1 The Hidden Taxable Capacity of Land: Enough and to Spare Mason Gaffney July 3, 2008. Accepted for publication in the International J. of Social Economics, Summer 2008 Copyrighted by Mason Gaffney Introduction Scores of economists tell us that an ideal tax is one based on the value of land. A big part of the benefit is getting rid of other taxes, taxes that impose “excess burdens” by twisting incentives against the bases taxed. Then these economists abandon the point by assuming land values are too low to support modern government, so forget the ideal tax base. Here we examine their reasons for so assuming. It turns out that the revenue potential of land is greater than almost anyone thinks. There is enough and to spare. We find that conventional sources of data are seriously negligent and consistently biased downwards. They omit much of the potential base and low-ball what they do measure. Then we go on to identify and uncloset hidden elements of revenue potential, by using truer and more comprehensive definitions and measures of rent and land values, and several modes of raising public revenues from them. Some other economists and pundits, at the same time, express the opposite concern. They bridle at any land tax hike, even in a tax-cum-rebate proposal. It is just “feeding the beast”, they say, fearing that this feast is too rich. Some even take both positions alternately, as E.R.A. Seligman did a century ago when he bent the twig of modern tax theory1. But here we just address the more common concern whether land revenues have the capacity to replace other taxes, so we may sunset the latter. We are looking at a “revenue-neutral” shift, to banish counterproductive taxes on labor, production, dwellings, other 1 Andelson, Robert V., and Mason Gaffney, 1979, “Seligman and his Critique from Social Utility”. In Andelson (ed.), Critics of Henry George. Rutherford, NJ: Fairleigh-Dickinson University Press, pp. 273- 92 2 capital, and commerce. In the process we will specify ways to cut wasteful public spending by using private land better. Beyond that we may or may not, as separate issues, want to add some “lean” to the public sector to provide and maintain its crumbling infrastructure, a foundation of the private sector. We may have to pay down our heavy public debts. Interest on those debts now consumes a high fraction of public spending, and threatens to take more as our international credit rating falls, as the dollar already has. We may want to raise taxes to bail out underfunded existing obligations like Social Security, public health, medical care, and public schools (or vouchers, as one prefers). We may or may not want to distribute a social dividend in cash, on the Alaska model2. But again, each of those is a separate issue not treated here. Many modern champions of Georgist ideas have withdrawn into a corner, confining themselves to modifying the existing local property tax by exempting buildings. Many (not all) even shy away from demanding reform of moss-covered assessment rolls3. They express concern at being branded as “cranks” if they would do more, and of course their opponents see this weakness and use it to cow them4. This timidity narrows the prospective tax base to a small and shrinking part of the total system of public revenues. I ask my readers to join me in exploring the whole system. It is not just the property tax, narrowly conceived, that brims with Georgist issues. There are at least sixteen elements of land’s taxable capacity that previous researchers have either trivialized, or overlooked and “disappeared” entirely. In Group A, Elements 1-4 correct for 2 Governor Jay Hammond, a Republican, set up the Alaska program. Alaska Senators Stephens and Murkowski, along with other Republicans, pushed the Alaska model for Iraq. Democratic candidate Hillary Clinton touted a national social dividend for the U.S.A., keeping the issue alive but also drawing the fire of partisan politics which is outside the scope of this paper. The point is that both major parties show a sustained interest. 3 A notable exception was John Nagy, activist reformer with the Homeowners’ League of San Diego, an offshoot of the Henry George School of San Diego, in the 1970’s. Ted Gwartney, a professional assessor and appraiser, came out of the San Diego School tradition and has reformed assessments in several cities and the whole Province of British Columbia over a long career. He is currently Director of Assessments in Greenwich, CT. 4 Iain McLean, in an otherwise good chapter, has pulled his own teeth by expressing and halfway endorsing that fear. McLean, Iain, 2005, “The politics of land tax – then and now”. In Maxwell, Dominic, and Anthony Vigor (eds), Time for Land Value Tax? Oxford: Institute for Public Policy Research, pp. 17-31. 