Tag Archives: Rent

The Efficiencies of a Land-Value Tax

Thesis: The imposition of a land-value tax on commercial property by the US government would lead to more efficient use of scarce land in urban areas.  

Most Americans are familiar with the concept of a property tax: a major tax levied against one’s real estate, based on the value of the land and the improvements made to that land.  The notion of a land value tax (essentially just a piece of a traditional property tax – the piece based on a plot of land’s value) and the efficiencies it can bring about has growing clout amongst economists today, as housing costs in urban areas skyrocket.

Data gathered by Yale economist Robert Shiller and cited in The Economist shows that  “the inflation-adjusted cost of building new housing in America is roughly the same now as it was in the 1980s. The inflation-adjusted cost of buying a new home, by contrast, has risen by 30% over the same period”.  There are two main driving forces behind this dramatic increase in land value.  One, the information era and the rise of skill-based services has drawn workers to highly-skilled areas (e.g. cities), where proximity to other similarly-skilled workers increases their productivity and job opportunities, effectively increasing demand for urban land.  Two, after cities became aware of the detrimental effects of unchecked growth and urban sprawl, they began to institute strict limitations on growth, effectively decreasing the supply of urban land.  Combined, these forces have made land in these urban areas incredibly costly, making it more difficult for labor to move to the most productive markets in the country.

Another study presented by the same Economist article above found that the inefficient patterns of land use imposed by high urban housing costs could mean that US GDP in 2009 was a whopping 13.5% lower than it had the potential to be.  Land-value taxes are a potential mechanism for keeping inefficient land use in check.  Since they do not carry the same downfalls as other forms of taxation (land supply cannot be reduced and the tax cannot be evaded), they carry no deadweight loss.  Unlike property taxes, they don’t de-incentivize investment on a plot of land.  Not only do they increase revenue, but that increase is compounded by public investment: the construction of a neighborhood monorail would increase the value of land in that neighborhood, and thus the new revenue from land-value taxes could help pay for the investment.  Since the value of a plot of land increases as a result of the activities of others, it would make sense to tax that value.  But most importantly, land-value taxes lead to more efficient uses of incredibly scarce land as owners must ensure that their land is being used in the most productive way possible.  New York mayor Bill de Blasio has introduced a tax increase on New York’s vacant lots, as described in Brokelyn, in an effort to put the land to productive use.  I predict it won’t be long before we see other cities following in his footsteps.  But the idea is politically difficult: for most Americans, their home is their biggest asset, and they won’t take kindly to anything that threatens that asset’s value.  And the idea of low-income families being pushed out of a house so that some developer can put up a new set of condos has media frenzy written all over it.  For that reason, I propose that the tax be limited to commercial properties for the foreseeable future.

Revised Post 3: Skyrocketing Housing Prices in California

Mar 21st 2015

 cali_housing

(https://goldenstateoutlook.wordpress.com/2013/04/02/the-real-problem/)

Thesis: To resolve too expensive housing problems in California, its government should pass laws for construction and introduce various rent methods.

Because of the sub-prime mortgage shock in 2008, many people realize the significance of housing debt and its impact on the economic situation. In California, problems related to housing occur again, influencing on economic productivity, poverty rate, homeownership and commute time. According to Wall Street Journal, California has some of the most expensive housing market in the U.S. “The average home price in California, $440,000, is about 2½ times the national average, while California’s average monthly rent, $1,240, is about 50% higher than the average U.S. rent (Wall Street Journal).” Furthermore, the picture above shows the hours of minimum wage to afford a typical two-bedroom rent fee, describing that California is the most expensive state to live for workers. High cost of housing affects on the California economy because many employees try to avoid California to live, making companies difficult to hire and retain qualified employees.

To solve these problems, we should figure out why California has more expensive houses than other regions. Wall Street Journal points out that new home construction rate is much lower in California than the average in the U.S.; the rate in the state’s coastal metro areas increases by 32%, compared with 54% nationally. The low rate of new construction means the lack of supplies in housing, making the housing price increase. Also, some experts argue that the legislature should pass laws which would promote more density in urban areas, which is banned for the state’s environment. Randal O’Toole also contends the same statement that urban planners have crammed about 95% of Californians into just 5.1% of the state’s land area. Furthermore, according to Rothbard, there is a tendency that pro-development is bad for the environment, but that’s not necessarily the Californian case. “In a city with so much air pollution, more density-with people living closer to work and driving less-can be more environmentally friendly (Rothbard).”

cali_greenbelt

(http://en.wikipedia.org/wiki/California#/media/File:California_population_map.png)

I suggest three options to solve the density population problem in California. First one is reviewing the restrictions in development or construction. It is obvious that California has lower rate of new construction than the average rate in the U.S., because its government has strict rules in order to protect the environment. But, according to Randal O’Toole, if Californians could live at the same densities as the rest of the U.S., the state’s urban areas would cover 8.5% of the state, instead of 5.1%.

Another resolution is introducing various rent options to California. For example, Korea has a unique leasing option; tenants deposit a bunch of money (basically gives to the apartment agency) and pay less monthly rents than those who don’t deposit money. This option is flexible that monthly rents can vary depending on the amount of deposit. When tenants want to leave or the agreement terminates, homeowners should give back the deposits. This option can reduce the burdens of monthly rents for tenants while homeowners can invest that big pile money and get extra earnings.

Finally, the Californian government can support families by giving some subsidies. However, this option seems impossible because the government is almost broke; everyone knows that California State has severe problems in its budget.

Although I point out three options, the second and the third one only can be temporary solutions. The fundamental problem in California is the supply of houses is too low compared to its demand, increasing the housing prices. Some people may argue that it is the nature of the economics and should let it go. However, the pure economic theory doesn’t always fit to the reality which has numerous factors. If the Californian government shouldn’t solve this problem, middle and low income families in the state will be more suffering than others. And it already happened that that many workers, or middle class families (those who make less than $50,000 a year), left California.