The Agenda

On Property Taxes

Last week, Felix Salmon accused me of not being very inventive. Naturally, this wounded my pride:

 

Andy Grove reckons that the solution is for American companies, at the urging of the government, to become more protectionist, putting up trade barriers to create domestic jobs. Like Reihan Salam, I’m unconvinced. But Reihan isn’t particularly constructive himself, saying only that we need “a wrenching series of labor market and entitlement and tax reforms designed to improve work incentives, most of which will prove far less popular than simply bashing China”, which will somehow both raise taxes and foster lots of new employment at the same time. I’ll believe it when I see it.

Michael Hudson is a bit more inventive: he’d like to see a move away from income taxes and towards property taxes. That would help bring property prices down, making housing more affordable, and leaving more money left over for consumption. But that’s a plan designed to work in Eastern Europe, not in the U.S.

I should note that the “wrenching series of labor market and entitlement and tax reforms designed to improve work incentives” I had in mind weren’t about raising taxes. Rather, I envisioned reforming entitlements to make them less economically ruinous, thus allowing us to reduce marginal tax rates and corporate taxes. But I didn’t want to stray too far from the topic at hand. I will say that Mike Masnick wrote a terrific piece on Grove that’s very much worth your time.   

As for Michael Hudson’s idea, ahem, I’ll just say that I’ve been enthusiastic about property taxes since Raghuram Rajan and Luigi Zingales described their virtues in Saving Capitalism from the Capitalists. Hudson writes:

 

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.

Hong Kong, for example, promoted its economic take-off by relying mainly on collecting the land’s rental value, enabling it to minimise employment taxes (currently 15 per cent). Yet throughout the former Soviet sphere, real estate taxes often have been only a fraction of 1 per cent until this year. This low tax on land was part of the reason for the property bubbles in these countries, because untaxed land value was paid to banks, which, in turn, lent it out to bid up prices all the more. Shifting the burden of tax from labour to land would actually hold down the price of housing and commercial space, because rental value that is taxed would not be recycled into new mortgages.

Housing costs typically absorb 40 per cent of family budgets in eastern European countries. Lowering this rate would help to boost demand elsewhere in the economy. A reduction to 20 per cent – the typical rate in Germany’s much less indebted economy, where lending has been more responsible – could even provide further scope for wage moderation without lowering living standards.

An excellent idea — here’s what I had to say on the subject a last summer:

What if the problem isn’t the property tax at all but rather, well, all other taxes? In 1879, Henry George, a brilliant if slightly crankish autodidact, published Progress and Poverty, a scathing polemic that blamed all economic ills on the private ownership of land. A staunch believer in laissez-faire economics, George found it perverse that we tax productive activities like work and innovative investment while letting landowners grow rich simply because they scooped up property at the right time. In that spirit, George called for a “Single Tax” on the unimproved value of land. There’s a certain compelling logic to the Single Tax that stands the test of time. When you tax income, aren’t you punishing people for working hard? But when you tax an asset like land, you’re simply encouraging the most valuable use of that land. In the years since George faded from the scene, a number of economists, from Milton Friedman to Paul Romer, have found virtue in the Single Tax, not least because it creates the right incentives for government. Simply put, the better you govern, the more valuable the property. The more valuable the property, the more revenue you raise.

I liberally borrow from Rajan-Zingales in this old post before doing some irresponsible riffing of my own. I am violating a cardinal rule by quoting myself, but I can’t help it.

 

In the United States, we find the property tax distasteful because we associate it with what the British call “the postcode lottery” — it is administered at the local and state levels, and it appears to reinforce and exacerbate pernicious inequalities. Would a nationwide property tax — with rigorously enforced assessments designed by the likes of Rajan and Zingales — prove more attractive? Well, property owners wouldn’t like it. But say it’s a swap: this would, say, replace income taxes, or a large share of income taxes.

What would happen? For one thing, the broad distribution of home ownership would end. Ownership is a skill. I can easily imagine a scenario in which most people who presently own their homes become renters — and, as a happy side effect, unemployment rates would decrease. There would, of course, be some unhappy side effects, if you believe, as a lot of paleos do, that more volatility, more people moving from state to state, region to region, is a bad thing. …

This concept would clearly undermine federalism/Tiebout choice/jurisdictional diversity, etc., though one hopes there’d be some countervailing decentralization. Imagine:

The property tax base is nationalized, and the other main source of revenue is a VAT. Information re: payroll/income is still collected for purposes of mitigating the regressive impact — transfers to people with modest incomes, or based on family size, etc. Schools are funded through a nationalized version of the Swedish system, i.e., “progressive vouchers” are disbursed to approved schools — we can exclude parochial schools, etc., if you insist, and promote monitoring/oversight by mandating open data formats, release of key metrics that can then be sliced, diced, and presented to parents by various third party providers, not-for-profit, for-profit, and public. This works in tandem with a Murray-style “democratization of credentials.” The progressive vouchers work by using the price system to compensate (imperfectly) for disadvantage, e.g., students from poor families and/or underrepresented minorities and/or with learning disabilities would be assigned a larger voucher amount.

Tiebout is still at work, though somewhat constrained, as local education authorities compete to offer desirable school places. Also, all kinds of other services are in the mix, man. To raise revenue: piggyback on the VAT? Or, in a reversal, the feds could avoid an income tax, or use it as a tax on the superrich, while cities and towns could use it more frequently than they do now (i.e., hardly ever).

Take Reihan’s observations with a grain of salt, says Reihan.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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