Tax me, please

People hate taxes. But they are necessary, and some are better than others.

Henry George’s argument in his 1879 book Progress and Poverty is that all benefits from progress accumulate to land owners. He proposed a single tax on land: “because the value of the unimproved land is unearned, neither the land’s value nor a tax on the land’s value can affect productive behaviour. If land were taxed more heavily, the quantity available would not decline, as with other goods; nor would demand decline because of land’s productive uses.”

I agree. A land tax is by far the least bad tax. Milton Friedman even agreed: “In my opinion, the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.”

There are many reasons to prefer land taxes. First, they discourage speculation. They provide a disincentive for land ownership without immediate prospects of productive use. This idea relates closely to the current (and let’s be honest, old and ongoing) debate about housing affordability and housing supply. A land tax would hinder the ability for developers to “land bank” thereby artificially stifling supply of new dwellings. It would increase competitiveness of supply in the land market. This is one reason why even the proponents of a housing shortage should embrace this tax.

Indeed, they may even encourage planning changes by governments (maybe through pressure on local governments by the federal government) to allow greater density to increase their tax base.

Second, a land tax has the effect of encouraging efficient use of land and investment in buildings. Those wishing to increase density in the cities to reduce urban sprawl should also see benefits here. Owners of land in urban areas would have more incentive for subdivision, and increasing density, to avoid this tax. In fact the economic success of Kong Kong, Taiwan and Singapore has been attributed to high land taxes - a path that Korea is keen to follow.

Third, they are a difficult tax to avoid, and administratively simple (indeed small land taxes are currently enforced in all States for owners with land holdings above a threshold value). Land ownership is well documented, and tax evaders could have their land compulsorily acquired.

What about arguments against such a tax?

One of the main arguments against land taxes is that they discourage investment. For example, when developing a large estate, improving the amenity of the area from the first stage (think of the lake and shopping areas at suburbs like Forest Lake in Brisbane) will increase the value of surrounding land still held by the developer and increase their tax liability until they can sell. This, it is argued, discourages investment in housing and buildings.

My response to this argument is that it will not, and for an obvious reason. First, the tax liability from these parcels can be fairly accurately known in advance and factored into the original decision to purchase the undeveloped site. The table below shows a stylised development feasibility in the “with” and “without” land tax scenario. Assuming people are willing to pay the same price for the final dwelling (because their tax reduction elsewhere offset their increased land tax liability - although that may not be entirely true, but is unimportant to this particular argument) the developer can still make a profit and has incentives to do so under the “with” scenario. He makes the same profit, has the same total cost, and same revenue - the tax incidence is on the seller of the development site the original landholder, not the developer.

The only problem I see is getting public support for the transition to a higher land tax society. One of the main problems is that the tax falls solely on land owners who are generally the wealthier sector of society with the greatest political clout. They can always popularise the argument that land taxes will add costs that will crush land ownership aspirations.