Tonight on The World of the Laffer Curve we cover the issue of property taxes. They’re an excellent way to demonstrate the Laffer principle that higher taxes leads to less of something, because unlike income taxes, where everyone needs an income, people don’t usually need property desperately. Some societies have extreme stratification based on property ownership (Third world Africa, where at least a little arable land is a major help in preventing starvation). America has a relatively milder version where in some major cities like our national capital, property ownership at even basic levels isaroundhalfthepopulace* and there’s no real loud outcry to fix that.
So, given that in our society land ownership is good but not essential, the full discouraging force of a tax can be seen to go into effect. Even better, given that oftentimes different munincipalities even relatively close to each other will have significantly different property tax rates, it’s possible to evade the property taxes when they’re too high. This creates a downwards pressure on land values in high-tax areas and an upwards pressure on land values in low-tax areas. Unsurprisingly people prefer to build in areas with low taxes. Those areas thus see increased growth and development relative to their surrounding areas. Sometimes politicians will seek to offer rebates to depressed areas; however this is ineffectual as when the areas are no longer depressed the rebates will cease. Businesses who invest because of the rebates make plans to exit when the rebates cease; they are unwilling to pay the hefty prices associated with land ownership. Other businesses are simply unwilling to invest in the first place when they are well aware that the arrangement will be temporary and that the government is waiting, like some strange species of predator, to swoop down as soon as they’re well under way to success.
In America, land can actually be a liability if one is not wealthy enough to pay several percent of the land’s market value to the government every year. Low property taxes are beneficial for growth. Unlike temporary cuts, deductions, and rebates, business in generally low-tax land areas are permanent and business that aren’t there are more likely to move there. Low property taxes are also egalitarian (in the short term at least, before land prices rises to compensate); they make the land market more accessible to those with less in the way of resources by reducing the amount of liquid assets that a land owner must be able to access in order to pay taxes. This short term egalitarian effect is very economically beneficial in and of itself; it creates a boom of entrepreneuship.
*Updated December 6th, 2007. I don’t know where I got the original 48% number from. I changed it to ‘around half’, but it’s still basically hearsay and should be taken with a grain of salt.
