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The Economist: Overhaul Tax for the 21st Century


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"All countries should tax both property and inheritance more. These taxes are unpopular but mostly efficient. In a world where property ownership brings windfalls that persist across generations, such taxes are desirable. A conservative first step would be to roll back recent cuts to inheritance tax. A more radical approach would be to introduce a land-value tax, the most efficient of all property taxes and one with a long liberal heritage (see Briefing)."

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The second appealing feature of land-value taxes—and the one that entices economists—is their efficiency. Typically, taxing a good lowers supply and raises prices. Income taxes cause people to work less or exert less effort. Taxes on alcohol deter drinking. Taxing property values as a whole discourages development. But land is different. Its supply is fixed and cannot go away. As a result, as long as landlords are competing with each other for tenants—whose numbers and willingness-to-pay are unaffected—the tax cannot, in theory, be passed on through higher rents. Landlords must simply pay up and carry on as before. In 1978 this efficiency led Milton Friedman, a celebrated free-market economist, to declare a tax on the unimproved value of land “the least bad tax”.

 

So taken was George by the arguments for land taxation that he thought the state should confiscate all land rents. Nobody would be allowed to profit from land ownership. He thought this would raise enough revenue to all but abolish other taxes. His campaign for “the single tax” suited George who, like Friedman, advocated free trade and free markets throughout the rest of the economy.

 

No Georgist era

 

Yet despite George’s fame and influence, “Progress and Poverty” did not lead to widespread adoption of land taxes. In Britain a type of land tax was stripped from the radical “people’s budget”, passed in 1910 under a Liberal chancellor of the exchequer, David Lloyd George, after landowners in the House of Lords objected. In subsequent decades Georgist ideas were left behind on both sides of the Atlantic. The trade-union movement was more concerned with rights for workers than land rents. Policymakers focused on attacking excess profits accruing to shareholders, notably those arising from the market power of vast firms like Standard Oil.

 

 

https://www.economist.com/leaders/2018/08/09/overhaul-tax-for-the-21st-century

https://www.economist.com/briefing/2018/08/09/the-time-may-be-right-for-land-value-taxes

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2 minutes ago, b_m_b_m_b_m said:

What would a land value tax do to property values in metropolitan areas, suburbs etc.

From the article: 

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A land-value tax would do little to change the underlying shortages that have driven up property prices. Contrary to the claims of some Georgists, it would not much change the incentive to develop or sell valuable land, argues Stuart Adam of the Institute for Fiscal Studies, a think-tank. Owners of vacant plots in pricey areas would indeed face the same costly levy as owners of adjacent tower blocks. They would have to pay the tax somehow, and a landlord short on cash may have to sell the plot. But there would be no change in incentives for owners with deep pockets, such as property-development firms. Lower land values would exactly offset the fresh incentive to sell vacant land. Meanwhile the forgone rent from letting a plot lie vacant would remain the same. However, revenues from the tax could be used to cut conventional property taxes, which do deter building. This would not help much in rich cities where the main constraint on new building is regulatory, says Enrico Moretti of the University of California, Berkeley. But it might help rejuvenate areas that are otherwise in decline.

 

It would help, but it would need to be coupled with loosening up zoning regulations to have a real impact in the large metro areas.

 

This article is fairly negative about the land value tax. I think there are economists that would argue it is better than The Economist makes it seem.

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To stop companies shifting profits, governments should switch their focus from firms to investors. Profits ultimately flow to shareholders as dividends and buy-backs. But few people are likely to emigrate to avoid taxes on their investment income—Apple can move its intellectual property to Ireland, but it cannot put its shareholders there. Corporate tax should be a backstop, to ensure that investors who do not pay taxes themselves, such as foreigners and universities, still make some contribution. Full investment expensing should be standard; deductions for debt interest, which incentivise risky leverage for no good reason, should be scrapped.

This is an interesting idea that I'd like to see explored more. I imagine the consequences of this kind of thing would be significant, but it's difficult to quickly assess what they would be. My first instinct would be that simply because you're moving from taxing one large entity to many small ones a lot more of the expected tax revenue would be collected, just because on average investors wouldn't be as good at finding loopholes and what not. Still, when many of those investors are themselves large companies, maybe it doesn't change much.

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Read this article two days ago—wish the economist would opine about this kind of stuff on the front page more often.  Usually you have to search their Buttonwood’s Notebook blog for smart policy recommendations, now that they’ve closed down their Schumpeter column.

 

Targeting rents and land as the primary sources of tax revenue is by far the best way to produce government revenue.  Rents do not add productive capacity to the economy—they merely leech of production.  Redistribution of this parasitic form of income plows money back into the production of the industrial economy, which is where broad-based growth and rising living standards for the average person (rather than the idle rentier) comes from.  This was more commonly understood before John Bates Clark ruined economists’ understanding of the distinction of productive vs unproductive income by arguing, through tortured logic, that there was no such thing as the latter.  This trampled over the legacy of the classical economists, including—among all people—Adam Smith, and Ricardo.

 

It’s crazy how many students of economics today have little understanding of the history of their profession.  It’s precisely the veil of ignorance the Chicago School needed to cement their hold on power by making Clarks’s nonsensical thesis the ‘new normal’ of economics, despite the intellectual feebleness of so much of its philosophical foundation.  Not to mention what keeps sensible tax policies from being implemented.

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21 hours ago, sblfilms said:

I’m a little confused by the argument that you can’t pass the LVT on to renters. Rents are generally debt-service + maintenance + insurance + taxes +/- whatever profit the market will bear. When property taxes go up here, rents go up too...

Rents are composed of:

- Whatever money the market will bear.

 

This money can then go to things like... debt-service + maintenance + insurance + taxes + profit.

 

If you decide that you aren't going to profit from renting because of a high LVT, you need to sell the land to not incur that LVT, and another landlord will step up in your place and rent the land out. If it is unprofitable for every landlord, then the land isn't worth that much and the price and corresponding LVT will lower, and at some point it will be worth it for some landlord. Land doesn't go away, it always exerts its supply forces on the system.

 

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What would a land value tax do to property values in metropolitan areas, suburbs etc.

Generally encourage more density, especially in plots of land that are unused. I'd expect taxes to lower in dense cities, stay the same low amount in rural areas, and taxes to rise in suburbs. A 2 million dollar 2 story home in SF would be punished severely by a LVT. A 60 story high rise would have its taxes drop considerably.

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No, landlords are always going to seek to rent out their apartments at the maximum possible value they think they can get. An increase of property tax does not change that formula whatsoever.

 

Higher property taxes will lower the value of the property, so you should actually see the opposite effect take place.

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