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.
Perhaps the solution is to levy property taxes specifically on land owned by corporations!
This also addresses the "elderly homeowner problem". A 75-year-old homeowner is too old to move if their property tax goes too high.
A downside of property tax for corporations is it nudges us towards WFH (doesn't need commercial office space), food delivery services (doesn't need central restaurant real estate), and thus social atomization. I wonder if there is a way to use taxes to nudge in the opposite direction? For example, we could only levy property taxes on strip clubs, factories, and other undesirables, to encourage them to move to cheap land away from the ritzy downtown. Maybe this could even allow cities to delete zoning regulations.
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
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?
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.
Totally! How about, if you make monthly property tax payments, we'll reduce your tax a bit. Easier for home owners to budget monthly instead of annual shock.
Also, since property taxes are included in their mortgage payments, that old guy didn't realize he was paying property taxes and is really ticked when he has to pay them directly himself even AFTER he pays off his mortgage.
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.
This is basically what Prop 13 does and California has been ruined by it. It means the little old lady not only no longer *has* to move, she rationally *may not* move out of her oversized property since the tax is assessed on a small fraction of its true value.
I think a simpler fix would be for the government to allow the postponement of property taxes until transfer of the property, or, if one prefers less government involvement, for credit institutions to provide home loans to the elderly. The estate would then settle that debt using the proceeds from selling the property.
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
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.
Thanks for this comment, Tracy. I found this line of thought to be missing from the otherwise fascinating post. I agree that citizens don’t like to pay taxes primarily because they don’t see any meaningful relationship to the government services they get in return.
Very interesting, although I tend to think the issue is Friedman's observation that most taxes are not paid directly, but I have to write a check for land/property taxes. When I pay income taxes, I get paid (just a little less). When I pay sales taxes, I get something (at a little bit higher price). When I pay land taxes... I pay a tax. Money goes bye. I had to think about giving away that money, and I didn't get something at the same time.
Ultimately, the less people have to think about paying a tax, and ideally can get someone else to do it, the better.
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.
“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.
Rearranging taxes to be ‘more efficient’ cannot escape the fundamental problem: all taxation interferes with the natural calculation of prices and profits. Every additional levy distorts production decisions, misdirects capital, and reduces the economy’s overall wealth. No clever design can remove the damage taxes impose on economic calculation. Shifting from income to consumption or property taxes may change who pays, but it can’t prevent the economy from producing less than it otherwise would.
Rearranging taxes to be ‘more efficient’ cannot escape the fundamental problem: ALL taxation interferes with the natural calculation of prices and profits. Taxes distort production decisions, misdirect capital, and reduce the economy’s overall wealth. No clever design can remove the damage taxes impose on economic calculation.
Shifting from income to consumption or property taxes may change who pays, but it can’t prevent the economy from producing less than it otherwise would.
This is very interesting but I don't think it's quite correct. Inefficient taxes are popular because they benefit incumbent interests.
A land tax is efficient because it's the confiscation of a de facto monopoly, and monopolists don't like having their monopolies confiscated.
Also, your model doesn't quite price the incentives correctly because tax liability is borne by the individual taxpayer but the deadweight is borne by society, so you always have the incentive to fight your own tax liability even if that tax would be efficient - you have to pay the taxes yourself but share the recovered deadweight loss with your neighbors.
***
In theory, the solution to monopoly is to buy off the monopolist. At an abstract level, coordination problems and trust problems prevent this from happening. More importantly, humans evolved in ancestral environments with coordination problems. The social choice implication is that human nature drives us to defend our monopoly rather than allow ourselves to get "bought off" and share in the recovered deadweight loss. For this reason, human society will probably always be run inefficiently.
Another great post. Tangentially related (I think, maybe on its head from your thesis) is "Public goods, politics, and two cheers for the military-industrial complex" by Dwight R. Lee. He argued that the inefficiency of having military bases in every state was worth the cost of providing the public good of national defense.
An aside: your co-authored paper "Preventing Plunder" was unknown to me, but terrific. A related paper is :DAL BÓ E, HERNÁNDEZ-LAGOS P, MAZZUCA S. The Paradox of Civilization: Preinstitutional Sources of Security and Prosperity. American Political Science Review. 2022;116(1):213-230. doi:10.1017/S000305542100071X. The Cliff Notes version is: 7/26/2016 Failed states and the paradox of civilisation | VOX, CEPR’s Policy Portal. This is an interesting and under-explored topic.
I could not find the David Friedman reference (and his home page was little help). Another aside: David Friedman has written "The Economics of War," another quirky but fascinating paper applying economics to the question of: why do soldiers fight? I suspect his parents would have been quite proud of his contributions to economics.
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.
Perhaps the solution is to levy property taxes specifically on land owned by corporations!
This also addresses the "elderly homeowner problem". A 75-year-old homeowner is too old to move if their property tax goes too high.
