Gaffney (2005): A Better Way of Gauging the Excess Burden of Shiftable Taxes

Overview

"A Better Way of Gauging the Excess Burden of Shiftable Taxes" (subtitled "Tax-induced Misallocation and Underuse of Land") is a 2005 working paper by Mason Gaffney, also circulated among his workpapers as WP095/WP067.[1] Its stated purpose is methodological: Gaffney proposes measuring the excess burden of a shiftable tax not through the conventional "excise tax effects" and "Harberger triangles" of standard public finance, but by directly modeling how a tax changes a landowner's ranking of possible uses for a given parcel — that is, by how much the tax pushes land out of its highest-value use into a lower one.[1] He frames this as "a truer and more general measure of excess burden" than the standard exposition.[1]

The Argument: Only a Tax on Site Value Is Neutral

Gaffney builds two linked algebraic models. The first is a one-year model with only current costs (no durable capital): if N is net revenue (site rent, N = G - C for gross revenue G and costs C), a tax on costs at rate t leaves the landowner with NAT/N = 1 - t(C/N) — a ratio that falls sharply as the cost-to-net-revenue ratio C/N rises, meaning the tax bears hardest on labour-intensive, high-turnover uses of land and lightest on low-intensity uses like a parking lot.[1] A worked numerical example shows the effect's scale: a 14.2% payroll tax, applied where costs are ten times net revenue, consumes 142% of the land's net return — wiping it out entirely regardless of how productive the site was before tax.[1] The second model extends the same logic to durable capital under a property tax, deriving that a 2% annual tax on a building's assessed value can reduce the after-tax site value of an intensively-improved parcel (e.g., an apartment building, with a building-to-site-value ratio of 4 or 5) by more than 100%, effectively eliminating the incentive for that use, while leaving a lightly-improved parking lot almost untouched.[1] Gaffney concludes that only a tax based on site value itself (S) — the net income "imputable to the site" — is neutral across land uses; taxes on costs, gross revenue, building value, or sales all "tilt" landowners toward less intensive, lower-value uses of land, and a sales tax in particular is "death on downstream operations of high turnover" because it is levied on gross sales without even deducting expenses.[1]

Standing and Limits

• Source and genre. This is a working paper hosted on Gaffney's personal site, not published in a peer-reviewed journal; it is written by a committed Georgist advocate as an explicitly pedagogical, algebra-driven demonstration (it is formatted and captioned as course material — "Notes," worked numerical tables — rather than as a submitted research article).
• What is rigorously established versus what is asserted. The algebraic derivations themselves are checkable: given Gaffney's stated assumptions (fixed land supply within a jurisdiction; elastic supply of capital, labour, and materials; elastic demand for land's products), the conclusion that only a tax on S avoids distorting the ranking of land uses follows deductively — it is the same standard result behind the zero-deadweight-loss case for land value taxation, restated through a different lens (use-ranking distortion rather than a supply-and-demand-curve Harberger triangle). What is Gaffney's own methodological argument, not a peer-reviewed or widely adopted convention, is the claim that this land-use-shifting approach is a better general measure of excess burden than the standard exposition — no other economist's excess-burden estimate on this wiki uses Gaffney's specific method, and the paper does not engage directly with the mainstream excess-burden literature it proposes to supersede.
• Scope. The paper's numerical examples are illustrative parameterizations (assumed tax rates, assumed cost/revenue ratios, an assumed 50-year building life and 7% discount rate) chosen to demonstrate the mechanism, not empirical estimates drawn from real assessment or tax data.
• Relation to ATCOR. The paper does not use the term ATCOR and predates the 2005 paper that coins it by the same author, but shares its premise that elastic capital and labour supplies mean shiftable taxes are ultimately borne by land rent; see ATCOR for the wiki's treatment of that broader, separately sourced theorem.

See Also

• Deadweight Loss — the standard efficiency argument this paper offers an alternative derivation of
• Gaffney (2005): The Physiocratic Concept of ATCOR — the closely-dated companion paper sharing the same elastic-capital/elastic-labour premises
• ATCOR
• LVT can replace capital taxes without efficiency loss
• Mason Gaffney

Sources

1. Mason Gaffney (rev. January 2005), "A Better Way of Gauging the Excess Burden of Shiftable Taxes: Tax-induced Misallocation and Underuse of Land," Working Paper — used for all claims, derivations, and figures on this page; read in full for this page and verified against the source PDF. Free PDF (masongaffney.org) · archived