A land tax won't make cities more affordable

The land tax, an idea that dates to Henry George and the classical economists of the late 19th century, is having another one of its moments. Martin Wolf of the Financial Times views the case for it as "overwhelming," as do many others. I am less certain.

The levy, also called the land-value tax, is more radical than higher property taxes; it is an attempt to capture the entire value of land and redistribute it to the government and, in turn, the citizenry. As such, it requires separating the value of property improvements (such as buildings) and the value of the land itself.

The theory is that land has nowhere else to go, so if you can tax the land value only, you can raise revenue without distorting the allocation of resources. It's an especially appealing argument now, with land prices and rents rising in many of the world's major cities. Why not capture some of that value and give it back to the citizenry?

Yet I hesitate. Theories, even compelling ones, can take you only so far. Practically speaking, a hardcore land-value tax feels too simplistic.

A land tax is only being talked about because urban planning is so broken, serving too many interests other than those of ordinary middle-class residents. Those biases are structural, often resulting from electoral systems that favor incumbent landowners and homeowners. The administration of a land tax would be ruled, in large part, by those very same political interests. Therein lies the root of my worries.

As I mentioned, any land-tax system would need to distinguish between the value of the land and the value of the improvements on the land. Everyone agrees that the improvements should not be taxed at more than normal rates. How would a proposal for a pure land tax play out?

Say you have a house in Palo Alto, California, a notoriously NIMBY city. Your land is probably worth a lot more than your house. For a pure land tax to become reality, it would have to go through the meat grinder of local politics.

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I can predict what will come out of that meat grinder: a policy to compensate current landholders, one way or another, for the land tax. So if Palo Alto introduces a land tax, it likely that the revenue will go back to those very same NIMBY interest groups. Alaska's oil wealth results in residents receiving a windfall each year from the state; Palo Alto's land wealth would result in a similar sort of rebate to its residents.

Keep in mind that a lot of people rely on rent and land revenue to stay solvent, so it is quite likely that they will argue on "fairness" grounds that they should be grandfathered in and exempt from the land tax. What if you bought your home in Los Angeles in 1991 and now live there on a modest income? Or collect rent as a small-scale landlord? If the land tax zaps away your major source of wealth, you will either rebel politically or move. Local politics will become even less friendly to the middle class.

Politics will also intervene in the debate over defining what is the pure land tax and what is the tax on improvements. These decisions will not be handed down by God, but rather argued among local officials, real estate interests, homeowners, renters and voters. If you want to build something in a land-tax jurisdiction, you will have to wade into this political battle. And sometimes you will lose. If you are not one of the favored interest groups (and in NIMBY jurisdictions, new builders typically are not), you will end up being taxed on improvements and not just on the pure land value.

And so look where all this has ended up. One of the arguments for the pure land-value tax is to encourage new construction, thereby making housing more affordable. But it is likely to encourage interventions that increase both the taxes and the political difficulty of new construction. If you think local real estate-related political squabbles are intense today, just think how crazy they will be when all that land-tax revenue is at stake.

It's not the tax system that drives high rents and NIMBYism; it's the power of interest groups. Even with a pure land-value tax, that power won't just go away. The more likely outcome is an intensification of conflict - and a higher cost of building.

(COMMENT, BELOW)

Cowen is a Bloomberg View columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include "The Complacent Class: The Self-Defeating Quest for the American Dream."

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