Give up. Taxation isn’t about optimality, it’s about power and perception. The primary question is “how much can the authority extract without losing the constituency”. I have a few more practical concerns with this proposal:
Why land? This would seem to apply to any transferable asset.
The “grandma’s house” problem. Nobody supports a system where Grandma has to pay massively higher taxes or lose her house. This generalizes to a desire for tax stability. Highly unpredictable taxes leads to revolution.
Transfer costs are now taxed as well. People bid up your property, well above it’s value to you, but somewhat below the cost of relocating. That’s probably fine, as taxes are arbitrary at their base anyway.
I don’t get the idea of selling liability—who’s on the hook if the new liability-holder dies or stops paying? I don’t think secured taxes (those based on the threat of taking the base thing) can be fully separated from their collateral. You can fix the same problem with a simple insurance contract, though.
Give up. Taxation isn’t about optimality, it’s about power and perception. The primary question is “how much can the authority extract without losing the constituency”.
I think there’s two ways we can approach this.
One is as an interesting problem to look at. It’s not necessarily that policy proposals will be adopted, but exploring policies is an interesting exercise, and it may lead to marginally better policies or even Pareto improvements in policy if they were adopted. And following the idea that the purpose of policy exploration is to have ready-at-hand better policies/ideas when a crisis strikes and people are looking for alternatives because the current system isn’t working, it seems worth doing this work even if it doesn’t seem clear what the path to adoption is.
The second is that you’re right, humans often forego “better” solutions for ones that better serve other purposes. For example, is taxing income a good idea? Probably not, but it’s relatively easy to do and to understand, so it’s a straightforward policy choice. Does this mean we can’t consider alternative taxation systems to the one we have, though? I think it doesn’t, only that people developing policy must eventually consider things other than economic efficiency if they hope to develop policies that are likely to be adopted.
Why land? This would seem to apply to any transferable asset.
This could work for other assets where
each asset has a natural peer group (in this case, other properties in the neighborhood) from which to predict the value; or the value can’t change so you can just use the market price of the asset itself
it’s hard to hide the asset
the asset can’t be imported/exported, or you don’t care if your country loses this asset. For diamonds, needlessly distortionary but not a disaster; for car manufacturing equipment, very bad.
Would marketable securities (e.g., exchange-traded stocks) be a good candidate for this kind of tax? I guess not, because that would introduce an incentive to own non-marketable securities instead, which would distort the economy and make it less efficient. So do we also need that the taxed asset class has no untaxed substitutes?
Perhaps, with a low enough rate. Taxes will always incent some substitution, especially if they’re large relative to the underlying asset value. It’s quite possible that the additional asset reliability of being traded on a taxed exchange can be recovered by taxation on the assets in the exchange.
Note that land has substitutes too—you can live/work in a less-valuable-to-others space, or in a different jurisdiction, or focus your investments on non-taxable improvements (non-fixture furniture, removable appliances, non-durable landscaping or cleaning services, etc.)
Now I’m confused. Improvements that change the valuation of your property (in the “average of neighbors” case, those that improve the overall neighboorhood) are taxed in this system, right? Non-taxable improvements are those that don’t change the calculated/bidding value.
Substitution to a lower-tax is as much distortion as the same substitution to no-tax. Impacting people’s cost/value decisions about their purchases is a distortion. For both stocks and land, it’s debatable how much distortion is acceptable.
And I’ve gotten kind of lost on which aspects of this we’re talking about—apologies if I’ve responded to a different thing than you intended.
Yes, sorry, if you improve your neighbors’ properties, that increases your tax burden. But that’s usually only a small fraction of the value of the improvement to your property.
Substitution to a lower-tax is as much distortion as the same substitution to no-tax.
Would you claim that this tax reduces urbanization? For some reason, I’m not totally sure one way or the other. I agree that would count as a distortion.
I think this tax is fairly theoretical and un-implementable, so predicting second-order impact is not very helpful. More importantly, the size of the tax is more important than the mechanism of calculation for answering the question of what behavioral impact it will have. If the tax is roughly the same amount as current property taxes, it’ll have roughly the same results.
My guess is that urbanization would slow a little bit with real-estate taxes two or three times higher than today, but probably not stop. over time, differential tax rates will and do shift some people and operations toward lower-tax jurisdictions, but unless it’s egregious, it’s hard to overcome the network effect of being physically near other successful people/businesses.
