The case for land tax

The Economist states:

A new study by John Norregaard of the International Monetary Fund suggests that the average rich country, including all levels of government, raises under 5% of total tax revenue from annual levies on land or the buildings on it. The norm in middle-income emerging economies is lower still, at around 2% of all tax revenue (see right-hand chart). Including property-transaction taxes like stamp duty raises the total a bit but not by much. …

But, overall, property taxation plays a relatively small role.

That’s a pity. Taxing land and property is one of the most efficient and least distorting ways for governments to raise money. A pure land tax, one without regard to how land is used or what is built on it, is the best sort. Since the amount of land is fixed, taxing it cannot distort supply in the way that taxing work or saving might discourage effort or thrift. Instead a land tax encourages efficient land use.

That’s why I support a land tax – it is the least distorting tax. Taxes on income discourage work. Taxes on capital discourage investment. Taxes on goods and services discourages consumption. But what does a tax on land do?

Property developers, for instance, would be less inclined to hoard undeveloped land if they had to pay an annual levy on it. Property taxes that include the value of buildings on land are less efficient, since they are, in effect, a tax on the investment in that property. Even so, they are less likely to affect people’s behaviour than income or employment taxes. A study by the OECD suggests that taxes on immovable property are the most growth-friendly of all major taxes. That is even truer of urbanising emerging economies with large informal sectors.

I only support a land tax, if other taxes were reduced so that the overall level of taxation doesn’t increase. As The Economist states, a land tax is one of the growth-friendly forms of tax – far more than income taxes.