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November 2022: Land Tax as a Solution to Housing

Plus! Progressive Ireland, a Pyramid and Farmers

In Summary

  • Reasons for Housing Crises

  • Why do we tax work? (And not land?)

  • Reasons for and against taxing work

  • Where did taxes on work come from?

  • Taxing land instead of labour (Georgism)

  • So why don’t we have a land tax?

  • Other stuff: Progressive Ireland, a Pyramid and Farmers

Reasons for Housing Crises

If it weren’t for housing bubbles, we would only have the weather to talk about.

Some – not necessarily good – supply-based reasons for housing shortages include:

  1. Builders/developers sitting on land waiting for it to increase in value.

  2. Bureaucratic and/or corrupt planning laws.

  3. Locals objecting to building in their neighbourhood (e.g. because they don’t want low-income housing, there won’t be enough car parking, it will be too dense/noisy, local valuations will go down).

  4. Governments incapable of organising new social housing.

  5. Governments building housing that gets ghettoised and people don’t want to live in.

  6. Landlords not renting their residences because it’s uneconomical or inconvenient.

  7. People owning houses that are too big for them.

  8. Banks issuing insufficient mortgages because it’s unprofitable or disallowed by regulation.

Some – also not necessarily good – demand-based reasons include:

  1. Too many low income immigrants.

  2. Too many high income (e.g. tech worker) immigrants.

  3. A decrease in the average occupants per residence (e.g. due to more separations/divorces and/or lower cohabitation)

  4. Everyone moving to the cities because that’s where the jobs/craic is.

Why do we tax work? (And not land?)

Politicians love to talk about jobs and employment. Low unemployment is widely seen as a virtue. The United States Federal Reserve has a dual mandate of i) monetary stability and ii) keeping unemployment low. 

A lot of people derive meaning from work. Retirement comes as a blow to many, sometimes because they miss their work. Work can be something valuable in itself – something that gives meaning to life. Some of us live to work. Some of us work to live. Perhaps most of us are somewhere in between.

Given work pays for sustenance, but also has this positive externality of bringing meaning, why do we have taxes on work? Why do central banks use interest rates to increase work while the government taxes work? Moreover, why do many governments today rely on income tax as their largest source of revenue – as is the case in Ireland?

Reasons for and against taxing work

Conventional economic theory says that a tax on work reduces the amount of work that happens. This results in a smaller economy. The difference in what the economy is and would have been is what’s called “Deadweight Loss”. When you draw the supply-demand graph you find that i) tax increases the economic loss, but further ii) the loss is proportional to the square of the tax rate. So, a small tax rate creates some economic loss. Doubling that tax rate results in four times the economic loss.

This is partly the basis for the OECD recommended approach to taxation of BBLR = Broad Base Low Rate (I highly recommend TR Reid’s book on global taxation systems). This means applying relatively low rates of tax, but allowing for few exclusions/deductions. This achieves a few things:

  1. Low rates means that economic deadweight losses are not so bad.

  2. Low rates reduce tax avoidance.

  3. Low deductions reduce administrative costs for businesses

  4. Low deductions ensure that the government makes enough revenue.

There is a corollary of the quadratic scaling of economic deadweight loss with tax rates – It is better to get tax from a few sources at a low rate rather than rely on one main source of revenue taxed at a high rate. In other words, rather than to tax income at a high rate, it’s best to tax a few categories at modest rates, e.g. value added tax (kind of a sales tax), corporate tax, land tax, excise duty etc. This is not a diversification argument (although there is a diversification benefit), it’s an argument based on the non-linearity of deadweight loss.

The best practical example of BBLR is probably New Zealand, which has few tax deductions/exceptions and relatively low rates of tax. Singapore and Estonia also somewhat fit the mould.

Taxing work at high rates has similar economic losses as taxing goods or services. However, if work provides meaning – beyond economic benefits – then shouldn’t we be subsidising work rather than taxing it?

By and large, governments tend to subsidise work at lower income levels, e.g. through training programs. Governments also tend to focus income taxes at higher income levels, where unemployment is less of an issue – or at least less of a matter of basic sustenance. As per David Graeber’s book “Bullshit Jobs”, perhaps many jobs – especially higher paying jobs – are devoid of much meaning (and effect). Perhaps life should be about working to live, not living to work or living – even in part – for one’s work. In that case, to the extent taxes stop people from working, income taxes are a social good.

