets) in produced capital. Then came the neoclassical “two factor” models of the economy, which are completely misleading. As a result, taxes on land were increasingly considered in the context of taxes on property, even though natural resources are quite distinct from capital stock created by effort and abandoned consumption.
A paper published in 2021 by the Center for Economic Policy Research, titled “Post-Corona Balanced-Budget Super-Stimulus: The Case for Shifting Taxes on Land”, provides a great overview of all the relevant arguments for today. Its authors have also provided an excellent summary at VoxEU.
The moral case for separating the returns on natural resources from other assets is that prior human efforts already exist. Their value depends on the latter, but certainly not on their owners. For example, the land under my house has gone up in value over the past few decades. I didn’t do anything to earn it. It was the result of the efforts of all who contributed to making London richer, including, of course, the public at large though their taxes. A large part of the aggregate value of the productive cities is thus captured by those who own the land.
In economics, it has long been understood that it is sensible to tax factors of production whose supply is unaffected by its price. The stock of reproduced capital is the opposite. In a globalized economy with free movement of capital, it is extremely difficult to tax such assets, as is also true for mobile human capital. In either case, attempting to do so runs the risk of reducing the capital supply and income. But it is not difficult to tax land, which is by definition static.
Another argument for taxing most of the rental value of land is that the credit system now mainly finances land ownership. Thus the land rent is converted into interest on unproductive loans. Speculation bubbles in land also drive credit cycles to devastating macroeconomic effect.
At a minimum, many governments now need to raise more revenue, ideally in ways that do not reduce prosperity. Again, the socialization of higher yields on land is an obvious way to do this. Furthermore, the tax base is huge: in the US and UK, the value of “non-produced assets” is more than half of total assets. The same is true in many other countries.
None of this would matter much if in practice the potential gains from moving away from taxes on capital and labor produced were not large. but they are. The authors of the paper estimate from a simple model that an increase in the tax rate on the value of land from a level of 0.55 percent to 5.55 percent, with reductions in the taxation of capital and labor produced by 28 and 10 percentage points, respectively, would reverse the trend. Will increase production by 15 percent relative to . If policymakers want to spur growth, this is an obvious place to start: far more tax-free rents and far less capital formation and people to work.
The political power of big and small landlords, why the old arguments of the great economists have been ignored for so long. But it is also an intellectual mistake to conflate land with produced capital as if they were the same thing. Furthermore, some argue that pricing land is practically impossible. But this is wrong. As the paper shows, it is possible to value land if governments choose to do so.
Obviously, there will be huge transitional problems, not least a change in the values the mortgagees have agreed upon. One way could be to introduce new taxes on land only on the values Above Today’s Another would be to gradually phase out the new taxes.
Crucially, if reforms capable of making the country better overall exist, it should be theoretically possible to offset the disadvantages of those we care about and still make everyone else better off. There are very few such policies. be bold. try this one.
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