August 7, 2006
Regarding Property Taxes Posted by Fredric Smoler at 03:05 PM EST To my mild surprise, I am in (partial) agreement with John Steele Gordon’s dislike of property taxes. Taxes on real estate target only one class of asset, so they are a discriminatory levy on capital. If the state has such a right, why shouldn’t it also take an annual percentage of financial assets, or of the value of jewelry in a vault, or of books in a library?
Property taxes can also be somewhat regressive. The poor are unlikely to own a lot of real estate, indeed any real estate, but a home tends to be a very large portion of an ordinary American’s wealth. I have the impression that in the world in which I grew up, the net worth of ordinary Americans was usually the sum of equity in a primary residence and the value of a defined-benefit pension; to the degree that that has changed, it is in significant part because fewer and fewer people have defined-benefit pensions. For most people, a mortgage is a mechanism for forced savings, and real estate taxes offset those savings and may well tax them regressively. The wealth tied up in a middle-class citizen’s home is presumably a larger percentage of her wealth than is the primary residence of a richer citizen.
As a renter, I think I am the picture of disinterestedness on this question, for in the words of the old Irish proverb, I own no more land than would fit in a window box. The renter escapes direct property taxes (although those taxes are normally passed on via the rent), whereas the owner receives not only positive discrimination via the mortgage-interest tax advantage, but invidious discrimination via property taxes. Do the two sorts of discrimination balance out? I do not know, but I rather doubt it; I would hesitate to estimate net effects, because of the tendency of tax preferences for mortgage interest payments to drive up purchase prices for property. In any case, most economists dislike tax preferences for mortgage interest payments and can make a good case for their prejudice, so we should consider getting rid of both practices.
Some of John Steele Gordon’s objections to the property tax are not objections in principle. Valuations could in theory be made less arbitrary, annual assessments could be rescheduled or levied monthly, etc. But the objection in principle is pretty strong, and I think his history is sound: Property taxes date from an era when most wealth was imagined to exist as income-generating real property. Although other forms of wealth existed, and were indeed more and more conspicuous, real property was imagined to be held in pretty reliable proportion to holdings of total wealth. We no longer live in such a world. Leaving aside hyperbolic comparisons to slavery, tar-and-feathering, and witch hunts, the injustice of disproportionately taxing one asset class seems pretty clear.
So what would be a good alternative? I rather doubt that John Steele Gordon would favor my ideas—somewhat higher and more sharply progressive income taxes, supplemented by higher gasoline taxes and other carbon taxes, which would to some degree be rebated to the poor by tax credits or other redistributive mechanisms, maybe a selective national value-added tax (omit VAT on food, medicine, etc.), also to be partially rebated to the poor. I am going to take a wild guess and assume that of those three he would find some sort of consumption tax least offensive. My stronger hunch is that a flat tax on income along with reduced public expenditures will be his prescription.
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