My usual answer to “why tax land?” is “the speed of light”, i.e. the physical constraints of our universe making locality valuable. And we’re okay to tax things that are powered by things like physical constants because they are constant and if you get the policy right you minimize the creation of disincentives on the margin, i.e. you tax the “fixed” value of land (locality) so you avoid doing things like creating price floors and ceilings or creating marginal disincentives that result in no development or less development since any marginal development will pay for itself, taxes included.
To be clear, you can’t tax land. You tax people (or corporations), calculating the amount based on land, secured by your ability to (re)take their land. But more importantly, my question wasn’t “why tax land”, but “why not tax everything?” michaelcohen had a pretty good answer for this—land is a better target than most assets because it’s difficult to hide and not subject to removal from the tax jurisdiction.
Basically, land is easily found and threatened by the tax authority (for both physical and historical reasons).
If the insurers go insolvent, does the government default?
I would suggest a system where the government sells bonds linked to specific future tax revenues, and allow a property owner to buy the bond for their own property many years in advance, essentially prepaying the taxes at the current bond rate. If property values and taxes, or even just collections, crash, the bond holders take the loss.
If I were designing the system, the final fallback would STILL be that the tax is secured by the asset. Insurance is just a side-contract, and if the insurer doesn’t pay, you sue them. If they still don’t pay, then the owner pays. If nobody pays, the government takes the land. It’ll make a nice park, if they can’t auction it off for enough :)
This way, the tax rules are simple, and any insurance or smoothing deals are optional ways to make it more predictable for owners (and more costly overall).
Right. That’s a silly and unnecessary idea. Your liability is someone else’s asset. In this case, the government’s. There’s absolutely no way that the asset holder (be it the tax authority, or a lender) should or would let you turn their secured debt (you pay or we take the asset) into an unsecured one (you pay or we … ask again?).
You can’t generally transfer liability and you certainly can’t transfer or discharge FUTURE TAX liability.
Give up. Taxation isn’t about optimality, it’s about power and perception. The primary question is “how much can the authority extract without losing the constituency”. I have a few more practical concerns with this proposal:
Why land? This would seem to apply to any transferable asset.
The “grandma’s house” problem. Nobody supports a system where Grandma has to pay massively higher taxes or lose her house. This generalizes to a desire for tax stability. Highly unpredictable taxes leads to revolution.
Transfer costs are now taxed as well. People bid up your property, well above it’s value to you, but somewhat below the cost of relocating. That’s probably fine, as taxes are arbitrary at their base anyway.
I don’t get the idea of selling liability—who’s on the hook if the new liability-holder dies or stops paying? I don’t think secured taxes (those based on the threat of taking the base thing) can be fully separated from their collateral. You can fix the same problem with a simple insurance contract, though.
I think there’s two ways we can approach this.
One is as an interesting problem to look at. It’s not necessarily that policy proposals will be adopted, but exploring policies is an interesting exercise, and it may lead to marginally better policies or even Pareto improvements in policy if they were adopted. And following the idea that the purpose of policy exploration is to have ready-at-hand better policies/ideas when a crisis strikes and people are looking for alternatives because the current system isn’t working, it seems worth doing this work even if it doesn’t seem clear what the path to adoption is.
The second is that you’re right, humans often forego “better” solutions for ones that better serve other purposes. For example, is taxing income a good idea? Probably not, but it’s relatively easy to do and to understand, so it’s a straightforward policy choice. Does this mean we can’t consider alternative taxation systems to the one we have, though? I think it doesn’t, only that people developing policy must eventually consider things other than economic efficiency if they hope to develop policies that are likely to be adopted.
This could work for other assets where
each asset has a natural peer group (in this case, other properties in the neighborhood) from which to predict the value; or the value can’t change so you can just use the market price of the asset itself
it’s hard to hide the asset
the asset can’t be imported/exported, or you don’t care if your country loses this asset. For diamonds, needlessly distortionary but not a disaster; for car manufacturing equipment, very bad.
ETA from Wei Dai:
there are no untaxed substitutes for the asset
Would marketable securities (e.g., exchange-traded stocks) be a good candidate for this kind of tax? I guess not, because that would introduce an incentive to own non-marketable securities instead, which would distort the economy and make it less efficient. So do we also need that the taxed asset class has no untaxed substitutes?