3 the downward bias in standard data. In Group B, Elements 5-12 broaden the concepts of land and its rent far beyond the conventional narrow perception. This includes showing how the benefits of untaxing useful activity are shifted into higher taxable land rents, a very powerful effect. In Group C, Elements 13-14 show how removing “excess burdens” uncaps viable tax rates. In Group D, Elements 15 and 16 explore a moot idea on how mortgage interest might be treated as rent; and on how taxing the rents of absentee owners improves a local balance of payments. The following Table of Contents shows how the four Groups and the Sixteen Elements fit together, and reinforce each other. I urge the serious reader to refer back to this Table often, as the focus shifts from one Element to another of the total thesis. The Elements are the trees; this is the forest. Table of Contents Page Introduction 1 Table of Contents 3 GROUP A: How conventional data sources hide land values 5 Element #1: Commonly used data sources 5 1-a: Assessed values for property taxation 5 1-b: I.R.S. data with rents zeroed out 6 i. Cash Rents zeroed by overdepreciation 6 ii. Omitting imputed rents 8 iii. Misposting internalized rents 9 1-c: NIPA data 10 1-d: F.R.B. data 11 1-e: N.B.E.R. data 11 1-f: Lincoln Institute data 15 1-g: Data on equity values alone 17 1-h: Ignoring consumer budget data 17 1-i: Using median values for means 17 Element #2: Recent rises of rents and values 18 Element #3: Lowballing the land fraction of real estate 19 Element #4: Farmland 19 Group B: Broadening the meaning of land and its rent 24 Element #5: Rents best tapped by variable charges 24 5-a: Fixed vs. variable tax bases 24 5-b: User charges for crowded streets & roads 25 5-c: Some other variable charges 26 Element #6: Taxing the income from land 27 4 6-a: Historical and legal background 27 6-b: Untaxing income from labor 28 6-c: Untaxing income from capital 29 6-d: Plugging loopholes for land income 31 6-e: Current unearned increments as current rents 34 Element #7: Taxing for conservation 40 7-a: Taxable surplus in water resources 40 7-b: Effluent charges: “Tax bads: not goods” 43 7-c: Handling non-point pollution 44 7-d: Exhaustible resources: buried bonanzas 48 Element #8: Novel, unseen, and unrecognized resources 56 8-a: Radio spectrum 56 8-b: Fisheries 57 8-c: Littoral space 58 8-d: Some other variant kinds of land 61 Element #9: Unconventional de facto tenures now untaxed 62 9-a: Land-grabbing capital 62 9-b: Zoning 67 9-c: Grandfathering 68 9-d: Licensing 68 Element #10: Salvaging rents now being dissipated 69 10-a: Dissipation by open access & crowding 69 10-b: Dissipation by rent-seeking while tenuring 71 Element #11: Rent gains from abating other taxes: the concept of ATCOR 74 11-a: Examples of ATCOR from experience 74 11-b: The logic of ATCOR 76 11-c: The ATCOR tradition in economic thought 80 11-d: The muddied waters of modern theory 81 i. Forward shifting of taxes 81 ii. Making capital stand still 82 iii. Abusing the Ramsey Rule 82 Element #12: Rent gains from removing excess burdens: the concept of EBCOR 85 12-a: Logic of the EBCOR Effect 85 12-b: A simple test for tax neutrality 87 12-c: Algebra of EBCOR and a numerical example 89 12-d: The broader reach of a narrower tax base 91 GROUP C: Uncapping the tax rate 93 Element #13: Freedom from the constraint of excess burdens 93 13-a: Absence of taxable event 93 13-b: Raising the tax base by taxing it (sic) 94 13-c: Cutting waste in government 94 5 13-d: Tax capitalization is not erosion 95 13-e: Better allocation of land 96 13-f: Capital formation and macro stimulation 98 13-g: Equity-cum-efficiency-cum-incentives 98 13-h: Local multiplier effect 99 Element #14: The unseen reservoir of high internal valuations and holdout prices 99 14-a: High internal valuations by owners 99 14-b: “Contingent valuation” 100 14-c: Low internal valuations by non-owners 102 GROUP D: Moot new elements of taxable rent 102 Element #15: Mortgage interest as land rent 102 Element #16: Improving our balance of payments: the multiplier effect of taxing absentee owners 104 Summary and Conclusion 105 Appendix I: 31 reasons why land valuations assessed for tax purposes fall short of market values 107 Appendix II: Rounding out the EBCOR model by treating capital costs explicitly 113 Bibliography 119 Endnotes 134 GROUP A.