Vargas' Podcasts

Powered by 🌱Roam Garden

What if the only tax was a land tax?

  • Blog Post Archived
  • Notes
  • Content {{word-count}}
    • Imagine you and three friends are left stranded on an island. This island is filled with resources, but it's unknown whether it will be enough to keep you all alive for the rest of your life. How do you divide up who gets what part of the island?
    • One approach is the one kids refer to as "finders keepers". You all scurry the island claiming pieces of land and resources for yourself as soon as you see it. You quickly realize that this would turn your only friends against each other. Behavior to debilitate each other by force would be incentivized in order to guarantee the highest quality of life for yourself.
    • Another approach is to just divide it into four equal quadrants and everyone takes one. However, this is sub optimal according to each of your interests and strengths. Your friend who's a world class fisherman would rather have as much of the coast as possible instead of his share of the inland. Another friend is a sharpshooting archer and wants as much of the pasture where the deer graze as possible. You all also get really upset at your third friend, who seems to just sit on his quadrant of land not producing anything of value from it.
    • There's a final, more transactional approach to dividing up the island. Based on whatever resource you'd like to claim ownership over, you promise to provide some value to the rest of the group based on the value of that piece of land. This appears to be efficient in the sense that your lazy friend will only get his small portion while the sharpshooter will have his whole pasture. It also resonates ethically since nobody really had ownership over the island to begin with, so it seems fair to pay the rest of the group for the right to monopolize your piece of it.
    • Extrapolate the island to include the entire Earth and the group of four friends to include all of humanity. This final approach would resemble a very rarely used policy known as the land value tax.
    • What is a Land Value Tax?
    • The U.S. federal government generates about $3.5 trillion in revenue a year under the following breakdown:
      • 50% Income Tax
      • 32% Payroll tax
      • 11% Corporate Income Tax
      • 3% Excise Tax
      • 4% Estate Tax
    • What's shocking about this breakdown is that it amounts to 93% of our revenue being taxed on labor, 4% on our capital, and 3% on actual services that the government provides us. The tax on labor has been shown to be regressive towards the middle class while the tax on capital has led to the wealthy holding their assets in offshore accounts. There is now an entire economy generated around effective strategies towards avoiding taxes. This is, from a societal perspective, wastful.
    • Meanwhile, investing in real estate has become a highly effective vehicle for accruing wealth. This could be explained by two fundamental properties about land. One, it's a resource with a fixed supply so value will always increase over time compared to other variable supply assets like fiat currency. Two, there's zero marginal cost due to no land tax. There is often a property tax, but this is assessed at the value of the property at the time of purchase.
    • One of the first rules of economics tells us that if you want to disincentivize a particular behavior, make it more expensive. Much of the distaste for the current tax structure is that it disincentives labor. In contrast, shifting to a land value tax would subsequently disincentivize land acquisition. Because the supply of labor is elastic while the supply of land is inelastic, it's actually favorable to disincentivize the latter over the former. Alleviating the burden on income would encourage more labor. Shifting the burden towards land would encourage landowners to put their sites to best use to cover the expenses, just like in our hypothetical island.
    • How can it replace?
    • Prior Art
What if the only tax was a land tax?