A land tax is appealing is that there is a fixed amount of land in New Zealand. As a result, if you tax land the price of land will fall, but the amount of land being used will not change. In contrast, a tax on labour income will lead to some people working less, and a tax on capital will lead to lower levels of investment in New Zealand. This attribute of a land tax means that it is more “efficient” than other taxes, implying that for any given amount of revenue the government wants to raise this tax will do it for a lower cost to the rest of us.So it is efficient. And economists love efficiency! But is it fair? There are two main questions with regard to fairness, or claims Matt: 1) How can we justify taxing people based on the land that they own? and 2) Is taxing people who own land instead of income fair?
With regard to the first question, there are a few basic government powers that limit the land owners right to absolute control of their land – and one of those is taxation. I would argue that this is akin to stating that society owns land while individuals that hold the land title are in effect given rent-free permanent leases and the right to use the land within certain conditions.Hopefully next week Matt will argue for a poll tax, which is also efficient!
The concept of permanent lease allows for clear property rights so that people have certainty when using the land for their own purposes, such as erecting or renovating buildings, growing crops, or farming animals. But it should also allow for the government to charge rent on the land on behalf of society, which in essence what a land tax would be.
Although this justification for a land tax appears a bit strange at first, it is in fact no different to one of the common justifications for income tax. Society helps individuals to develop their skills and ability to earn income by providing public hospitals, schools, and other infrastructure. A tax on individual labour income can in turn be seen as payment for these services and for the opportunity to develop skills and ultimately earn a greater income. If we accept this justification for income taxes, it would seem reasonable to also apply it to land taxes.
But is it fair to shift the burden of taxation from income to land?
There are winners and losers from any change in tax policy. If we were to introduce a land tax and reduce income taxes, people who hold a significant amount of land would lose out, while young people with their working lives ahead of them would gain. Furthermore, individuals that own land but have variable income year-to-year may suffer from cash-flow issues under a land tax. Finally, following a drop in land prices, financial institutions exposed to lending on land would also suffer loses.
However, changes in wealth as a result of the imposition of a land tax will only happen once. As a result, it would be possible for the government to compensate the immediate losers of the changes through lump-sum payments if it deems the adjustment to the new tax unfair.
For example, if we believe that a land-tax really hurts people who have retired but own their land freehold government could send them a one-off payment to make up for this.
By doing this society gets the gains of a land tax in terms of efficiency without hurting the worst off in society.