Perhaps, with a low enough rate. Taxes will always incent some substitution, especially if they’re large relative to the underlying asset value. It’s quite possible that the additional asset reliability of being traded on a taxed exchange can be recovered by taxation on the assets in the exchange.
Note that land has substitutes too—you can live/work in a less-valuable-to-others space, or in a different jurisdiction, or focus your investments on non-taxable improvements (non-fixture furniture, removable appliances, non-durable landscaping or cleaning services, etc.)
You don’t need to focus on “non-taxable improvements” in this system. No improvements increase your tax burden.
You can live/work in a less valuable space, but this land gets taxed too, so it’s not an *untaxed* substitute.
Now I’m confused. Improvements that change the valuation of your property (in the “average of neighbors” case, those that improve the overall neighboorhood) are taxed in this system, right? Non-taxable improvements are those that don’t change the calculated/bidding value.
Substitution to a lower-tax is as much distortion as the same substitution to no-tax. Impacting people’s cost/value decisions about their purchases is a distortion. For both stocks and land, it’s debatable how much distortion is acceptable.
And I’ve gotten kind of lost on which aspects of this we’re talking about—apologies if I’ve responded to a different thing than you intended.
Yes, sorry, if you improve your neighbors’ properties, that increases your tax burden. But that’s usually only a small fraction of the value of the improvement to your property.
Would you claim that this tax reduces urbanization? For some reason, I’m not totally sure one way or the other. I agree that would count as a distortion.
I think this tax is fairly theoretical and un-implementable, so predicting second-order impact is not very helpful. More importantly, the size of the tax is more important than the mechanism of calculation for answering the question of what behavioral impact it will have. If the tax is roughly the same amount as current property taxes, it’ll have roughly the same results.
My guess is that urbanization would slow a little bit with real-estate taxes two or three times higher than today, but probably not stop. over time, differential tax rates will and do shift some people and operations toward lower-tax jurisdictions, but unless it’s egregious, it’s hard to overcome the network effect of being physically near other successful people/businesses.
I don’t see why it’s unimplementable. Do you mean politically difficult? That shouldn’t detract from our ability to analyze the effects.
This is a concrete way to answer the question “is it distortionary”
I’m imagining a federal tax that’s the same everywhere.
Can you explain why?
My usual answer to “why tax land?” is “the speed of light”, i.e. the physical constraints of our universe making locality valuable. And we’re okay to tax things that are powered by things like physical constants because they are constant and if you get the policy right you minimize the creation of disincentives on the margin, i.e. you tax the “fixed” value of land (locality) so you avoid doing things like creating price floors and ceilings or creating marginal disincentives that result in no development or less development since any marginal development will pay for itself, taxes included.
To be clear, you can’t tax land. You tax people (or corporations), calculating the amount based on land, secured by your ability to (re)take their land. But more importantly, my question wasn’t “why tax land”, but “why not tax everything?” michaelcohen had a pretty good answer for this—land is a better target than most assets because it’s difficult to hide and not subject to removal from the tax jurisdiction.
Basically, land is easily found and threatened by the tax authority (for both physical and historical reasons).
Yeah, see
If the insurers go insolvent, does the government default?
I would suggest a system where the government sells bonds linked to specific future tax revenues, and allow a property owner to buy the bond for their own property many years in advance, essentially prepaying the taxes at the current bond rate. If property values and taxes, or even just collections, crash, the bond holders take the loss.
If I were designing the system, the final fallback would STILL be that the tax is secured by the asset. Insurance is just a side-contract, and if the insurer doesn’t pay, you sue them. If they still don’t pay, then the owner pays. If nobody pays, the government takes the land. It’ll make a nice park, if they can’t auction it off for enough :)
This way, the tax rules are simple, and any insurance or smoothing deals are optional ways to make it more predictable for owners (and more costly overall).
That’s entirely incompatible with the idea of selling the tax liability separately.
Right. That’s a silly and unnecessary idea. Your liability is someone else’s asset. In this case, the government’s. There’s absolutely no way that the asset holder (be it the tax authority, or a lender) should or would let you turn their secured debt (you pay or we take the asset) into an unsecured one (you pay or we … ask again?).
You can’t generally transfer liability and you certainly can’t transfer or discharge FUTURE TAX liability.
I guess I’d trust competition between private insurers to set better prices than a government agency.
I don’t know much about how insurers are regulated, but I think this system works alright?
Bidding on tax bonds would set equally efficient prices on them, since it would be the insurance companies’ people bidding on them.