FrankThoughts

This is a very exciting thing that I wish more people knew about.

There is a significant source of tax revenue that is untapped in most places, which targets unearned income, would not harm any productive activity, and further might even help things run more smoothly if it replaces less-efficient taxes.

I’m talking about taxing economic rent.

In economics, economic rent is any payment to the owner of a factor of production in excess of the costs needed to bring that factor into production.

One such factor of production that is commonly cited is land. Aside from some negligible exceptions, land is fixed in supply. It costs nothing to produce. Yet you can easily imagine people leveraging ownership of land in order to make money, sometimes in ways that seem kind of shitty:

• Suppose someone were allowed to purchase Niagara Falls and then set up a tollbooth to allow people to look at it, with the proceeds going to their own pocket rather than maintenance or preservation.
• Suppose someone were to buy land that contains natural resources (presuming they have the mineral rights, too) and then charge a mining company to extract those resources.
• Suppose someone were to buy empty land and then charge people to use it; for example, to build apartments on it. This is not the usual way this is done; usually the same person owns the land and any buildings on it, but this is my hypothetical.

In each of these cases, the person is drawing an income for doing nothing of value. They’re just a middleman between nature and human production. Of course, economics is a descriptive field of study, and so it doesn’t support statements like, “this is shitty, parasitic, unearned income”. So instead it says, “this is income above and beyond that which would be required to bring the land into production”, which is true because it requires zero income to bring this land into production. It’s already there.

Have you ever made yourself angry thinking about those guys hundreds of years ago, playing Finders Keepers with big swaths of land and making themselves rich off of dead algae from 300 million years ago?

Here’s something interesting. Although economics can’t tell us whether such income is good or bad, it can tell us what happens when we confiscate it: nothing.

Easy come, easy go. You earn money without producing anything of value? Then we can take that money without harming productive output. It’s that simple. Actually, I’m hand-waving pretty aggressively here, but I’ll write a separate in-depth explainer post soon.

There’s something kind of beautiful about that dynamic, in my opinion, because really the land and its natural resources really are very valuable, and that ought to be the birthright of everyone who lives here. Not something that someone can claim dibs on. And here we have a 100% economically-sound policy telling us that we can capture that money for the public good without harming economic productivity.

Now for the tricky part. There are two, actually.

The first is that the “unearned” income stream is usually mixed with legitimate, earned income in a way that is difficult to separate. Copper ore may not be the result of human activity, but extracting it requires human activity. Often, the people who have mineral rights and the people who are extracting and selling the ore are one and the same. The same goes for something like apartment buildings. The land may not be the result of human activity, but the construction and maintenance of the apartment buildings is, and the people who own the land are usually the same people who own and lease the apartments. In both cases, part of their income is legit, and part is economic rent. Separating the two is possible but not easy.

The second is that a lot of people already bought these assets (land, mineral rights, etc.) with the understanding that they would be able to collect this economic rent, even if they didn’t know it by that name. Whenever one buys an asset like this, they tend to make an evaluation of the Present Value of future profits. If the government starts confiscating economic rent across the board, then the rug is pulled out from under them. For example, if you’re a homeowner, you bought your house with certain assumptions, such as the imputed rent you’d benefit from, and the hope that the land will appreciate. If an extreme, 100% land value tax were implemented after you bought the property, the sale value of your land will essentially go to zero, and the only thing you have to sell is the house itself, which is a depreciating asset. If the full land value tax was the rule from the beginning, this wouldn’t matter because you’d simply adjust what you’re willing to pay for the property up front to compensate for the extra taxes you’d have to pay. It’s the switcheroo that screws you.

So, these are some big obstacles. Nevertheless, there are solutions. Just one that I’ll mention because it’s easy and it addresses both problems: just convert existing property taxes to land value taxes. Target the same amount of revenue, but apply the tax only to the land, not the buildings on it. On average, this won’t affect land prices at all, so the switcheroo problem is solved. The revenue collected will also likely be far below the amount of economic rent the landowners are receiving, which avoids the separation problem, too. There will be winners and losers, as always, but the amounts are small enough that it won’t be catastrophic for anybody.

What good would that do? Well, it boils down to who the winners and losers are. If you’re a land speculator who owns an empty lot in an expensive area of town, then you’re going to lose. Before the change, you were paying less tax than your neighbors because although the land had similar value, your property had no improvements on it and therefore your total property value was less. After the change, you will be paying almost the exact same tax as your neighbors and that will hurt extra bad because you’re not making any productive use out of your property.

On the other hand, if you’re someone who is already making above-average productive use of your land, then you will likely come out ahead after the change.

So if nothing else, this kind of change incentivizes productive land use and disincentivizes land speculation. One thing I would address first, though, are artificial limits on productive use of the land. Some zoning is appropriate — you wouldn’t want someone to build a belching power plant right in the middle of a residential neighborhood — but current zoning laws are so restrictive that landowners essentially can’t even build a duplex in something like 90% of residential zones. If you institute a land value tax without giving people a way to make more productive use of their land, you’re punishing them for no reason and destroying half the point. And the biggest rent-seekers in this regard are often local residents who flood ZBA meetings to oppose new developments, ostensibly for reasons like “maintaining the character of the neighborhood” but really a huge part of it is that they like the fact that restricted housing supply is pushing their property values up. We ought not let rent-seekers get away with it; there are people coming of age who need a place to live.

Anyway, here are a few examples of where this type of policy is already implemented and is working.

• Norway’s Petroleum Taxation Act imposes a 78% marginal tax rate on net petroleum profits that has generated trillions in revenue, and yet they still have a huge private oil industry. That bears highlighting again. This type of tax does not harm production.
• Australia’s Petroleum Resource Rent Tax imposes a 40% tax on taxable petroleum profit.
• Pennsylvania has several cities that have experimented successfully with a split-rate compromise in which land is taxed at a higher rate than the buildings on it. Housing production subsequently improved, however they also implemented some other pro-growth policies around the same time, so it’s not a clean experiment.