26 Jul 2016

The political economy of property taxes

I advocate property tax as a source of revenue due to its simple measurement and implementation. It's also progressive, in that property owners (and indirectly, renters, shoppers, et al. using the property) will pay more for properties that are worth more.

So why do we see such a small share of local and national tax revenues from property taxes compared to income, expense and -- worst of all -- corporate taxes?*

In my opinion, it's because rich people want to avoid taxes on their wealth, so they "help" politicians design and implement those other taxes in ways that sound "fair" on paper, but actually take very little from the rich (as opposed to a lot from the middle classes).**

Bottom line: Follow the money (or lack thereof) if you want to know who the system is really designed for!

* Corporate taxes make no sense in theory (we want to tax people) and they are MUCH easier for corporations with lawyers to avoid/dodge compared to the individual taxpayer.

** I asked several leading scholars of inequality for their opinions on property taxes. They just shook their heads as they agreed with me. Property taxes are totally off the radar of most people -- perhaps because they see themselves as potential "victims" of higher property taxes without considering how much more the wealthy would pay with, say, a 4-5% annual property tax that had no exemptions. (It's no accident that the Vatican is the greatest real estate owner in the world.)


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Albert said...

Agree on ease of measurement and implementation and overall fairness. However, your point on political economy of the land tax deserves a more historical response re: the long transition from feudalism to capitalism and a new form of neo-feudalism of the post-1980 global economy. Even though the bouregois classes overthrew the landed nobility in the 18th-19th century, the landed nobility have surprisingly persistently remained wealthy through property, and have sought to maintain a opacity over land ownership in the last few decades. For some historical perspective, check out the recent hubub over the Duke of Westminsters death: http://www.flassbeck-economics.com/the-duke-of-westminster-feudalism-the-history-of-social-stratification-inequality-and-what-to-do-about-it/

"Barone and Mocetti show this on the basis of a surprisingly detailed set of tax records left behind by the city of Florence. They find meaningful income persistence across seven centuries. Gregory Clark from Davis in California reached a similar conclusion with regards to Sweden, going back to the 17th Century. "

"There are about 65 million people in the UK and 60 million acres of land. Yet about two-thirds of the land – 40 million acres – is owned by fewer than 6,000 people. In the 19th century, landowners paid tax on their land. Today, so corrupt is the system of taxation that they actually receive subsidies for it. "

David Zetland said...

@Albert -- great comment/background. Thanks!

DB said...

I'd be curious about your thoughts in the issues involved in switching from taxation of flows to taxation of stocks. I'd have some transitional concerns with double taxation of previously taxed income later invested in property, though I can easily imagine the transitional injustice balanced out by the long term benefits.

Additionally, I'd be interested in the impacts of moving from a system taxing multiple sources to a single tax source. As tax rates increase linearly, DWL increases quadratically, and I'd be interested whether spreading taxes across weakly interconnected sources could increase efficiency despite added complexity.

David Zetland said...

Yes, you're right that there'd need to be a transition. The biggest issue is not cash flow but the capitalization effects, i.e., real property would fall in value as its tax burden rose. Thus, I'd say 10 years as a phase in.

Double taxation would NOT be such an issue, since taxes on stocks would be double (multiple) by definition. Thus, we're talking about an ongoing burden (or obligation or responsibility), which can be viewed in the same way as paying rent. That's why we say "rents" anyway (back to Ricardo!)

A friend (BB) swears that moving to a single source (property) rather than a mix (income/property/excise) invites abuse but I can hardly see the advantages of the current income tax mess, with its numerous holes and dodgers. This article (https://www.theguardian.com/business/2016/sep/21/how-to-hide-it-inside-secret-world-of-wealth-managers) describes how "professionals" hide $200B per year in tax havens. It wold be much easier to tax property, as most billionaires live (or own property) in places like London or New York.

The biggest advantage of the property tax is that the DWL is minimized, as the elasticity of response to a fixed % of value is zero. (Selling does not help you avoid, as you'd still pay as a renter.) Property taxes have the combination of lowest DWL and lowest transaction costs. Why aren't they used? Too effective at taxing the rich!

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