On the flip side, more “work” could be good for everyone. “Work” in the economic sense means value, not hours. In principle, if taxes are lower, this allows people to work for fewer hours for the same pay. Or, less tax could allow some people to drop their higher paid bullshit job for a lower paid more meaningful job.

Where did taxes on work come from?

Government spending as a percentage of GDP is much larger today in Ireland or the US than it was at the start of the 20th century. Taxing income helped to cover that increased spending. Previously, taxes were largely based on import/export duties and sometimes land or property taxes. 

If government spending is high, this requires a) running a large government deficit and building up lots of debt, or b) finding some large bucket items to tax. In practise, many countries did/do both. In terms of large bucket items, there are:

  • Employment/income tax – definitely a large bucket of revenue to tax. This tax can also be made progressive.

  • Value added tax (VAT) is an effective tax from a collections perspective. Businesses get refunded taxes on their input costs and are therefore incentivised to report what VAT they paid to their suppliers. This results in a self reinforcing system of compliance.

  • Corporate tax. In principle, corporate tax is a double tax because it taxes a company’s profits even though the shareholders pay taxes via dividend or capital gains tax. One problem is that foreign investors in a corporation often don’t pay local taxes on dividends or capital gains (although there is withholding tax in many jurisdictions like Ireland and US). So, corporate tax allows governments to guarantee some tax income irrespective of where the shareholders are. Another argument for corporate tax is that corporations have almost person-like status that can continually accumulate capital and power. Corporate tax provides a check on this. By nature, corporate taxes are somewhat progressive because stockholders are a wealthier portion of the population. Corporate tax can further be progressively applied, as it will be soon in Ireland to a small degree (12.5% for domestic small corporations, 15% for large).

  • Property/Land tax – the value of land is very high relative to GDP. Land is also immovable so it can’t run away.

By contrast, putting a tax on luxury goods or on things like tax or tobacco is quite a small opportunity for revenue.

In Ireland, the largest sources of revenue are personal income tax, VAT, corporate income tax and excise taxes. Together these typically make up 90% of Ireland’s revenue. Why not tax land at a much higher level?

Taxing Land instead of Labour

This brings us to an idea called “Georgism”, which involves shifting back most – if not all – tax to land. Why? Because land is one of the few categories of tax where there isn’t any economic deadweight loss! Why is this different?

The supply of labour is variable. If you tax work, the supply of work goes down. If you tax land, there is still the same amount of land. The tax is just shifting money from landowners to the government. Society is not any worse off as a whole (unless the government spends that money badly, which is not entirely unreasonable).

There is a nuance. The tax must be on land, not land+buildings. Buildings are not in fixed supply. If you tax buildings there will be less built. Many governments tax property – probably because it’s easier to measure property prices than just the land. However, subtracting out building value is not that hard. One approach is to compare properties in a similar location that are of similar size but built on different amounts of land.

Here are some of the benefits you get from taxing land and reducing taxes on labour:

  1. You don’t have to tax labour as much, so you get less economic deadweight loss.

  2. You get the social/intrinsic/meaningfulness benefits of lower unemployment.

  3. Landowners are more incentivised to build/use their land, because they are taxed on the land not on the buildings.

A land tax may also reduce housing bubbles. One theory for housing bubbles is that an area gets wealthy either because of natural resources or because of knowledge/tech. Pretty quickly people want to move there. Now, much of the income earned in that area starts to go towards property. An increasing amount of money goes towards a fixed amount of land. You have a bubble that takes off.

A land tax can cancel out any land-associated rent that you earn or save by buying property. This makes it no longer profitable to plough money into land as investment. Instead, it’s only profitable to buy property to the extent you earn or save building-associated rent.

A land tax stops people from playing the zero sum game of investing in land. It moves them towards playing a positive sum game of building more buildings on that land.

So why don’t we have a land tax?

A land tax brings overall social benefits, but it also shifts wealth from land to labour. A majority of the wealth of the upper middle class is accounted for by real estate. This is a vocal cohort, one with high voter turnout and one that pays high taxes as a percentage of their income. So, moving straight to a land tax would be unpopular, to say the least, with this cohort. I’m unsure whether my class-based framing is a good one here. Perhaps it suffices to say that a land tax would move wealth away from landowners, which includes homeowners, and this would likely be unpopular.

