Land tax and benefits, a point to think on

Land tax.  It is a popular idea among economists.

However, I have heard some people pushing it based on getting land “in use” (this was mentioned at Kiwiblog for example).  I am not sure if I agree on this point.

Saying that we should tax land so people use it is similar to saying we should cut benefits to get labour “in use”.  Both these arguments involve increasing individual costs to get “activity” going.  This isn’t necessarily welfare optimal.  Remember the goal of policy is not to increase productivity or to get our GDP number as big as possible, it is to ensure that we have a society where net happiness is as high as possible.

Focusing on getting things “in use” by pushing a cost on private individuals does not ensure that net happiness will be higher, and is definitely a violation of the principal for policy we suggested here that:

Any regulation should be based on the idea of avoiding coercion either from the private or the public sector

Arbitrarily adding costs to get people to arbitrarily do other things is coercion, and I don’t know if I can support the actions of any private or public agents that are based solely on coercion.

I like a land tax as a replacement for other taxes given that the elasticities of supply and demand are low – implying that the “deadweight loss” from taxation will be relatively low.  Furthermore, the tax on land is a “fixed cost” of production, implying that the impact on downstream costs should be minimal (depending on how this changes relative land use in the long-run of course).

These reasons are not related to some arbitrary goal of maximising statistics, but instead on the idea that we should be trying to raise any target level of revenue at the lowest possible social cost.

  • Tussock

    The land tax idea has a lot of merit. Theoretical considerations around the ‘deadweight’ concept, as above, support it. It should work well in practice, too, whereas capital gains taxes are something of a disappointment.

    If a ‘land’ tax is levied on rateable capital value, like most local body rates, then it is predictable, easily calculated, difficult to avoid, and usually relates to income quite well. It should not be levied on ‘land value’ though: this raises problems with valuation and fairness.

    We need to avoid the California situation, where the tax take varies wildly from year to year, being over dependent on the net income of high earners.

    But no doubt our experts are well aware of all this. The idea seems well worth pursuing.

  • Tim

    The question about whether forcing land from idle to productive use is ‘optimal’ (in the sense of welfare-maximising) is an old debate, but as far as I am aware it isn’t fully resolved.

    1) Is there a difference between idle labour being induced to work, and idle land being induced into being used productively?

    On the face of it, yes, because leaving labour idle produces welfare, but leaving land idle just wastes a resource (the use of a site for a period of time). That is, leaving labour idle, a.k.a ‘leisure’, yields some pleasure to the (non-)worker. But what do we get by leaving land idle? The services of land cannot be ‘stored’ like the services of capital goods can. Instead they disappear as time ticks on.

    So is there any benefit to society from leaving land idle, ie not developing it today? Actually, yes – one possible benefit is that it leaves open the possibility of developing it in the future, and future development of the type that is most advantageous for the landowner tomorrow might be different to the development that is best for the landowner if he were forced to develop it today. It might be that the socially optimal use of the land is to withhold it from use now, and develop it later (perhaps when there is uncertainty about the future demand for floor space in a certain suburb, it may be better to wait for more certainty rather than commit to a possibly inferior land use).

    For instance, the (privately) best use of a site in 2007 (when labour costs were high) might have been a 2-storey apartment block; with lower building costs in 2009 and lots of demand expected in 2011, the best use of that site in 2009 might be a 4-storey apartment block. If the earlier development had taken place, it would preclude the later development taking place (because buildings are durable and cannot be easily converted from one form into another). Sometimes, withholding land from use for a period of time instead of prematurely developing it is actually the best use of the land.

    2) Does a land tax actually force land (which MAY be being ‘optimally withheld’) into use?

    Another massive question… on the face of it, no. A land tax is a lump-sum tax. It’s not based on how I use the land, but on how the market values the land (which will depend on what the market thinks the best use of the land is). If I use a Queen st site for growing vegetables, I still have to pay tax on the market value of the site, which will reflect a more appropriate use.

    Does a lump-sum tax (ie, a tax that is independent of use) affect behaviour? No – so if leaving land idle is privately optimal in the absence of a tax, it remains so afterwards.

    However there are loads of reasons why actual landowners might react to the tax in a different way: credit constraints, etc. See Tideman “Taxing land is better than neutral” in Wenzer (ed), 1999, “Land value taxation”

    Regarding coercion, charging those who waste resources the same amount as we charge those who use resources productively cannot be considered coercion (any more than taxation in general is coercive, which is obviously something we all agree is necessary). If I burn petrol for no good reason I should pay the same pollution charge as someone who burns it to produce some valuable goods or services. Similarly, leaving land idle prevents the rest of society using it in just the same way as putting a building on it prevents the rest of society from using it. There is no ‘extra’ coercion from the tax, even if we do believe that such a charge will ‘force’ the land into use.