by H. William Batt, Ph.D. Albany, New York
Tax theorists typically measure revenue structures
according to the criteria of economic neutrality,
efficiency, equity, administrability, simplicity,
stability, and sufficiency. These are explained in turn.
Tax neutrality refers to the influence (or absence
of such) that any particular design has on economic
behavior. Typically taxes are perceived as a damp on
economic activity - taxing income reduces the incentive to
work, taxing sales discourages retail transactions, and
taxing savings reduces the propensity to save. The more a
tax is perceived to be neutral, the less the identifiable
distortions it imposes on the economy. The common
assumption of most tax theorists is that all taxes impose
distortions; it's simply a matter of which ones are least
burdensome to economic health. A tax which imposes no
distortions is ideally best. Most of our environmental
problems stem from the fact that our tax designs impose
distortions on our economies.
Tax efficiency is much like tax neutrality, and is
the measure of how much shifting of behavior it imposes,
resulting in what is called "excess burden," or "deadweight
loss" on the economy. Tax economists usually hold that the
best taxes are those that are shifted little if at all.
Because the elasticities (a technical word for the slope of
supply and demand curves) of each are very different, a tax
on land values and a tax on improvement values have very
contrastive effects on socio-economic choices. Using a tax
base that has little or zero elasticity is the best way of
assuring that taxes are not shifted. Zero elasticity is
another way of saying fixed supply, as, earlier noted, land
is.
The principle of equity is central to any
discussion of tax design. Tax design requires concern with
both what is fair and the extent to which it must sometimes
be compromised to satisfy the other principal criteria.
Fairness can be evaluated according to what is termed
"horizontal equity" - the extent to which those in similar
circumstances will pay similar tax burdens, and "vertical
equity" - how well those in different classes bear
different burdens in the tax structure. It is this latter
perspective that leads to the use of terms like
"proportional," "progressive," and "regressive" in
referring to tax structures. A tax is progressive with
respect to income if the ratio of tax revenue to income
rises when moving up the income scale, proportional if the
ratio is constant, and regressive if the ratio declines.
There is an ancillary question of whether taxing to reach
greater equity should employ measures of income or of
wealth, difficult as this is to measure. Such questions of
equity are a matter particularly central when discussing
the property tax. This is because, as earlier noted,
people capitalize their income in the course of a lifetime
- frequently in property. Although claims are often made
to the contrary and really comprehensive studies have yet
to be done, the consensus opinion among experts now is that
the property tax is really highly progressive, especially
for the land component.
Administrability refers to the ease with which a
tax can be administered and collected. Taxes which distort
the economy are inefficient but so are taxes that cost lots
to administer. This is measured not only in the direct
costs of tax avoidance and accounting expenses, but in the
level of evasion and cheating, and by the cost of
government auditing and policing. When the taxpaying
public perceives that a tax is easily evaded, cumbersome,
and unfair, it loses its legitimacy and calls government
itself into question.
This is why the principle of simplicity is
important: The more complex the tax design, the more
lawyers and accountants will find loopholes, encourage the
appearance of unfairness, and drive up the cost of its
administration. People know that with simple taxes other
parties are also paying their fair share, and all this
enhances the legitimacy and therefore the compliance of the
tax system. In recent years it has become possible in
principle to assess land value by computer algorithms
(called computer-assisted mass appraisal, or CAMA),
obviating the need for assessors altogether. Isobars can
be drawn on maps showing land values similar to how
elevations in land topography are shown on geographic maps.
Stability refers to the ability of a tax to produce
revenue in the face of changing economic circumstances.
Income and sales taxes, for example, vary greatly according
to phases in the economic cycle; the property tax, in
contrast, is highly stable regardless of the state of the
economy. This is one reason why school administrators have
typically been supportive of using the property tax base
rather than some other tax to support school services.
In assessing the value of a tax it is also important, of
course, to understand its potential to bring in revenue for
the purposes of government, usually deemed revenue
sufficiency. Income, sales and property taxes, along with
corporation taxes to a lesser extent, have come to be
regarded as the workhorses of the American revenue
structure. But, as anti-tax politicians are quick to note,
the higher these taxes are, the more they impose a drag on
the economy. This is why one should ponder whether to
consider raising taxes which have demonstrable distorting
effects.
In contrast, a tax on land value alone, which is
totally neutral, measures up so well that it looks like the
perfect tax! These criteria support the claim that taxing
land alone is a more appropriate solution to spatial
configuration issues and to tax issues than any other
remedy.