property tax

Renting From the Government?

Zachary Bartsch2 Comments

When I was younger, and a more disagreeable libertarian, I was staunchly against almost all taxes. And not just all taxes in general. Each type of tax was a specific affront to human dignity in its own egregious way.

  • Sales taxes represented government meddling in private contracts.
  • Income taxes represented government stealing people’s time.
  • Property tax represented that living on land was a privilege provided by the state landlord. Private property was a myth.

I won’t win the fight over whether the state governments should be spending money. But, given that we have to pay for services, I can definitely opine on the desirable and undesirable traits of one tax or another. Economists tend to like sales taxes because they encourage saving, investment, capital formation, and greater output. Maybe that’s a good idea. But it’s not clear to me that we should incentivize consumption tomorrow at the cost of consumption today.  There is no singular right answer to that tradeoff.

I would love to have a per-adult lump sum tax in which everyone pays the same dollar figure no matter what. I would also love to receive a million dollars – and that ain’t going to happen either. In lieu of a lump sum tax on people, I think that the next best thing is a lump sum tax on land. Each acre in a county can pay the same tax bill. On the margin, firms would economize on land and tend toward density. That would bring lots of agglomeration and economies of scale. Jeremy wrote recently about land taxes, which have a lot of proponents. I share the concerns about estimating land value and I think that it’s a non-trivial challenge.

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Land-Value Taxes in the Real World: Split-Rate Taxes

Jeremy Horpedahl4 Comments

Tyler Cowen is skeptical about the possibility of a pure land-value tax, even though it has many theoretical benefits. In particular, Cowen points to a host of what we might call “Public Choice NIMBY” issues. In the real world, the same political forces that drive all of the current urban planning issues would either prevent it from being implemented at all, or prevent it from actually being implemented the way Henry George would have wanted.

I grant all these objections, but I do note that there have been multiple YIMBY successes in recent years, particularly in California where NIMBY forces are probably the strongest in the country. Still, if Cowen is mostly correct, are there any real-world options that offer some of the benefits of a LVT? In short, the main benefits are that the deadweight loss of the tax is very small, and that land is more likely to be used for its highest-valued use (which in many cases will mean more density, though this intersects with zoning policy).

Yes. For the clearest example, look to Pennsylvania. Cities are allowed to implement what is called a “split-rate property tax.” It does not only tax land, as a pure LVT would do, but instead taxes land at a higher rate than improvements. A ratio around 5:1 is typical (meaning land is taxed at 5 times the rate of improvements), though some cities have been as high as 26:1.

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What’s the Worst Tax?

Jeremy Horpedahl2 Comments

It’s the most wonderful time of the year, when we start to get all those little documents in the mail and electronically showing how much you earned in the past year. The purpose of these little documents, of course, is to complete your federal and state income tax returns. While many Americans dislike paying income taxes, there is another tax that is rated as even worse in surveys: the property tax.

Why do Americans dislike the property tax so much? One popular explanation is that people don’t like the idea that “you never really own your property.” In other words, even after you have paid off your mortgage, you must continue to pay property taxes, which feels like a form of “rent” that you pay to the government. Of course, that “rent” does pay for a variety of public services, primarily K-12 education in most locations, but this still seems to rub many Americans the wrong way. The libertarian phase “taxation is theft” conveys a similar sentiment for income taxes, that you never “really own” your own labor if you must pay taxes on your earnings.

But there is also an economic explanation for the hatred of the property tax: it is very salient, especially to taxpayers that no longer have a mortgage. While those of us that still have a mortgage on our home pay property taxes through our normal monthly mortgage payment, Americans that have paid off their mortgage typically write a check (or two) to pay the full amount of their property tax bill. An interesting paper by Cabral and Hoxby finds that jurisdictions with more taxpayers using escrow for their property taxes (meaning they have a mortgage) also have higher property tax rates. And furthermore, they “find that owners with tax escrow report their taxes much less accurately than those without tax escrow” (look at Figure 2 in the paper to see the huge differences).

Income taxes, on the other hand, are not salient for most Americans. Payroll withholding means that the taxes are taken out before we even get our paycheck, and you’ll only notice them if you look at your pay stub. And about three-quarters of US taxpayers get a tax refund at the end of the year. For most Americans, the only salient part of the income tax system is a check they receive as a refund, rather than writing a check for their property taxes.

What does all this mean? Should income taxes be made more salient? Should property taxes be made less salient? A simple answer could be that all taxes should be equally salient. Or if you view one tax as superior in some way, maybe that tax should be less salient, so there is less opposition to it.

I don’t have the answers to these questions. But I do have a question for readers: do you know your own income tax rate? Specifically, what is the marginal rate on your federal income taxes? I invite readers to write down their guesses, then look up the correct answer. How close were you? Please leave a comment, and be honest!