1 How Taxing Land Reduces Poverty Nicolaus Tideman Department of Economics Virginia Polytechnic Institute and State University Washington, March 25, 2014

2 How Land Should Be Taxed Not by its area, but by its value (sale value or rental value) Not just when it is sold but regularly (yearly or monthly) With assessments that are up-dated regularly Without exemptions, except for a general per capita exemption With forfeiture for non-payment of taxes

3 Five Ways Taxing Land Reduces Poverty 1.Taxing land yields revenue that permits reductions in taxes that fall more heavily on poor people. –Poor people tend to have a smaller proportion of land value than income or other tax bases –When taxes are shifted away from poor people, poverty is reduced –This effect is increased by a per capita exemption

4 Five Ways Taxing Land Reduces Poverty 2.The substitution of taxes on land for taxes on income, sales and value added increases the incentive to work. –When people have a greater incentive to work they work longer and harder, increasing the nation’s productivity –A more productive economy will have less poverty

5 Five Ways Taxing Land Reduces Poverty 3.Substituting a tax on land for a tax on capital improves access to capital. –Capital is mobile; it moves to where it gets the market rate of return after adjustments for taxes and risk –When taxes on capital (income taxes, property taxes) are lower, a country gets more capital –More capital makes labor more productive, raising wages –With more capital, there are lower prices of the things capital makes –Higher wages and lower prices reduce poverty –Taxation of natural resources is a separate issue

6 Five Ways Taxing Land Reduces Poverty 4.Taxing land reduces land speculation, increasing the effective amount of land. –The land market is subject to a “winner’s curse” –Land is most valuable to those who make the most extreme estimates of how rapidly it will rise in value –They keep it unused creating an artificial scarcity of land –Taxing land reduces the profit from land speculation, which reduces the amount of land speculation and relieves the artificial scarcity of land

7 Five Ways Taxing Land Reduces Poverty 5.Taxing land puts more land in the hands of people who can use it more productively. –With imperfect capital markets, interest rates vary –The lower the interest rate, the higher the present value of future taxes, and the more an increase in land taxes reduces the value of land –Therefore taxing land shifts land from those who have low interest rates to those who have high interest rates, who get more from their land, increasing the productivity of an economy –Increases in productivity tend to reduce poverty

8 Five Ways Taxing Land Reduces Poverty 1.Taxing land yields revenue that permits reductions in taxes that fall more heavily on poor people. 2.The substitution of taxes on land for taxes on income, sales and value added increases the incentive to work. 3.Substituting a tax on land for a tax on capital improves access to capital. 4.Taxing land reduces land speculation, increasing the effective amount of land. 5.Taxing land increases the relative value of land to those who can use land more productively.

9 Thank you! Nicolaus Tideman Virginia Polytechnic Institute and State University