Time for land-value tax?

For all the alarm about the “rise of the robots,” or “software eating the world” or the peril of climate change, one of the most pressing economic dangers of the future is getting short shrift: Landlords are eating the world.

There is growing concern that wealth inequality has skyrocketed, and that capital- income accounts for a growing share of the economic pie. This was the theme of Thomas Piketty’s “Capital in the Twenty-First Century.” But although we usually think of “capitalists” as they were defined by Karl Marx – i.e., owners of corporations – we forget that land also is a form of capital, which means landlords (and homeowners) are capitalists, too. Furthermore, according to Matt Rognlie, an economics Ph.D. student at the Massachusetts Institute of Technology, it is land, not corporate capital, that has been responsible for the lion’s share of the increase in capital’s share of income.

This increase is happening worldwide. A great report by the Economist showed that the share of residential property value as a percentage of gross domestic product has skyrocketed in European countries since 1950.

This is bad for the economy. In the modern age, land has value for a very different reason than in the past, summed up by the real estate mantra: location, location, location.

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In a city or suburb, land’s value comes from location.

As our economies become more complex, there are more kinds of stores, more cultural activities and more industries to cluster together. Therefore, the value of location increases, which pushes up the value of land. It doesn’t matter how much empty land is out there – who wants to live on the Kansas prairie? What matters for the value of modern land is the incentive to locate close to other people.

More stores, more industries and more culture are good things. But it’s a very bad thing that location has become so important to us, because location is an inherently scarce commodity. What can we do?

One approach, advocated by the 19th-century economist Henry George, is to tax the value of locations. Essentially, a land-value tax is a property levy with exemptions for development. This encourages construction and development, while reducing the cost that businesses have to pay to locate close to one another. Another approach to reducing the cost of density involves reducing zoning and other building restrictions, essentially allowing developers to create more locations where people can live and gather.

The problem, of course, is that these solutions are politically difficult. As in so many situations, economists know what needs to be done to boost the national economy, but special interests are almost certain to block those policies. •

Noah Smith is an assistant professor of finance at Stony Brook University and a Bloomberg View columnist.

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