When the public has lost its appetite for the argument that taxing the wealthy is in some way unfair – a claim which, in the midst of a pandemic that has sharply heightened in equality, falls even flatter than usual – the next common retort is that it is somehow impossible to do. Those opposed to such taxes throw up their hands and sigh. “We’d love to tax the wealthiest among us, but we can’t do so effectively.”
A couple reasons are put forth for this: on a state level, there is always the specter of a flight of the wealthy away from high tax states. This has been a popular story to tell about California; as the state sees residents leave, many outside observers have claimed that high taxes have driven them away. California’s tax structure is indeed dysfunctional, but it is in fact lower income Californians who are leaving, indicating that high taxes are top earners are not the primary culprit. Another argument, prominently advanced by D.J. Tice in the Minnesota Star Tribune recently, is that high taxes will be passed down to customers and workers, and in any event will disincentivize the kind of behavior we want from millionaires and billionaires.
This argument has somewhat more merit – there is no real economic question that taxing a good or service will increase its scarcity and thus its price, which in effect passes the tax on to customers. There is also no question that taxing an activity makes people less likely to do it. Henry George in “Justice the Object, Taxation the Means” makes this same argument by pointing out that it is precisely this effect that states often count on when imposing punitive taxes: “In most of our counties and States when dogs become too numerous, there is imposed a dog tax to get rid of dogs. Well, we impose a dog tax to get rid of dogs, and why should we impose a house tax unless we want to get rid of houses? Why should we impose a farm tax unless we want fewer farms? Why should we tax any man for having exerted industry or energy in the production of wealth?”
So, in one sense Dice is to be commended for shifting our focus on to the incentive structure of our tax system. He argues that “It could be those who are least able to move their capital, or move themselves, to lower-tax locations who indirectly pay the price of Minnesota government’s generosity to itself”, and cautions “let’s not be overconfident about controlling who or what we disincentivize in the process.” These are indeed compelling considerations – and George’s solution of a land value tax effectively answers them both.
If low earners are hit harder by taxes because they are unable to move their capital, or themselves, to another state, a land value tax is a very obvious solution. After all, no one using ordinary means can move their *land* to another state. And so the tax cannot be dodged. Indeed, it is one of the best ways to tax non-residents, since the location of the land in question, unlike income or even a sale, is indisputable.
And if we are worried about incentives, surely it makes sense to take George’s advice and acknowledge that “you may tax land values all you please and there will not be a square inch the less land”. And if millionaires and billionaires decide, as result of this tax, to invest less of their money in a state’s land, so much the better – that allows for lower prices and easier land acquisition by those who want to use it for homes or businesses, or for municipalities to buy land for public use. Indeed, because the supply of land cannot be diminished, the tax also will not be normally ‘passed on’ to consumers in the form of higher rents. If, with the current supply of land, landlords could charge higher rents, they would. Given that the supply of land will remain the same after the tax, the rents charged on land will stay broadly the same.
There is no doubt that in economics, as in life generally, unintended consequences are the rule, rather than the exception. An exploration of tax incidence and incentives is always a crucial part of developing solid policy. But such an exploration is meaningless if the best it can do is warn against any attempt to tax the wealthy. A more careful examination of these issues leads to a near-unavoidable conclusion: taxing land is the best way to align the incentives of the wealthy with the needs of the public, and to collect revenue for the state.