My Problem with Land Taxes

From time to time, as for instance earlier today, Matt Yglesias likes to write about the many supposed virtues of land taxes. The idea is that property taxes as implemented in this country are proportional to the value of the developed human-built structures on the land, not solely to the intrinsic value of the land itself. And that has an unfortunate incentive effect: it's a tax on development. Now, lots of taxes have unfortunate incentive effects. Income taxes discourage earning income, in theory. Capital gains taxes discourage investment. Estate taxes discourage leaving enormous estates to your heirs. The idea is that when you tax some asset or activity, you set up an incentive for there to be less of that asset or activity, which is generally a bad thing. Discouraging people from doing things they would otherwise do of their own accord is bad, all else being equal. Of course, all else isn't equal, and we need money, and by now we need a lot of money, to fund the government. So we've got to tax something, which means we've got to discourage something. Except there's one thing we can't create any more of, and that's land. Not the stuff above the land, not the stuff we put on land, but the land itself. The surface area of planet earth. We have a certain amount of it, and we're never going to get any more or any less. So taxing land has no distortionary incentive effect. It can't induce people in the aggregate to have less land, because, well, land sales are zero-sum.

But I have a problem, and it relates to a point about land taxes that Yglesias mentions in his post. Land taxes encourage, pretty strongly, intense development of land. If you're going to be paying the same penalty for owning a certain square foot of the earth no matter what you do with it, you need to make sure that you get as much money out of it as possible. And that means, as a general rule, destroying whatever of the natural world existed on the land. Nature is incredibly valuable; in my AP Environmental Sciences class I recall seeing a figure that the ecosystem produces as much economic value each year as humans, i.e. as world GDP, and presumably that's the high point of the human/natural GDP ratio. But it isn't very profitable. The vast majority of the benefits of the natural world, there's simply no way for the guy who owns a given plot of land to capture. Processing carbon dioxide into oxygen, for instance. Now, plenty of natural benefits can be harvested by land owners, but plenty can't, giving land owners faced with land taxes a particularly strong incentive to destroy the environment of the land they own. Which is, of course, a recipe for global disaster.

Now in principle, this is something that a tax policy could well account for while also getting the efficiency gains of land taxes. Economics isn't hostile to the idea that environmental concerns have both merit and economic value, at least not in principle. Land owners always have an incentive to convert the global-scale environmental benefits being created by their land into private benefits they can more easily monetize, even if the conversion is a huge net loss for society as a whole. Land taxes make this incentive a problem of actual rather than simply opportunity costs, and given human psychology that means it throws this unfortunate incentive into sharper relief. But, viewed properly, this kind of over-development is not efficient for society as a whole, and economics has a well-developed solution for what to do in these cases: tax them! Specifically, tax any negative "externalities" of individual private action. So, in this case, you'd want a tax on environmental degradation as such. Say, a fine whenever you cut down a tree, or for every square foot of earth you cover in pavement rather than dirt and plants. In principle a comprehensive tax on environmental degradation would eliminate the private motive to gain immediate personal profit at a global long-term expense by destroying any vestiges of nature within private possession. And if we had that kind of tax in place, land taxes wouldn't really be problematic. Developing your land to eke every last drop of money out of it and damn the environmental consequences would stop being a viable strategy to deal with the costs of paying the land tax.

Now, one wrinkle in this analysis is that the places on planet earth that are subject to the most intense development are immensely important for the broad task of allowing seven-plus billion humans to life on this earth without doing too much damage to it. I speak, of course, of cities, which are on the one hand massive acts of environmental degradation and on the other hand are well-known to have much, much lower per capita environmental costs than suburban living. So the appropriate regulatory tax regime might be different in a big city, and it might make more sense to encourage the "go for the biggest possible development" strategy. I'm not sold that there aren't any other concerns not captured by the short-term profit motive that deserve some consideration in urban life, but I could well believe that there's no real point trying to preserve the local environment, not when development would so efficiently preserve the environment of other localities. But in general, my basic point stands: I get the economic logic behind a land tax, but unless implemented alongside a systemic effort to internalize the problems of ecological degradation I would much fear their actual consequences.