A downside of property tax for corporations is it nudges us towards WFH (doesn't need commercial office space), food delivery services (doesn't need central restaurant real estate), and thus social atomization. I wonder if there is a way to use taxes to nudge in the opposite direction? For example, we could only levy property taxes on strip clubs, factories, and other undesirables, to encourage them to move to cheap land away from the ritzy downtown. Maybe this could even allow cities to delete zoning regulations.
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
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?
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.
Totally! How about, if you make monthly property tax payments, we'll reduce your tax a bit. Easier for home owners to budget monthly instead of annual shock.
Also, since property taxes are included in their mortgage payments, that old guy didn't realize he was paying property taxes and is really ticked when he has to pay them directly himself even AFTER he pays off his mortgage.
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.
This is basically what Prop 13 does and California has been ruined by it. It means the little old lady not only no longer *has* to move, she rationally *may not* move out of her oversized property since the tax is assessed on a small fraction of its true value.
I think a simpler fix would be for the government to allow the postponement of property taxes until transfer of the property, or, if one prefers less government involvement, for credit institutions to provide home loans to the elderly. The estate would then settle that debt using the proceeds from selling the property.
Texas allows this (says Lars Doucet) for seniors
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
Does the higher value perceived for money lost (property tax) compared with the same amount not received (income tax) play a role?
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.
Thanks for this comment, Tracy. I found this line of thought to be missing from the otherwise fascinating post. I agree that citizens don’t like to pay taxes primarily because they don’t see any meaningful relationship to the government services they get in return.
Very interesting, although I tend to think the issue is Friedman's observation that most taxes are not paid directly, but I have to write a check for land/property taxes. When I pay income taxes, I get paid (just a little less). When I pay sales taxes, I get something (at a little bit higher price). When I pay land taxes... I pay a tax. Money goes bye. I had to think about giving away that money, and I didn't get something at the same time.
Ultimately, the less people have to think about paying a tax, and ideally can get someone else to do it, the better.
It’s not clear to me why land value taxes would be any easier for the government to raise than property taxes.
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!
“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.
Rearranging taxes to be ‘more efficient’ cannot escape the fundamental problem: all taxation interferes with the natural calculation of prices and profits. Every additional levy distorts production decisions, misdirects capital, and reduces the economy’s overall wealth. No clever design can remove the damage taxes impose on economic calculation. Shifting from income to consumption or property taxes may change who pays, but it can’t prevent the economy from producing less than it otherwise would.
Rearranging taxes to be ‘more efficient’ cannot escape the fundamental problem: ALL taxation interferes with the natural calculation of prices and profits. Taxes distort production decisions, misdirect capital, and reduce the economy’s overall wealth. No clever design can remove the damage taxes impose on economic calculation.
Shifting from income to consumption or property taxes may change who pays, but it can’t prevent the economy from producing less than it otherwise would.
This is very interesting but I don't think it's quite correct. Inefficient taxes are popular because they benefit incumbent interests.
A land tax is efficient because it's the confiscation of a de facto monopoly, and monopolists don't like having their monopolies confiscated.
Also, your model doesn't quite price the incentives correctly because tax liability is borne by the individual taxpayer but the deadweight is borne by society, so you always have the incentive to fight your own tax liability even if that tax would be efficient - you have to pay the taxes yourself but share the recovered deadweight loss with your neighbors.
***
In theory, the solution to monopoly is to buy off the monopolist. At an abstract level, coordination problems and trust problems prevent this from happening. More importantly, humans evolved in ancestral environments with coordination problems. The social choice implication is that human nature drives us to defend our monopoly rather than allow ourselves to get "bought off" and share in the recovered deadweight loss. For this reason, human society will probably always be run inefficiently.
Another great post. Tangentially related (I think, maybe on its head from your thesis) is "Public goods, politics, and two cheers for the military-industrial complex" by Dwight R. Lee. He argued that the inefficiency of having military bases in every state was worth the cost of providing the public good of national defense.
An aside: your co-authored paper "Preventing Plunder" was unknown to me, but terrific. A related paper is :DAL BÓ E, HERNÁNDEZ-LAGOS P, MAZZUCA S. The Paradox of Civilization: Preinstitutional Sources of Security and Prosperity. American Political Science Review. 2022;116(1):213-230. doi:10.1017/S000305542100071X. The Cliff Notes version is: 7/26/2016 Failed states and the paradox of civilisation | VOX, CEPR’s Policy Portal. This is an interesting and under-explored topic.
I could not find the David Friedman reference (and his home page was little help). Another aside: David Friedman has written "The Economics of War," another quirky but fascinating paper applying economics to the question of: why do soldiers fight? I suspect his parents would have been quite proud of his contributions to economics.
What if we include the benefits of tax revenue via government spending? Or model the cost of fighting against taxes?