Martin Wolf has a typically thoughtful article in the Financial Times on the benefits of a land value tax (Sunday, 6 February 2023). In many countries, the value of land is significant compared to GDP, but unless there is an actual transaction on the land, its value is not captured. (And hence, not taxed). In this post, I share some thoughts on why this may not be a panacea.
Unless properly structured, this tax will be terribly regressive - much like Value Added Tax (VAT, or sales tax). If the tax starts at the first dollar or pound value of land, then the lower and middle class tax payers who are already under significant stress will find themselves paying for an asset that has, at least indirectly, already been taxed.
We already pay VAT on construction and on new finished property. We pay VAT on all renovation and furnishings (products and services). We pay property levies and taxes that go to municipalities or other indirect schemes (renewable energy taxes on the electricity bill; public broadcaster taxes).
We pay VAT on all utilities. We pay stamp taxes and other taxes on mortgages. We indirectly or directly pay for infrastructure improvements (like sewerage) through fees or taxes, (or both), depending on the country and system.
When it comes time to pass this all on, we pay an inheritance tax. And, of course, we are taxed on our labour (income taxes) or entrepreneurship (corporate taxes and dividend taxes) which provided us with the income to buy property in the first place.
Should a land tax be implemented, steps to alleviate the impact on the poorer and middle class segments should be a major concern.
It would be far more reasonable to place some form of value-adjusted land tax (on a 10-year transition period) linked to both the property zone valuation and the taxpayer income.
Over time (after 10 years), this tax could shift to being linked on average property zone valuations alone.
And yes, it would be a good idea to reduce property or property-equivalent taxes elsewhere as a result. But I doubt this will happen.
In Greece, the government introduced a wealth tax (ENFIA) on land and built property at the start of the economic crisis. But it did not reduce taxes anywhere else. Since the introduction of ENFIA, state expenditure to GDP has risen. Public payroll has risen. Public debt has, incredibly, risen. And inflation is now raising mortgage costs, utility costs and all cost of living expenditure.
At the end of the day, governments in Europe need to ask themselves why, with so much state and debt spending, social and economic outcomes are so bad.
The state is strangling activity in so many sectors with a meaningless authorisation culture, yet when it comes time of the state to make meaningful investment decisions - for example, license a nuclear power station or build a railway extension - it takes years and often results in suboptimal results (long delays, overspending, corruption).
The same occurs when the average citizen asks the state to fulfil even its basic role. We pay astronomical social security taxes, yet these are not enough for a functioning public health care system (which we cannot opt out of) nor for a public sector pension free of penury (which we can also not opt out of).
We pay for police protection: good luck getting any when it counts. We pay for a justice system, yet this appears rigged in favour of special interests and requires long delays and exhorbitant costs. We pay for public education, which is barely delivered thanks only to a very few professional teachers and administrators who go above and beyond to excel in a stagnant environment.
So, I agree with the theory of land taxation. But I'm quite worried about the execution and the outcomes of it, especially on the poor and middle class.