JDN 2457145 EDT 20:49.

Today’s post we’re on the socialism scale somewhere near the The Guess Who, but not quite all the way to John Lennon. I’d like to questions one of the fundamental tenets of modern capitalism, but not the basic concept of private ownership itself:

What if you couldn’t own land?

Many things that you can own were more-or-less straightforwardly created by someone. A car, a computer, a television, a pair of shoes; for today let’s even take for granted intellectual property like books, movies, and songs; at least those things (“things”) were actually made by someone.

But land? We’re talking about chunks of the Earth here. They were here billions of years before us, and in all probability will be here billions of years after we’re gone. There’s no need to incentivize its creation; the vast majority of land was already here and did not need to be created. (I do have to say “the vast majority”, because in places like Japan, Hong Kong, and the Netherlands real estate has become so scarce that people do literally build land out into the sea. But this is something like 0.0001% of the world’s land.)

What we want to incentivize is land development; we want it to be profitable to build buildings and irrigate deserts, and yes, even cut down forests sometimes (though then there should be a carbon tax with credits for forested land to ensure that there isn’t too much incentive). Yet our current property tax system doesn’t do this very well; if you build bigger buildings, you end up paying more property taxes. Yes, you may also make some profit on the buildings—but it’s risky, and you may not get enough benefit to justify the added property taxes.

Moreover, we want to allocate land—we want some way of deciding who is allowed to use what land where and when (and perhaps why). Allowing land to be bought and sold is one way to do that, but it is not the only way.

Indeed, land ownership suffers from a couple of truly glaring flaws as an allocation system:

1. It creates self-perpetuating inequality. Because land grows in value over time (due to population growth and urbanization, among other things), those who currently own land end up getting an ever-growing quantity of wealth while those who do not own land do not, and very likely end up having to pay ever-growing rents to the landlords. (I like calling them “landlords”; it really drives home the fact that our landholding system is still basically the same as it was under feudalism.) In fact, the recent rise in the share of income that goes to owners of capital rather than workers is almost entirely attributable to the rise in the price of real estate. As that post rightly recognizes, this does nothing to undermine Piketty’s central message of rising inequality due to capital income (pace The Washington Post); it merely tells us to focus on real estate instead of other forms of capital.
2. It has no non-arbitrary allocation. If we want to decide who owns a car, we can ask questions like, “Who built it? Did someone buy it from them? Did they pay a fair price?”; if we want to decide who owns a book, we can ask questions like, “Who wrote it? Did they sell it to a publisher? What was the royalty rate?” That is, there is a clear original owner, and there is a sense of whether the transfer of ownership can be considered fair. But if we want to decide who owns a chunk of land, basically all we can ask is, “What does the deed say?” The owner is the owner because they are the owner; there’s no sense in which that ownership is fair. We certainly can’t go back to the original creation of the land, because that was due to natural forces gigayears ago. If we keep tracing the ownership backward, we will eventually end up with some guy (almost certainly a man, a White man in fact) with a gun who pointed that gun at other people and said, “This is mine.” This is true of basically all the land in the world (aside from those little bits of Japan and such); it was already there, and the only reason someone got to own it was because they said so and had a bigger gun. And a flag, perhaps: “Do you have a flag?” I suppose, in theory at least, there are a few ways of allocating land which seem less arbitrary: One would be to give everyone an equal amount. But this is practically very difficult: What do you do when the population changes? If you have 2% annual population growth, do you carve off 2% of everybody’s lot each year? Another would be to let people squat land, and automatically own the land that they live on—but again practical difficulties quickly become enormous. In any case, these two methods bear about as much resemblance to our actual allocation of land as a squirrel does to a Tyrannosaurus.

So, what else might we use? The system that makes the most sense to me is that we would own all land as a society. In practical terms this would mean that all land is Federal land, and if you want to use it for something, you need to pay rent to the government. There are many different ways the government could set the rent, but the most sensible might be to charge a flat rate per hectare regardless of where the land is or what it’s being used for, because that would maximize the incentive to develop the land. It would also make the rent fall entirely on the landowner, because the rent would be perfectly inelastic—meaning that you can’t change the quantity you make based on the price, because you aren’t making it; it’s just already sitting there.

Of course, this idea is obviously politically impossible in our current environment—or indeed any foreseeable political environment. I’m just fantasizing here, right?

