Nobel Prize in Economics recipient Joseph Stiglitz answers questions during a Q and A session at the World Business Forum in New York, U.S., Wednesday, Oct. 6, 2009. Photographer: Craig Ruttle/Bloomberg News
Nobel Prize in Economics recipient Joseph Stiglitz answers questions during a Q and A session at the World Business Forum in New York, U.S., Wednesday, Oct. 6, 2009. Photographer: Craig Ruttle/Bloomberg News

US should adopt a land tax to combat inequality

By Bloomberg Time of article published Mar 5, 2015

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IN THE lasting debate over Thomas Piketty’s book on outsized returns on capital, a significant fact has been obscured: If you exclude land and housing, capital has not risen as a share of the US economy.

If you’re surprised, you’re not the only one. Intuition suggests this capital-output ratio should be higher today than it was in the early 1900s. Yet, in the US, capital excluding land and housing has been roughly constant as a share of the economy since the mid-1950s, and is lower today than at the turn of the 20th century.

What has skyrocketed over the past several decades is the value of land and housing. In the New York metropolitan area – an extreme example, to be sure – the average price per square foot of land rose to $366 (R4 301) in 2006 from $47 in 1999. Rising land prices aren’t limited to New York, and they remain large even after the effects of the Great Recession.

From 1970 to 2010, US housing capital as a share of the economy rose by more than 40 percentage points, and by much more than that in other advanced economies, as Matthew Rognlie of the Massachusetts Institute of Technology has found. That increase, furthermore, explains almost all the rise in measured capital as a share of the economy.

“There has been a large long-term increase in the share of net income from housing for every country in the sample except Germany,” Rognlie said. “Meanwhile, the non-housing capital share shows no clear trend.”

Income inequality

Perhaps it shouldn’t matter that land and housing play such a crucial role in the overall capital trend. The implications for increasing inequality remain the same, after all. Yet for our understanding of the economic processes at work – and for fashioning appropriate policy responses to inequality – it does make a difference.

Joseph Stiglitz, the Nobel-winning economist at Columbia University, recently presented a paper that argues Piketty has misdiagnosed the problem of wealth and income inequality, including by ignoring the crucial role of land and housing. And as a result, Piketty’s policy proposals might do more harm than good.

Stiglitz thus urges that policymakers distinguish between wealth, which includes land, and productive capital, which doesn’t. The distinction is important because an increase in the value of land and housing – unlike an increase in other forms of capital, such as computers and equipment – doesn’t necessarily increase our capacity to produce goods and services. It doesn’t imply that we have any more land to use.

Stiglitz also argues for imposing a land value tax, to directly address this source of increasing wealth inequality. Economists have long favoured such a tax because it does little or nothing to distort incentives: Since land is roughly fixed in supply, there’s little one can do to escape a land tax. Indeed, from the perspective of economic efficiency, a land value tax scores higher than even VAT, which is typically seen as the most efficient form of taxation.

Furthermore, more than 30 countries have already implemented some form of land value tax. And the US has some limited experience of its own, dating to 1913, when Pittsburgh and Scranton, Pennsylvania, imposed a higher tax on land value than on buildings.

So here is a bold idea for a national candidate: Propose a national land value tax. It will highlight the fact that, except for land and housing, capital ratios have not risen here, despite Piketty’s rhetoric. It will also be economically efficient and reduce wealth inequality. The revenue could be used to reduce other taxes, or to help close the actuarial deficits in our entitlement programmes, or a combination of these.

Sometimes old ideas are good ideas. Henry George advocated forcefully for a land tax in his 1879 book, Progress and Poverty. More than 135 years later, perhaps its time is ripe. – Bloomberg

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