There’s a meta question here. Is land tax a question of whether or not to support home ownership? On the one hand, home ownership encourages care and pride in one’s residence and community, as well as independence and perhaps forced-saving. On the other hand, today’s system of home ownership is contingent on vast levels of personal debt. Today’s home ownership also relies on an extraordinary concentration of people’s wealth in their homes. Politically, a land tax is likely to be seen as anti- home ownership. It’s not. On net, a land tax should smooth and reduce housing bubbles. It will no longer be appealing to invest in land for the sake of riding a wave. Instead, it will make sense to invest or spend those funds somewhere more productive.

While a tax on a zero sum game like land does little economic harm, a subsidy on a zero sum game like land brings little benefit. If one assumes that 50% of housing value is land, one can consider that 50% of government subsidies for housing (such as social housing, mortgage interest relief and artificially low interest rates) have the effect of fuelling a housing bubble. One might interpret this as an argument against social housing or first time buyer incentives. That’s not the case. Housing programs and incentives can bring social and economic benefits. However, they do harm by funnelling money towards the zero sum game of land. How to fix that? Continue with social housing and incentives, but pair it with a broad based land tax that neutralises or reduces the net money flowing into land. This allows government to quench rather than fuel the land game.

I still haven’t answered how to overcome the political problem for homeowners of a land tax. Here are some ideas:

  1. Without much pain, property taxes could be switched over to land taxes. This could be done in a revenue neutral way such that land tax rates would be higher, but the tax only applies to land value. This would already reduce economic losses and incentivise building on land rather than leaving it fallow.

  2. Gradually increase land tax rates over a 10 or 25 year time period. Honestly, this sounds hard to do if governments swap every 5 years, but I’m putting it out there as an idea.

Other questions that pop up, but I won’t dig deep on:

  • What about homeowners who have little income to pay higher land taxes (under scenario 2 above)? Tax credits and deductions can be used for low income earners as is done for personal income tax. If needed during a transition period, homeowners could defer land taxes until the property is sold.

  • Is a land tax constitutional? Land is property and taxing property is somewhat equivalent to the government taking private property. In the US, I understand there may be constitutional issues. In Ireland I don’t believe this is the case.

  • Would a land tax be enough to displace other taxes? Land is worth a lot relative to GDP, so apparently it would be enough. This goes against a previous point that it is best to spread taxes out over a few forms. However, that is correct! Spreading taxes out is only (theoretically) recommended for taxes that cause a deadweight loss. Nonetheless, due to real world uncertainties, there probably is good reason to continue to spread taxes, even if there were to be a large land tax.

  • Wouldn’t it be hard to measure land value? As I said above, there are ways to separate buildings and land. Some property taxes already do this (although many may underestimate the value of the land).

  • Would rent prices go up? Theoretical no, since land is in fixed supply. Empirically, this also seems to be the case (e.g. from Denmark, where there were sudden changes in land taxes for neighbouring homes because of a redefining of tax districts – allowing for a natural experiment).

For further exploration, look up Lars Doucet on DuckDuckGo and/or find Progress & Poverty on Substack. They have written in great detail about Georgism and land taxes.

In summary

Housing is a highly challenging topic. A land tax isn’t going to solve housing. A land tax is likely to be politically unpopular. Still, I think swapping from property to land taxes, and then increasing land taxes a bit, is a relatively low pain high gain opportunity. Ireland doesn’t need all government revenue to be from land tax, but maybe bring it into the top four (after personal income, VAT and corporate tax).

And that’s it for this month, thanks for reading folks, Ronan

Other Stuff

A few notes on income taxes in Ireland

In Ireland the lower rate of 20% kicks in at income of 20,000 EUR and the higher rate of 40% around 40,000 EUR (with another roughly 12% in social charges). This puts Ireland in the top few OECD countries in terms of how progressive the tax system is. The median worker pays a relatively low rate by OECD standards, while the top 5-10% of income earners pay about half of the country’s personal income tax.

Land taxes in Ireland and Farmers

There is currently a proposal to tax empty land at a 3% rate. This has some political appeal because people don’t like to see land go fallow when housing is short. However, it is a move that’s unpopular among farmers, who are disproportionately affected because they have significant wealth in land. Farming land is zoned differently, so its value per acre – and hence the nominal tax paid per acre – is lower. Still, a land tax does shift wealth from farmers.

While politically popular and also aligned with land tax principles, taxing fallow land seems ineffective as landowners will find ways to minimally meet the requirements for the land not to be fallow. A better option would be to move all property tax to being land-based. Where there are affected groups like farmers and homeowners, there would need to be compensation and/or phasing in of changes.

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