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Progressivity in Taxation

The canons of taxation — the characteristics by which we judge the desirability of a tax — include economic neutrality, efficiency, equity, administrability, simplicity, stability, and sufficiency. We also tend to regard as desirable that a tax be progressive — that is, that it impose a higher burden on those who are more able to pay. Land value taxation is progressive. Our most valuable land, which tends to be in the lands of the very wealthy, is in the central business districts of our largest cities. And acre of urban land can be worth 100,000 times what an acre of agricultural land is worth. Publicly held corporations own some, family trusts and real estate investment trusts own some. Ownership of such assets is highly concentrated in the top 5% of the wealth distribution. And our existing assessment systems undervalue those holdings by huge margins.

But ability to pay is not the right criterion. Check out that theme for more detail! (It may surprise you!)

Bill Batt: The Merits of Site Value Taxation

... Land Tax is the Perfect Tax
It may therefore come as a surprise to many that the perfect tax to students of tax theory is one imposed on land value alone. Unlike the conventional property tax which uses both land value and improvement value as its base, a tax on landsites satisfies all the criteria of sound tax theory. It is highly stable, regardless of the state of the economy. It can always be set to raise sufficient revenue, without undue burden. Because land supply is inelastic, it cannot impose any economic distortions and it is therefore totally neutral with respect to all economic choices. Whatever tax is borne is capitalized in the value of the site parcel, without in any way affecting its sale price, which of course is determined by the market. Most importantly of all, studies have now recognized that a tax levied on land according to its value is quite progressive, contrary to much conventional wisdom. ... Read the whole piece

Bill Batt: How Our Towns Got That Way   (1996 speech)
There were many arguments to be made for the classical tradition, the result of which would be to rely upon payment of rent of land according to its value to society. George recognized that land value is largely a function of how society has elected to invest in any general neighborhood; there is no argument for any one titleholder to reap the reward of what others have invested. Gaffney points out that, from the standpoint of economic theory, the framework had the following virtues:
  • It reconciled common land rights with private tenure, free markets and modern capitalism, a growing and persistent problem as the industrial society took hold.
  • It enabled the lowering of taxes on labor without raising taxes on capital.
  • It reconciled equity and efficiency. It constituted a progressive tax because land is concentrated so much among the wealthy and because the tax cannot be shifted. It was efficient because it is neutral among different land-use options.
  • It constituted no disincentive to business location or population settlement. In this way it encouraged the most efficient land use and discouraged sprawl.
  • It created jobs without inflation, and raised government revenue without any penalty upon its base.
  • It strengthened public revenues and at the same time promotes economy in government.

Those economists who today still persistently hold to the view that there is something special about land that make it unwise to treat as a form of capital are known as Georgists. They represent a small minority of the economics profession, but, little known as they are, they are among its most esteemed members.... read the whole article

Mason Gaffney: The Taxable Capacity of Land
... The relevant rule we need here is just that people's house values are more alike than their lot values. It is lot value, more than house value, that divides the rich from the poor.
  • The average house (ex land) in the posh UEL jurisdiction is worth 2.8 times the average in the Victoria Rural jurisdiction ($173.1/$61.9).
  • The average land parcel (ex building) in the UEL is worth 17.5 times the average in the Victoria Rural jurisdiction ($692.5/$39.6).
Now do us both a favor, please. Pause and savor that comparison. Let it linger, as though you were testing a slow sip of wine from Fredonia's famous grapes. Roll it on your tongue, mull sensually over its aroma and bouquet, and, getting back to business, mull cerebrally over its full import. The house that shelters the very rich family is worth 2.8 times the house of the modest family; but the land under the house of the very rich is worth 17.5 times the land of the modest. Seventeen and one half times as much! Again, it is lot value, more than building value, that divides the rich from the poor. Seldom will you find an economic rule more strongly supported by data. It's just a matter of presenting the data so as to test and bring out the rule.

An American counterpart of Vancouver's "University Endowment Lands" is Beverly Hills, California, where land value composes some 80% of residential values, and the mean parcel is worth something like a million dollars. Beverly Hills, with its great wealth and mansions, is known as "Tear-down City." Every year many a grand old palace that once sheltered some renowned matinee idol, and rang to scandalous parties, is torn down to salvage its site for the next, grander one. In a land boom, such as crested in 1989, half the city goes to the brink of demolition and replacement.

What do those data tell us? The rich as a rule do not live next to the poor. Rather, they cluster in neighborhoods with much higher lot values. The poor seek shelter first, and go where it is affordable. The rich put a high premium on location, neighborhood, views, and grounds, resulting in higher land fractions in their real estate. Mansions are visible evidences of wealth, impressing viewers powerfully; land values are invisible. The perceptual bias is to underrate the invisible, if you are not regularly in the real estate market. In the numbers, however, land and buildings are equally visible, and their message is clear. It is land value more than house value that divides the rich from the poor. Ergo, a tax shift from buildings to land is a shift from the poor to the rich, even though the houses of the rich are exempted. It makes the property tax more progressive. ...

Making the property tax more progressive is not just equitable, it raises its revenue capacity. That is because visible damage to the poor and marginal puts a cap on any tax. You can't squeeze blood out of a turnip, and if you try you'll look like the Sheriff of Nottingham. A land tax won't drive the poor from their humble huts, because it exempts the huts, and the sites have low tax valuations. It may tax a few off valuable land, if their poor huts are there and they own the land. However, if they own such land, are they really poor?

They may be "land-poor:" a few folks always are. They have non-cash assets, but are illiquid. "Illiquid" may be just a euphemism for "holding out for more" -- there is always a market at a price. Even so their plight, genuine or affected, traditionally evokes sympathy and support. We must address it.  ...   Read the whole article

Mason Gaffney: George's Economics of Abundance: Replacing dismal choices with practical resolutions and synergies
b. Reconciling progressivity and motivation.
A land tax abates concentration of wealth and power without limiting ambition or enterprise. It taxes wealth while sparing both capital and income. It puts no cap on ambition and enterprise, except to redirect those useful traits into creation, production, hiring, and capital formation, and away from the zero-sum game of land-grabbing.

It requires no incentive-warping progressive rate: all land is taxed at the same rate, in proportion to value. The tax achieves progressivity by using the observed reality that wealth rises with income, faster than income; and landholdings rise with wealth, faster than wealth. Otherwise put, the land tax offsets concentration because ownership of wealth is more concentrated than income; and ownership of land is more concentrated than other forms of wealth. As George said, "The great cause of the concentration of wealth is concentration of the ownership of land."  ... read the whole article

from "What Happens When a Large City doesn't have a Property Tax but Attempts to Enact One: A Case Study of Mesa, Arizona, at http://www.lincolninst.edu/pubs/dl/1232_Chapman%20Final%20SM.pdf

Most public finance economists understand that while a property tax is sometimes difficult to analyze for distribution effects, it most assuredly is not regressive. There may be political arguments against this tax, but regressivity is not one of them. [page 1; the footnote references Tiebout (1956) and Youngman (2002).]

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