On the necessity of a land tax

Constantin Gurdgiev gave a good overview of why a land tax is essential if Ireland is to build a smart / knowledge economy a few months back on the Renegade Economist. It’s probably worth reviewing his arguments today, the day Fianna Fail ruled out a (admittedly unfair) flat rate property tax. Gurdgiev blames the disparity in taxation between investments in human capital (e.g. increased education) – typically each additional Euro earned is taxed at 53% – and investments in land, where the return on investment is taxed at a much lower 26% or so (sometimes even 0% because of various tax breaks).

Meanwhile in the Financial Times, American progressive left economist Michael Hudson argues that there is an alternative to austerity – the burden of taxation should be moved from labour to resources such as land –

Facing these two unpalatable options, some of eastern Europe’s leaders have begun to realise that there is, in fact, a third option: radical reform of the tax system. Taxes in most post-Soviet eastern European economies, along with countries such as Greece, are regressive. They add to the price of labour and industry while under-taxing property. Latvia is an extreme example: its flat taxes fall almost entirely on employment, meaning workers take home less than half of what employers pay.

The good news is that these high taxes on labour leave open the option of shifting taxes on to other areas, in particular land. Lowering taxes on wages would reduce the cost of employment without squeezing take-home pay and living standards. Raising taxes on property, meanwhile, would leave less value to be capitalised into bank loans, thus guarding against future indebtedness.

A longer version is freely available on Michael’s website.

Martin Wolf echoes many of his points in another FT article

So I am a land speculator – a mini-aristocrat in a land where private appropriation of the fruits of others’ efforts has long been a prime route to wealth. This appropriation of the rise in the value of land is not just unfair: what have I done to deserve this increase in my wealth? It has obviously dire consequences.

First, it makes it necessary for the state to fund itself by taxing effort, ingenuity and foresight. Taxation of labour and capital must lower their supply. Taxation of resources will not have the same result, because supply is given. Such taxes reduce the unearned rewards to owners.

Second, this system creates calamitous political incentives. In a world in which people have borrowed heavily to own a location, they are desperate to enjoy land price rises and, still more, to prevent price falls. Thus we see a bizarre spectacle: newspapers hail upward moves in the price of a place to live – the most basic of all amenities. The beneficiaries are more than land speculators. They are also enthusiastic supporters of efforts to rig the market. Particularly in the UK, they welcome the creation of artificial scarcity of land, via a ludicrously restrictive regime of planning controls

and

If “a crisis is a terrible thing to waste”, here is an urgent case for action. Socialising the full rental value of land would destroy the financial system and the wealth of a large part of the public. That is obviously impossible. But socialising any gain from here on would be far less so. This would eliminate the fever of land speculation. It would also allow a shift in the burden of taxation. Perhaps as important, with the prospects of effortless increases in wealth removed, the UK might re-examine its planning laws.

No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .

Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm