I think this is a very interesting analysis and the benefits of limiting the government's ability to tax might be worth it. I am very skeptical though that this is the reason voters don't like efficient taxes which is the article's hook. I even doubt that voters have any kind of intuition for these dynamics.
The real reasons are probably perceived fairness arguments which you alluded to earlier in the article. Even as someone who'd love to see LVT as the primary form of taxation, have some concerns about the tax basis for LVT being established accurately.
The whole structural argument presented here is a bit arcane for most people but I think it overlaps with the emotional objection people have to poll and property taxes: that they are unavoidable, arbitrary, etc. It's easier to swallow consumption and income taxes because they are costs that result from your decisions. Efficient taxes are much more obviously just a charge that is being levied on you in proportion to how much the government needs, which is more threatening
Not to be cynical, but the average voter almost certainly thinks that corporation taxes are paid by corporations i.e. not by him. It's tariffs: polling generally shows that voters like them, but people think they are paid by foreigners.
People know they pay property taxes, so they object to them.
This seems a little circular and counterintuitive to me. Voters resist efficient taxation, because they know efficient taxation is less painful, and so voters will be less resistant to efficient taxation? And they prefer inefficient taxation because they will be more resistant to it?
One thing I’ve never really seen mentioned but I think captures part of why property and land value taxes are both unpopular and actually inefficient is the uncertainty of future value coupled with the illiquidity of transactions. If your property tax might triple and moving is costly that is a tax you may especially want to avoid. While people are right to be against things like prop 13 and it’s certainly true your net worth may have gone up drastically in this scenario, inducing selling home equity into an illiquid market in order to pay these unexpected taxes is a loss for the homeowners and therefore leads to them wanting to avoid it more than by just its expected value leading to distortion
I agree. I live somewhere with high property tax rates, so this comes up a lot in local politics. The archetypical anti-property-tax anecdote is an elderly person on fixed income being forced to sell their home.
I had a shower thought about this yesterday: What if the tax-assessed property value of a home were indexed to CPI and only updated to match market conditions when the property is sold or transferred? That would introduce all sorts of new distortions, but it would also:
1. Remove this kind of "binding constraint risk"
2. Reduce the marginal tax on improvements made in cases where the owner doesn't plan to sell.
Had a somewhat similar shower thought in having the ability to pay property tax with home equity (has added benefit of giving some incentive for government to make the assessment more accurate). Yours is fairly similar just restricting it to the amount above baseline being paid with equity which also makes sense and helps with cash flow problem
“Prosecutors have no financial incentive to convict innocent people because conviction doesn’t enrich them.”
But innocent people have a financial incentive to pay some smaller financial penalty to avoid an expensive defense. (Your premise assumes a benevolent state. It isn’t. Prosecutors are like hammers and hammers need nails.)
I may be reading too much Michael Huemer, but the state will always have the authority to enforce either efficient or inefficient taxes because it has the power to use force against taxpayers.
Voters should strive to be a little less irrational and try to understand deadweight loss.
You must be a very good teacher because I always come away from reading your posts with a greater depth of knowledge. Thank you.
My personal instinct is that voters hate property taxes because they are so visible, either writing big checks once or twice a year or added to mortgage payments. Income tax is half-hidden by regular paycheck deductions. Sales tax is half-hidden by showing up in everything we buy. We get used to them and forget them.
A lesser reason for hating property taxes is fear: failure to pay is not just another debt, as with income taxes. The government can confiscate your home, evict you, sell the property, and in some jurisdictions, keep the entire proceeds. People have lost their homes for paying a few hundred dollars too little and the government sending notices to the wrong address. The Supreme Court has recently told states to return the excess to the delinquent owner, but there are lots of creative ways around that.
Combine the disgust at governments behaving badly with the huge checks, and that seems to me explanation enough.
When I look at my property tax assessment the % that is attributed to land is small relative to improvements. So a property tax is pretty far from a LVT tax.
Also, I would point out that the value of a home is mostly just "how good are my neighbors". Do you live in a low crime area within a good school boundary line? Basically, property taxes tax people for the crime of building desirable communities by being good neighbors.
I wonder if either the economists or the voters were consideing the progressive personal consumption tax and the substitution of the progressive personnal consumption tax for the income tax and the VAT for the wage tax.
The argument for the advantages of inefficient taxes makes sense. Whether voters have some intuitive understanding of it or not is an interesting question. If they do, then you might expect in jurisdictions where voters are more tolerant of high taxes because they value relatively high levels of government services, taxes would be more efficient. On the other hand, if a significant share of voters thinks the government is spending too much on services of questionable value, those voters might prefer inefficient taxes to constrain the government.
“Real-world property taxes blend both, making them less efficient than the theoretical ideal but more efficient than pure capital taxes.”
You leave out one of the other reasons that at least intuitively for people who pay attention to it property taxes are “good”. Namely, they are generally neither progressive nor regressive. Everyone recoils from regressive taxes. Leftists like progressive taxes, but the high marginal rates cause disincentives and larger deadweight loss.
And while it doesn’t apply re: commercial property, for homes (rental or owned), property taxes are also consumption taxes, which would put them “higher” on a list of less-bad taxes.
Decond, thank you for acknowledging near the end your bait and switch. Because it’s really not primarily about popularity at all, or even about the “goodness” of these less efficient taxes; it’s about why we end up with what we get. Corporate taxes aren’t *good* or *desirable* because they can be avoided; they are *acceptable* because despite being leftist-popular and having high deadweight loss, they can be avoided and so get kept low.
You didn’t cover it, but cap gains taxes are very similar. They are about as bad as corporate taxes in terms of deadweight loss, but given that people can decide when/whether to sell, that control over timing limits how high governments voracious for revenue can set the rates.
I enjoyed this analysis. I wonder how visible consumption taxes, such as value-added-tax in the UK, are to voters, or whether they are just lumped in with "inflation" are are more politically invisible.
The UK also has stamp duty as well as a form property tax called council tax. Stamp duty hits the sweet spot of being both economically inefficient and generally disliked by voters, being a tax on those who buy property that has to be paid upfront, rather than with the mortgage.
Council tax attempts to tax property, but property bands have not been updated since the 1990s. On the one, it does not penalise renovation, but on the other, it creates some very arbitrary differences in council tax rates between boroughs. I'm fortunate to pay relatively low council tax in my borough, having just moved from a less well-off area that paid more tax.
I think this is a very interesting analysis and the benefits of limiting the government's ability to tax might be worth it. I am very skeptical though that this is the reason voters don't like efficient taxes which is the article's hook. I even doubt that voters have any kind of intuition for these dynamics.
The real reasons are probably perceived fairness arguments which you alluded to earlier in the article. Even as someone who'd love to see LVT as the primary form of taxation, have some concerns about the tax basis for LVT being established accurately.
That's fair. I added a bit at the end explaining this isn't actually a theory of why voters don't like it.
The whole structural argument presented here is a bit arcane for most people but I think it overlaps with the emotional objection people have to poll and property taxes: that they are unavoidable, arbitrary, etc. It's easier to swallow consumption and income taxes because they are costs that result from your decisions. Efficient taxes are much more obviously just a charge that is being levied on you in proportion to how much the government needs, which is more threatening
Not to be cynical, but the average voter almost certainly thinks that corporation taxes are paid by corporations i.e. not by him. It's tariffs: polling generally shows that voters like them, but people think they are paid by foreigners.
People know they pay property taxes, so they object to them.
This seems a little circular and counterintuitive to me. Voters resist efficient taxation, because they know efficient taxation is less painful, and so voters will be less resistant to efficient taxation? And they prefer inefficient taxation because they will be more resistant to it?
One thing I’ve never really seen mentioned but I think captures part of why property and land value taxes are both unpopular and actually inefficient is the uncertainty of future value coupled with the illiquidity of transactions. If your property tax might triple and moving is costly that is a tax you may especially want to avoid. While people are right to be against things like prop 13 and it’s certainly true your net worth may have gone up drastically in this scenario, inducing selling home equity into an illiquid market in order to pay these unexpected taxes is a loss for the homeowners and therefore leads to them wanting to avoid it more than by just its expected value leading to distortion
I agree. I live somewhere with high property tax rates, so this comes up a lot in local politics. The archetypical anti-property-tax anecdote is an elderly person on fixed income being forced to sell their home.
I had a shower thought about this yesterday: What if the tax-assessed property value of a home were indexed to CPI and only updated to match market conditions when the property is sold or transferred? That would introduce all sorts of new distortions, but it would also:
1. Remove this kind of "binding constraint risk"
2. Reduce the marginal tax on improvements made in cases where the owner doesn't plan to sell.
Had a somewhat similar shower thought in having the ability to pay property tax with home equity (has added benefit of giving some incentive for government to make the assessment more accurate). Yours is fairly similar just restricting it to the amount above baseline being paid with equity which also makes sense and helps with cash flow problem
“Prosecutors have no financial incentive to convict innocent people because conviction doesn’t enrich them.”
But innocent people have a financial incentive to pay some smaller financial penalty to avoid an expensive defense. (Your premise assumes a benevolent state. It isn’t. Prosecutors are like hammers and hammers need nails.)
I may be reading too much Michael Huemer, but the state will always have the authority to enforce either efficient or inefficient taxes because it has the power to use force against taxpayers.
Voters should strive to be a little less irrational and try to understand deadweight loss.
You must be a very good teacher because I always come away from reading your posts with a greater depth of knowledge. Thank you.
My personal instinct is that voters hate property taxes because they are so visible, either writing big checks once or twice a year or added to mortgage payments. Income tax is half-hidden by regular paycheck deductions. Sales tax is half-hidden by showing up in everything we buy. We get used to them and forget them.
A lesser reason for hating property taxes is fear: failure to pay is not just another debt, as with income taxes. The government can confiscate your home, evict you, sell the property, and in some jurisdictions, keep the entire proceeds. People have lost their homes for paying a few hundred dollars too little and the government sending notices to the wrong address. The Supreme Court has recently told states to return the excess to the delinquent owner, but there are lots of creative ways around that.
Combine the disgust at governments behaving badly with the huge checks, and that seems to me explanation enough.
When I look at my property tax assessment the % that is attributed to land is small relative to improvements. So a property tax is pretty far from a LVT tax.
Also, I would point out that the value of a home is mostly just "how good are my neighbors". Do you live in a low crime area within a good school boundary line? Basically, property taxes tax people for the crime of building desirable communities by being good neighbors.
It’s not clear to me why land value taxes would be any easier for the government to raise than property taxes.
I wonder if either the economists or the voters were consideing the progressive personal consumption tax and the substitution of the progressive personnal consumption tax for the income tax and the VAT for the wage tax.
The argument for the advantages of inefficient taxes makes sense. Whether voters have some intuitive understanding of it or not is an interesting question. If they do, then you might expect in jurisdictions where voters are more tolerant of high taxes because they value relatively high levels of government services, taxes would be more efficient. On the other hand, if a significant share of voters thinks the government is spending too much on services of questionable value, those voters might prefer inefficient taxes to constrain the government.
Quite excellent, thought provoking piece.
Two comments:
“Real-world property taxes blend both, making them less efficient than the theoretical ideal but more efficient than pure capital taxes.”
You leave out one of the other reasons that at least intuitively for people who pay attention to it property taxes are “good”. Namely, they are generally neither progressive nor regressive. Everyone recoils from regressive taxes. Leftists like progressive taxes, but the high marginal rates cause disincentives and larger deadweight loss.
And while it doesn’t apply re: commercial property, for homes (rental or owned), property taxes are also consumption taxes, which would put them “higher” on a list of less-bad taxes.
Decond, thank you for acknowledging near the end your bait and switch. Because it’s really not primarily about popularity at all, or even about the “goodness” of these less efficient taxes; it’s about why we end up with what we get. Corporate taxes aren’t *good* or *desirable* because they can be avoided; they are *acceptable* because despite being leftist-popular and having high deadweight loss, they can be avoided and so get kept low.
You didn’t cover it, but cap gains taxes are very similar. They are about as bad as corporate taxes in terms of deadweight loss, but given that people can decide when/whether to sell, that control over timing limits how high governments voracious for revenue can set the rates.
I enjoyed this analysis. I wonder how visible consumption taxes, such as value-added-tax in the UK, are to voters, or whether they are just lumped in with "inflation" are are more politically invisible.
The UK also has stamp duty as well as a form property tax called council tax. Stamp duty hits the sweet spot of being both economically inefficient and generally disliked by voters, being a tax on those who buy property that has to be paid upfront, rather than with the mortgage.
Council tax attempts to tax property, but property bands have not been updated since the 1990s. On the one, it does not penalise renovation, but on the other, it creates some very arbitrary differences in council tax rates between boroughs. I'm fortunate to pay relatively low council tax in my borough, having just moved from a less well-off area that paid more tax.
Thanks for the economics!
Does the higher value perceived for money lost (property tax) compared with the same amount not received (income tax) play a role?