Evan Soltas
Jun 15, 2012

On Land Taxes

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas...It is ideas, not vested interests, which are dangerous for good or evil. - John Maynard Keynes, The General Theory, revisited by "Fear the Boom and Bust"

Matt Yglesias has a thought-provoking post up about land taxes. What he didn't really mention, now giving me an excuse to blog about it, is the fascinating intellectual history of land taxes. I don't really get to do a lot of economics history on this blog -- busy with the present -- but the argument that we really should be taxing land, and not property or other capital, goes back to Henry George and the 19th century. It's why I put the famous Keynes quote at the top of the post; George is very much the archetype of "some defunct economist." (Incidentally, Yglesias is far from oblivious of his intellectual influences.)

What I find so fascinating about Henry George, who proposed that the state's primary source of tax revenue should come from a flat tax on the value of unimproved land, is that the economics behind his idea are, in my opinion, sound and offer still a strong argument on its behalf. It represents a "road-not-taken" in our modern history, inviting us to peer down. (Remember that before this century, the U.S. federal government, among others, funded itself primarily through excise taxes and tariffs. The emphasis on individual and corporate income and payroll as the main source of revenue has not always been the case.)

The first argument in favor is that, in theory, a land tax will not create a deadweight loss. The supply of land is inelastic -- nobody (except the Dutch) can change, i.e. create or destroy, the quantity of land. Without a change in quantity supplied, there will be no loss in social welfare -- only a change between consumer surplus, producer surplus, and government revenue. (See graph to right.)

Second, shifting the burden of property taxes to unimproved land makes sense because, as Matt wrote, the incentives property taxes create are awful. Moreover, taxing unimproved land reverses the incentive problem entirely, encouraging land-use efficiency.

Third, it's well recognized that it's inefficient to tax capital income, which is a fundamental problem with the property tax.

If only because I want an excuse to read Progress and Poverty, can we make the idea of land taxes the next big thing in the economics blogosphere?