Why the Land Value Tax is a Critical Tool in the Fight Against Inequality

Two articles from over the weekend underscore the importance of the land value tax as a tool for reducing inequality.

Economist Tyler Cowen’s op-ed in the NYT explained that increasing inequality is more about wealth than income. It’s less about celebrities pulling in superstar incomes and more about the economy’s fruits accruing to capital – capital gains, patents and intellectual property, land, etc.

Cowen identifies wealth taxes as an important political battleground, since that’s where the money will increasingly be in the future. Liberals’ traditional tool of choice – the income tax, with its progressive rate structure – will no longer be up to the task. If we want to use the tax system to reduce inequality, we’ll need a different toolkit.

Dean Baker agrees with much of Cowen’s analysis, but makes the important point that some wealth taxes can be difficult to collect. He’d rather focus on reversing the policies that redistribute wealth upward – things like drug patent monopolies, cable TV monopolies, and doctor cartels that create fake scarcity of high-demand goods and services, and drive up consumer prices to ridiculous levels.

The second article from the weekend ties these two points together, and makes the case for wider use of land value taxes. David Leonhardt looks at some new research on economic mobility, which shows a pretty strong correlation between suburban sprawl and reduced economic mobility. Metros where jobs and housing are really spread out have lower economic mobility:

The researchers concluded that larger tax credits for the poor and higher taxes on the affluent seemed to improve income mobility only slightly. The economists also found only modest or no correlation between mobility and the number of local colleges and their tuition rates or between mobility and the amount of extreme wealth in a region.

But the researchers identified four broad factors that appeared to affect income mobility, including the size and dispersion of the local middle class. All else being equal, upward mobility tended to be higher in metropolitan areas where poor families were more dispersed among mixed-income neighborhoods.

Paul Krugman has further comments on the link between sprawl and economic immobility here.

Liberals sometimes misunderstand the economics of this issue, but the most effective way to stop suburban sprawl is not growth boundaries in the suburbs, but more construction in the city core. The “growth” part of “smart growth” doesn’t get nearly enough emphasis. You have to allow more infill construction in the city center and close-in neighborhoods. If you want less sprawl in the southeast PA suburbs, you need to upzone land around transit stations, and allow more infill construction in those high-demand areas. It’s the self-imposed housing shortage on expensive land in the city center that pushes the development horizon out to the fringes.

The land value tax attacks both of these problems. On the one hand, taxing land value is a direct tax on wealth. Land is the speculative commodity part of a piece of real estate. Land is the part that appreciates in value over time, not the building. With a land value tax, city government would capture a larger portion of the unearned appreciation in land wealth than is currently the case. This would be a progressive change in the tax distribution. It’s true that this would end up raising taxes on some people with lots of land wealth but low incomes, but homeowners are richer on average than non-homeowners.

A land value tax also attacks the problem of too little infill construction. Center City Philadelphia has huge parking craters. There are many large surface parking lots on the most expensive land in the city, in zoning districts where you are allowed to build skyscrapers. Under the current property tax, this expensive land is severely under-taxed, and the result is that large swaths of Center City are under-developed. This is happening at the same time there is a housing shortage in Center City and some of the nicer neighborhoods.

If the city started taxing land instead of buildings, or at a higher rate than buildings, it would become more expensive for blightlords and surface parking lot owners to camp on these vacant properties, and at the margin, more of them would build new buildings. Some of them would sell the land to people who want to build new housing and offices. But the effect would be to light a fire under the butts of the people who are slowing or blocking new infill housing construction, and pushing the development horizon out into poor neighborhoods and the suburbs. If more new housing construction was allowed to occur in Center City, rents would fall and more low-income people could afford to live closer to jobs, better schools, and all the rest, which increases their ease of climbing the economic ladder.


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