FAQ: Wouldn’t people be unable to afford homes under a land tax?

Hi Paul, thanks for your engagement. Certain activities are negative externalities (bads) that need to be internalized (accounted for in the cost), and other activities are positive and need to be liberated from the burden of taxation. So, tax bads, not goods is the central point. Which taxes are levied is just as important as how high or low they are.

When the burden of taxation is placed on land, this makes land more expensive to hold. When taxation is placed on improvements like homes, it makes holding homes more expensive. Thus, a tax on land that replaces all other taxes, including those on homes, would make homes cheaper to purchase, hold , and improve because these activities would not be taxed. In contrast, it would make large swaths of unused and speculatively held land expensive to hold.

A tax on land actually makes land cheaper to purchase precisely because it is more expensive to hold; the market is purged of speculators, thus making the relatively small amount of land one needs to construct a home on cheaper to purchase. See David Ricardo’s Law of Rent However, taxes on homes make them more expensive to construct, to purchase, to keep in use, to lease and rent, to fix and improve upon, and even to demolish when a person wants to build a nicer home. So, owning a home would be cheaper than ever under a single tax on land system.

Remember, this tax would also replace the income tax and all other taxes on production, which would mean that people would have more money to spend on less expensive homes.

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2 Responses to FAQ: Wouldn’t people be unable to afford homes under a land tax?

  1. Lindy Davies says:

    Hi, Jake and everyone!

    I quite agree with what you’re saying here. And I’d like to add just one small notion: in fact, land value itself is an externality. People don’t usually refer to it as such, but it satisfies every part of the definition: It arises and is raised or lowered independently of the landholder’s efforts. It distorts markets in a number of ways. It can be fully confiscated without raising prices or reducing demand (a tax on land value, in other words, is neutral).

    Policies that aim to “internalize” various kinds of external costs would seem to be fundamentally incoherent — wouldn’t they? — if they were attempted without taking land values into account in the first place.

  2. admin says:

    I completely agree. With respect to your last paragraph, I like to think of the externality of land values as the bottom of a spiraling wishing well coin funnel. There are lots of robbers along the funnel who grab the coins before they reach the base of the funnel, like IP owners for example. If you knock out any of these smaller robbers, you just increase the gains of the land monopolists. Any internalization of externalities created by small time robbers will simply allow the coins to progress down the funnel as windfall gains on land. So, in my mind, we have to start with the externalites associated with land value first and only then we can internalize the externalities created by other robbers such that there is some benefit to society.

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