Link: http://taxprof.typepad.com/taxprof_blog/files/120TN0683.pdf
David Cay Johnston, the peerless reporter and commentator on US income tax policy, formerly with the NYTimes, and the author of two excellent books (Perfectly Legal and Free Lunch), now a columnist for Tax Notes, has written a column on the incentives involved in the income tax deduction for interest.
Though I think he sees through a glass darkly on this one, he does make some important points:
He starts out with this:
What we make of life’s opportunities depends on how well we have prepared to take advantage of them. But first we must recognize opportunity when it comes knocking, or the chance is lost. And lost opportunity costs can be huge not just for individuals, but nations as well.
As a Georgist, I am led to wonder about this. What I think of when I read this is that one of life's biggest opportunities, as we structure our economy right now, is the privilege of claiming for oneself a choice bit of the natural creation or the community creation -- without being required to compensate the community for what one has taken. The former includes natural resources, such as ports, water, the electromagnetic spectrum, and the oceans -- not to mention breathable air. The latter includes that which the community has created, through both public spending and private spending: land value, created by the presence of concentrations of population due to favorable climate, attractive views, cultural amenities, and through public spending on such public goods as infrastucture (airports, highway systems, bridges, water delivery, sanitary sewer and stormwater runoff systems, public transportation, schools, emergency services, libraries, public health, parks, etc.), and what might be either public sector or private sector spending, on electricity, cable TV, WiFi, railroads.
All these things conspire to make some land more valuable than other land. Those who have title to valuable land get to collect rent from their fellow human beings, just as if they, personally, could take credit for all those natural, public and private amenities. What an opportunity! Shouldn't the smartest among us be permitted to privatize all that economic value? Isn't that what opportunity is all about?
NO!
DCJ says:
I agree that the deductions for mortgage interest and property taxes should be eliminated; and along with them, the deductions for state income or sales taxes. (Why provide an incentive for states to choose dumb taxes -- taxes which damage the economy?)
But I would remind DCJ that the property tax is two taxes -- one with very desirable effects and the other with undesirable ones -- which we have harnessed together to our detriment, and that perhaps the best contribution the Federal government could make to the situation is to encourage states, counties, municipalities and school districts to divorce the two pieces and reduce or phase out the one, and to rely primarily or entirely on the other.
Which one is which, and why? The bad part of the property tax is the part that falls on buildings and other manmade structures. What we tax we get less of, and what we get less of is high-quality, well-maintained technologically-efficient buildings that suit current users' preferences. When we tax buildings, we encourage poor maintenance. We encourage the tearing down of marginal buildings, so as to avoid the tax collector's annual bill. We discourage the fellow who in the absence of a tax on buildings would choose to build to the highest and best use of the particular site. We get a low-rise building where a high-rise might profitably go.
The good part of the property tax, like the girl with the curl, is very good. The good part of the PT is the part that falls on land value. Why?
First, because it doesn't take from the landholder anything which he created.Land increases in value for reasons that have absolutely no relationship to his ownership, his activity, his doing or failure to do anything. Why does land value increase?
increases in population -- but even the most fertile landholder doesn't cause this. Rather, it relates to immigration, natural fertility, longer lifespans, and, locally, the presence of natural amenities, vibrant economies, good jobs,
- advances in technology - elevators, air conditioning, fiberglass boats, advances in earthmoving equipment,
- public (and to a lesser extent) investment in infrastructure and services which people find worthwhile (and which can be provided more efficiently in common): highways, bridges, airports, trains, buses, good schools, public health, emergency response, libraries, inexpensive utilities, effective storm protection and stormwater runoff, trash pickup, recycing, sanitary sewers, clean water, reliable electricity, WiFi, public radio and tv, colleges, universities, parks, etc. (Does the fact that the private sector provides some of that investment mean that the private sector is entitled to the increase in land value? No -- the private sector is entitled to a fair wage on its labor and a fair interest rate on the capital they invest in ways that meet market demand. "Investment" in land is inert; it doesn't benefit the economy, doesn't create anything, and the large amount expended prevents spending on labor and capital. "Investment" in land simply concentrates our wealth into the hands of sellers.)
Second, when we increase the tax rate on land value, we bring down the selling price on land.
The increase in carrying costs is capitalized into a lower selling price. Why is this good?
A lower selling price on land is good because it permits more people to be able to afford the location they need to live on or to conduct business on, with a lower share of their income expended for the purpose;
- A lower selling price on land is good because a lower selling price permits a builder to optimize his profit by building a more modest home on the site, resulting in a home that is affordable, less expensive to heat or cool, to furnish;
- Funding a larger share of our common spending from a tax on land value permits us to rely less on taxes which (a) steal from producers that which they produce; (b) depress the economy; (c) are inefficient, because they cost a lot to collect; (d) are easy to avoid through dishonesty; (e) distort the economy
Third, when we increase the tax rate on land value, we get better land use. The really excellent sites get redeveloped -- promptly and repeatedly -- to their highest and best use. Highest and best use usually involves serving large numbers of people, or a wide range of needs. (A highrise building might provide a lot of housing, a lot of office space, retail locations for many specialized vendors, etc.) The inferior sites on the fringe will not get developed prematurely (or with unsuitably large buildings) because people who want to live near the center of things will be able to find housing there, and those who need a well-located place to conduct business will be able to find such a place, and will not be forced to inferior fringe sites, where only a small fraction of the available customers will be able to reach them. Farmland can stay farmland; wild land can stay wild.
Fourth, when we increase the tax rate on land value, we collect back for common purposes a larger share of that which the community has created, making it possible to fund more things which make the community a good place to live, without burdening producers. We create a virtuous circle, a sustainable economy, a healthy community. No one is getting rich from others' labor; no free lunches for landholders, paid for by tenants and workers. (How much of the rent should we collect? The lion's share -- perhaps 90% to 95%)
Land rent isn't the only thing we should be relying on more heavily than we currently do. The classical economists recognized a number of other things besides site value that have similar characteristics, which they collected under the generic term "land." Land, labor and capital, they said, were the three inputs to production. And two of those three are poor tax bases, for a wide variety of reasons.
Adam Smith provided us the canons of taxation, which we largely ignore today.
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