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).
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).