Dealing with High Rents, Pt. 1: A Land Tax

The existence of astronomically high rents in some of the most productive areas of the United States is not only a consistent source of anxiety and poverty for the people living there, but also a drag on our national economy. Edward Glaeser of the Brookings Institute notes that the high rents are increasingly causing population growth to shift to less productive areas of the country — Texas, for example, has been growing dramatically in population, even though per capita GDP there is significantly lower than in the Bay Area. There is little doubt that reducing the regulatory burdens and zoning restrictions in places like Manhattan or San Francisco would do much to improve the situation in those areas. However, a more widely applicable solution, and one that would both incentivize home building and provide needed revenue to city governments, is to shift the current burden of taxation from property to land.

This is hardly a new idea — indeed, I’m primarily applying the ideas of Henry George, a writer from the late 19th century who was largely inspired to investigate rent as a critical force in political economy through the observation that even as GDP per capita in a place rose, the percentage of people living in poverty did not fall, and indeed often rose right along with it. This was true even as interest rates fell, as well — indicating that ‘capital’ was also not earning a large rate of return, and so some other force must be at work. This was particularly evident to George in California, where overall wealth increased dramatically from 1850 to the 1870s, but poverty increased right a long with it. The same is true today — while California has by far the largest economy in the US, and a relatively high GDP per capita, it also has the highest level of poverty according to the Census Bureau’s supplemental poverty measure, which takes into account things like rent and cost of living.

The solution I would propose is simple, and probably best implemented at a State or County level (since municipal boundaries are rather arbitrary and usually too small to make a systemic difference)— a tax based on the value of a piece of land, irrespective of the current buildings on it, or lack thereof.

Why would this be superior to a tax based on property values, which is far more common in the US?

First, it would be more effective as a revenue mechanism, because land is essentially inelastic: no more can be brought into existence, nor can it cease to exist. This means that there would be, theoretically *no* dead weight loss from a tax on land, that is to say, the tax would not dis-incentivize any economic activity, nor would it negatively impact societal well being. If you’ll forgive a few Econ 101 graphs, this will be clear:

A tax on the value of property looks something like this, since the supply and demand both have some elasticity. The difference between Qt and Q* being value that is not produced because of the tax, and the Deadweight Loss triangle indicated societal losses

The deadweight loss has disappeared when we tax a good with perfectly inelastic supply — and land is about as close to perfectly inelastic as possible.

Second, a land tax will incentivize increased density and development. The necessity of this is visible in at least two ways. First, even in very expensive markets, it’s not uncommon to see empty lots worth (ostensibly) hundreds of thousands of dollars sit on the market for months or years before being developed. George observed this in California as well — much productive land was left unused and indeed unusable because it could only be bought at highly speculative prices. Indeed, there is no special incentive to sell an empty plot of land in a highly desirable city: so long as the land value is appreciating faster than the taxable value of the land, one is gaining value without doing anything at all, and indeed making a negative contribution to society. Taxing by land value rather than building value would change this calculus by increasing the pressure to generate revenue from these assets, and decreasing the effective penalty for developing them.

Further, this will remove the tax distortions that incentivize low-density housing. Suppose a given plot is capable of supporting one or two housing units: currently, if the owners add a second unit to a plot, rather than simply keeping an enormous lawn, they may be able to gain some revenue by renting the unit, or use it to house parents, children, or other family members, but in addition to paying the costs of construction (and probably running afoul of various zoning ordinances), they’ll be taking on a greater tax liability — in many cases substantially greater — by increasing the value of their property. It’s not hard to see how this creates a substantial deadweight loss in terms of land that both ‘producers’ and ‘consumers’ would be willing to rent at a mutually agreeable price, but is instead held in the form of lawns or empty lots because of tax pressure. This deadweight loss is even more painful because it takes a significant up a significant portion of a perfectly inelastic input — land.

As far as what I would with the revenue gained by such a system, that’ll wait for Pt. 2 of my proposals for local level changes to deal with high rents!