Well, not quite. There is one thing we could do that would be economically quite similar to government-only land ownership; it’s called a land tax. The idea is incredibly simple: you just collect a flat tax per hectare of land. Economists have known that a land tax is efficient at providing revenue and reducing inequality since at least Adam Smith. So maybe ownership of land isn’t actually foundational to capitalism, after all; maybe we’ve just never fully gotten over feudalism. (I basically agree with Adam Smith, and for doing so I am often called a socialist.) The beautiful thing about a land tax is that it has a tax incidence in which the owners of the land end up bearing the full brunt of the tax.

Tax incidence is something it’s very important to understand; it would be on my list of the top ten economic principles that people should learn. We often have fierce political debates over who will actually write the check: Should employers pay the health insurance premium, or should employees? Will buyers pay sales tax, or sellers? Should we tax corporate profits or personal capital gains?

Please understand that I am not exaggerating when I say that these sorts of questions are totally irrelevant. It simply does not matter who actually writes the check; what matters is who bears the cost. Making the employer pay the health insurance premium doesn’t make the slightest difference if all they’re going to do is cut wages by the exact same amount. You can see the irrelevance of the fact that sellers pay sales tax every time you walk into a store—you always end up paying the price plus the tax, don’t you? (I found that the base price of most items was the same between Long Beach and Ann Arbor, but my total expenditure was always 3% more because of the 9% sales tax versus the 6%.) How do we determine who actually pays the tax? It depends on the elasticity—how easily can you change your behavior in order to avoid the tax? Can you find a different job because the health insurance premiums are too high? No? Then you’re probably paying that premium, even if your employer writes the check. If you can find a new job whenever you want, your employer might have to pay it for you even if you write the check.

The incidence of corporate taxes and taxes on capital gains are even more complicated, because it could affect the behavior of corporations in many different ways; indeed, many economists argue that the corporate tax simply results in higher unemployment or lower wages for workers. I don’t think that’s actually true, but I honestly can’t rule it out completely, precisely because corporate taxes are so complicated. You need to know all sorts of things about the structure of stock markets, and the freedom of trade, and the mobility of immigration… it’s a complete and total mess.

It’s because of tax incidence that a land tax makes so much sense; there’s no way for the landowner to escape it, other than giving up the land entirely. In particular, they can’t charge more for rent without being out-competed (unless landowners are really good at colluding—which might be true for large developers, but not individual landlords). Their elasticity is so low that they’re forced to bear the full cost of the tax.

If the land tax were high enough, it could eliminate the automatic growth in wealth that comes from holding land, and thereby reducing long-run inequality dramatically. The revenue could be used for my other favorite fiscal policy, the basic income—and real estate is a big enough part of our nation’s wealth that it’s actually entirely realistic to fund an $8,000 per person per year basic income entirely on land tax revenue. The total value of US land is about $14 trillion, and an $8,000 basic income for 320 million people would cost about $2.6 trillion; that’s only 19%. You’d actually want to make it a flat tax per hectare, so how much would that be? Well, 60% of US land is privately owned at present (no sense taxing the land the government already owns), and total US land area is about 9 million square kilometers, so to raise $2.5 trillion you’d need a tax of $289,000 per square kilometer, or $2,890 per hectare. If you own a hectare—which is bigger than most single-family lots—you’d only pay $2,890 per year in land tax, well within what most middle-class families could handle. But if you own 290,000 acres like Jeff Bezos, (that’s 117,000 hectares) you’re paying $338 million per year. Since Jeff Bezos has about $38 billion in net wealth, he can actually afford to pay that ($338 million per year is about one-tenth of what Jeff Bezos makes automatically on dividends), though he might consider selling off some of the land to avoid the taxes, which is exactly the sort of incentive we wanted to create.

Indeed, when I contemplate this policy I’m struck by the fact that it has basically no downside—usually in public policy you’re forced to make hard compromises and tradeoffs, but a land tax plus basic income is a system that carries almost no downsides at all. It won’t disincentivize investment, it won’t disincentivize working, it will dramatically reduce inequality, it will save the government a great deal of money on social welfare spending, and best of all it will eliminate poverty immediately and forever. The only people it would hurt at all are extremely rich, and they wouldn’t even be hurt very much, while it would benefit millions of people including some of the most needy.

Why aren’t we doing this already!?