Right-Sizing Tax Talk
H. William Batt
[Reprinted from
GroundSwell, January-February 2011]
Promises of cutting taxes are all the rage this year, even when
candidates aren't willing to indicate where comparable budget cuts can
be done. The greatest amount of resentment seems to be directed toward
the real property tax, although that's the one that is least
understood of all.
Theorists of tax policy use criteria to evaluate which taxes are best
and which are worst, and they are typically found in graduate school
textbooks on public finance. Unfortunately, little effort is made to
help public officials understand them. A good tax should be measured
by as few as four criteria or as many as eight, depending on how the
measures are described.
A good tax is efficient -- it rests lightly on the economy without
deadening its vitality, neutral inasmuch as it imposes no distortions
on market choices, and fair insofar as people pay according to the
comparability of their situations. It is also easily administered with
low costs, simple for people to understand, and reliably stable to the
extent that the public can depend on the revenue stream for support of
services.
Economists and tax officials use terms like shifting incidence,
deadweight loss, excess burden, tax expenditures, moral hazard, and
capitalization, all of which are terms applied to the criteria noted
above. Yet tax theory rests on economic theory, and the economics that
has prevailed for the past century now appears flawed. One consequence
is that all the taxes that are reviewed by contemporary conventional
economists are deemed to have downside effects and that there is no "perfect
tax."
Applying classical economic theory, the economic paradigm that
obtained prior to 20th century neoclassical economics, offers answers
that are outside the realm of mainstream consideration today.
Classical economics recognizes the significance of rent, also called
ground rent, land rent, or economic rent, whereas neoclassical
economics trivializes it. Rent, as used by political economists from
Adam Smith, Thomas Malthus, David Ricardo, John Stuart Mill, Henry
George and Alfred Marshall, meant "income derived from the free
gifts of nature." In Wealth of Nations, Smith wrote "Both
ground-rents and the ordinary rent of land are a species of revenue
which the owner, in many cases, enjoys without any care or attention
of his own. Though a part of this revenue should be taken from him in
order to defray the expenses of the state, no discouragement will
thereby be given to any sort of industry.... Ground-rents and the
ordinary rent of land are, therefore, perhaps, the species of revenue
which can best bear to have a peculiar tax imposed upon them."
Mill added the observation that "Landlords grow rich in their
sleep without working, risking or economizing. The increase in the
value of land, arising as it does from the efforts of an entire
community, should belong to the community and not the individual who
might hold title." It was left to Henry George to synthesize what
had come before and write that "we may, without jar or shock,
assert the common right to land by appropriating rent by taxation."
Because land rents from natural resources are socially created
values, and constitute windfall gains to titleholders when not taxed,
they actually improve the performance efficiency of the economy when
they are removed to support public services. Taxing rents in no way
inhibits or distorts economic vitality, and conform in every other way
to the principles of sound tax theory. In fact, unlike other taxes, a
tax on land value actually fosters economic development rather than
being a leaden weight. This is because it frees up investment that
otherwise constitutes "frozen capital," and makes available
on the market sites that are otherwise held for speculative gain.
Because land has a fixed supply, the incidence of tax burden cannot
be passed forward, which means that it is paid by those who own land
sites with the highest market value. A land value tax falls largely on
urban sites in core areas. It is easily administered, unavoidable,
simple to understand, and highly stable. George wrote that "In
every civilized country, even the newest, the value of the land taken
as a whole is sufficient to bear the entire expenses of government,"
a thesis today known as the Henry George Theorem, and borne out in
studies by leading economists including Nobel laureates William
Vickrey and Joseph Stiglitz.
By law assessors must value land sites separately from improvements,
and computer technology now provides the means by which to do this
quickly and cheaply. It is a simple procedure to alter the
conventional property tax by phasing out the tax on the building
component and securing the same revenue stream by taxing land value
alone. The gains in efficiency and resulting economic performance are
amply demonstrated in the many localities worldwide where this tax
regime has been instituted. Objections to taxing the rental flows from
land sites fall apart when the economic dynamics are fully understood.
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