Studies in Fiscal Federalism and State–local Finance series
Edited by Dick Netzer
Chapter 1: Taxes on buildings and land in a dynamic model of real estate markets
Alex Anas 1 INTRODUCTION The Henry George (1879) single tax is a tax on land. But how should the tax be levied? The simplest example would be a lump sum tax on each unit of land to be paid regardless of what is to be done with that land and disregarding whether it is currently developed or not. Such a tax system is generally presumed to be neutral, as George had envisioned. And, it is presumed, one could vary the tax from one unit of land to the other: the implied tax rate as a proportion of land value would not have to be the same everywhere to achieve neutrality. But such a lump sum tax system – while probably deserving a lot more attention than it has received – would be considered inequitable unless it was related either to the beneﬁts received by the owners of the land or to the landowner’s ability to pay. Arguably, in an eﬃcient capital market, the best measure of a landowner’s ability to pay is his land value. But can tax authorities or econometricians accurately measure the value of land covered with buildings? Mills (1998) has argued that they cannot. The consequences of inaccurate measurement could be quite severe. Consider the example of an owner of a building who is planning to demolish his building and sell the land because that is the most proﬁtable action. Suppose that the tax authority, not knowing the land value, sets the lump sum tax on...
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