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Wednesday, March 30, 2011

What is the Least Bad Tax?

Fred Foldvary wrote on CALPCandidates:

> In allodial-speak, "communist" means one who opposes all subsidies.
> "Collectivist" means one who believes that if someone receives a
subsidy from
> government, he should send it back.
> "Central planner" means opposition to government redistribution from
workers to
> landowners.
> By those allodial definitions, I am a proud communist collectivist
central planner.

Me, too!


The reason so many economists say that a tax on land value is the "least
bad" tax is that such taxes have no deadweight loss. Any tax on
production or exchanges or movable assets causes economic inefficiency.
A tax on these things causes a deadweight loss (i.e. allocative
inefficiency) because people who would have more marginal benefit than
marginal cost are not buying the good or service — just as a subsidy
induces people to buy who impose more marginal cost than their marginal
benefit. However, this effect of taxation does not happen when the
supply of the taxed good is perfectly inelastic, as is the supply of
land — more precisely, the surface area of the Earth. Sites cannot flee
or evade taxation, and the available amount of them is not reduced when
they are taxed. (When a tax is not on a good but rather on a "bad", like
pollution or congestion, it's the very absence of the tax that causes
allocative inefficiency, because external costs are not internalized.)

Taxing land value is not only more efficient than taxing production or
exchanges, but it is also less intrusive. All the government needs to
know is who owns each plot of land and how much the unimproved land is
worth. Appraisers and insurers make such calculations routinely, and one
variant would have each land-holder self-assess as long as he's willing
to take any offer over his assessed value. There's no need to audit
anyone's behavior, as with taxes on income/production/exchanges. You
don't even need to visit the site or look over the fence, as you do with
taxes on land improvements or square footage. For illiquid landholders,
taxes could accumulate as a lien against the property, capped at its
market value, so nobody need ever be taxed off the land they hold.

Land value taxes need not even be strictly mandatory. If you as a
landholder decline to return to our community the ground rent you
appropriate from us, then we could simply disconnect you from our wires
and pipes, and while you're in arrears we could publish your name,
address, and photo as someone whose property and person are excluded
from the protections of our LVT-financed police and courts. If we catch
you using any of our streets, parks, or other LVT-financed public goods,
then you would owe the arrears on your parcel's land value tax, per the
terms of the prominent no-trespassing signs prominently marking those
public goods.

Land value taxes are naturally local, and so encourage Tiebout Sorting.
If the the local mix of government services is too high (or too low) for
your taste, or if they aren't a good value for the LVT rate financing
them, then you can vote with your feet. By contrast, income and sales
taxes tend to get centralized at the state or even national level,
because (unlike land) income and sales can flee to lower-tax
jurisdictions. (New Hampshire is among the most free states, and gets
the highest percentage of government revenue from property taxes.
California finances its high government spending with high centralized
state income taxes that rose after Prop 13 restricted local property
taxes in 1978.)

LVT retrieves the extra land value created by public services — streets,
pipes, levees, police, parks. This creates pressure to defund public
services that do not actually add value in the free market for land.

LVT turns out to closely model how consensual private communities tend
to govern themselves. Malls, business parks, hotels, condominiums,
homeowners associations — all tend to "tax" their tenants not according
to profits or revenues or inventory or improvements, but mostly by site
value (for which square footage is often a good proxy).

LVT imposes a built-in ceiling on government revenue. Critics of land
value taxation claim it wouldn't raise enough revenue because ground
rent is allegedly only a small fraction of GDP. That sounds like a good
thing to me. If government revenue is restricted by definition to ground
rent and fees for polluting/congesting/depleting the commons, then
government cannot be nearly as big as when it is allowed to tax labor,
production, exchanges, and all resulting products. Once you have
taxation of people's labor and exchanges and produced assets, there is
no limit to what the government can take from you.

For a long list of economists and Libertarians who defend LVT as the
least bad tax, see .