COMMON GROUND-USAAlthough property-tax rates expressed as percentages are usually small, in the United States they apply to capital values and are effectively much higher: if a property that yields 9 percent gross is taxed at 3 percent, the tax is equal to 33 percent of the pretax income -- and 50 percent of the 6 percent remaining after tax. A tax of 20 cents for each 80 cents paid for the costs of housing -- not as high as actually prevails in many urban areas -- is 25 percent when expressed on the same basis as a retail sales tax. A community with high tax rates on buildings will be at a disadvantage in the national (and international) competition for capital unless it can offer compensatory advantages. The Effect on New Building The tax on buildings and property other than land distorts resource allocation where older property exists. New, high-quality buildings are taxed more heavily per unit of space than are old ones, including slums. There is no justification for this in the costs that the two types of property and their occupants impose on local government in terms of police, fire protection, etc. Thus the user's payment for the services of local government goes down, relatively, as the building he occupies gets worse, even though public expenses attributable to the property are unchanged or may even increase. Likewise, residents who shift from poorer to better quality housing or business property must pay more toward the costs of government even though they will not ordinarily receive more government services. Cities that urgently need to replace obsolete buildings paradoxically base much of their financing upon a tax that encourages owners to hold on to deteriorated structures and penalizes owners of new ones. Every increase in the property-tax rates on structures (not land) reduces the desirability of putting capital funds into new buildings, creates an incentive against upgrading quality by new construction, and discourages maintenance. It also leads to the construction of rooms, apartments, and buildings somewhat smaller than would be the case in the absence of tax. Differences in effective tax rates among localities may have the effect of creating islands of relatively low tax rates. Some communities may have tax bases above average in relation to governmental obligations and can get by with lower tax rates. They attract capital. Some communities, perhaps by the use of zoning, exclude types of property associated with high governmental expense such as high-density housing, which brings many children and requires more schools. Tax rates elsewhere must then be higher. The existence of such enclaves will add to the fiscal imbalance of neighboring localities and accentuate the difficulties of older areas. Lower tax rates on the fringes of an urban area encourage suburbanization. Property nearer the center will be subject to high tax rates, agravating the troubles of central-city business properties. High taxes on structures also favor horizontal over vertical growth of metropolitan areas. Taxing the "Unearned Increment" The use of a land tax as the chief source of revenue has often been proposed. It was favored by the Physiocrats in 18th-century France. Probably the best known exponent was a 19th-century American, Henry George. His Progress and Poverty (1879) drew upon economic analysis in the tradition of Ricardo and Mill to argue persuasively for a single tax on land and the abolition of other taxes (then predominantly levied on other property). More recently, proposals for heavier taxation of land -- site-value taxation -- have found increasing support. One argument is that much of what is paid for the use of land reflects socially created demand and is not a payment to bring land into existence. The community can capture in land taxes some of the values it has created--including those resulting from streets, schools, and other facilities. This, it is maintained, would be a more equitable way of financing local government. Another argument is that the revenue from a tax on land would permit a reduction of taxes on buildings, which tend to deter new construction. A third argument is that higher land taxes would make for more efficient use of land. There is a great deal to be said in favor of increasing taxes on land and thus lowering land prices. Economically, of course, a "high" price for some land is essential in order to encourage the best employment of it. The user of land ought to pay the amount of its worth in its best use; but the owner, facing no cost of production, need not receive all that is paid. Government can reasonably take much of the total paid by the user. A heavier land tax would change the conditions of ownership. The total collected from users would not change, but private owners of land would retain less, the public treasury getting more. The price system would still allocate land use. Taxes on improvements could then be reduced greatly. The tax relief for deteriorated buildings would be slight, but for those of high quality the reduction could be large in relation to net return on investment. More buildings, new and better ones, would be supplied. Modernization and maintenance of existing buildings would become more profitable. Over the longer run, landowners would get less of the increments in land values and the public would get more. Socially created values would be channelled into government rather than private uses. Moves in the direction of site-value taxation have been made in Australia and New Zealand, South Africa, and parts of western Canada. The case for site-value taxation being a strong one, other areas will probably adopt it.
Now click on one of these links: Back to the Home page
|