Previously on UnPacked, I looked at the case for a Land Value Tax.
The basic argument is that when land prices – and, therefore rental values – soar (largely as a result of other people’s efforts), the returns to the landowner shouldn’t just be taxed, but taxed in preference to most other forms of income or wealth generation.
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Of course, you can’t tax the value of a piece of land if you don’t know what it is. In their new book Radical Markets: Uprooting Capitalism and Democracy, Glen Weyl and Eric Posner propose an ingenious means of valuing not just land, but all other taxable assets. In a critique of the book for CapX, Sam Bowman summarises its big idea:
“Weyl and Posner suggest a system of taxation where, in principle, everything is available to buy, all the time. A homeowner or patent holder, for example, must declare the price they would sell their house or patent for – and if someone comes along and offers them that, they will have to sell. Assets are taxed annually on that valuation – they suggest a rate of 7 per cent – with the proceeds distributed evenly among a country’s citizens via a cash ‘dividend’.”
Bowman points out that the impact of such a measure would be ‘dramatic’:
“Asset prices would fall by between a third and two-thirds of their current level, since the taxes that will be owed in the future would be priced in today. The large 7 per cent tax proposed by Weyl and Posner would raise roughly 20 per cent of national income – enough to eliminate other taxes on wealth and capital, and in the US pay for a $5,300 per person ‘dividend’ as well.”
In reality, no responsible government would engineer such a precipitous drop in asset prices – which would bring the banking system crashing down too. Any shift in taxation to land and other asset values would need to be introduced gradually — with the aim of calming not breaking the property market.
Taking that as read – and focusing solely on its application to land – are there any other objections to the Weyl-Posner proposal?
Bowman argues that you don’t need a Land Value Tax to deal with land owners who use their holdings to obstruct or ‘ransom’ much needed development – compulsory purchase powers could do the job instead. A less restrictive planning system would also help, he adds.
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However, as he says himself, “we have to tax something”. That being the case, taxing land is just about the least bad option. Putting up taxes on production means less production; putting up taxes on consumption means less consumption; but putting up taxes on land makes no difference to the amount of land, which, for obvious reasons, remains constant. The only thing a land tax disincentivises is property speculation – which is economically unproductive and socially useless.
The real problem with the Weyl-Posner proposal is the same thing that makes it brilliant – i.e. getting land owners to value their own land. The brilliant bit is giving the state the right to buy the land at the self-assessed value, which incentivises land owners not to under-value it. The problem is that this is manifestly unfair. Householders and small businesses are unlikely to have the expertise required to value their land accurately. Erring on the side of caution, they’d most likely over-value – and thus end up paying more in tax than professional speculators and major landowners. Alternatively, a few might naively under-value their land and thus face the compulsory purchase of a home or a workplace at a knockdown price.
However, there is an obvious solution, which is to turn the proposal on its head. Instead of owners valuing each piece of land, the state would do it; and instead of the state having a right to buy it at that price, the owner would have a right to sell – thus incentivising the state not to over-value (and thus over-tax) the land. This would be less oppressive, putting the onus of accurate valuation on the state and without placing ordinary property owners under a general threat of compulsory purchase.
I’ve come to believe that some form of Land Value Tax is not only feasible, but necessary. However, new taxes are always controversial. To introduce them requires not just cleverness and courage, but also wisdom and tact.