Friday, February 27, 2009

Rent Tax - A Conceivability or a Fantasy

In reading on various tax systems and their effects (including our current Federal/state/income/consumption tax system which Jimmy Carter himself called a humiliation to mankind), I stumbled on a set of literature which any individual with an interest in macroeconomic policy would find interesting:
http://www.wealthandwant.com/themes/Deadweight_Loss.html
To give one a sense of the matter without requiring a thorough read, the literature above suggests ideas parallel to the following:
“The use of rent for public revenues therefore has no excess burden, no burden on society or the economy. Taxes on income, goods, and transactions do have an excess burden, since by raising the price and reducing the quantity of goods, resources do not get allocated to where the people most want them. Taxes on labor and goods raise prices, while rent-based payments do not affect the rent, and they lower the price of land rather than raise it.
Rent is therefore the ideal source of general public and community revenue. Tax reform should therefore shift to rent as the primary source of general funds. Pollution charges can supplement the rent, and indeed can be considered a rental charge for using and abusing the atmosphere, land, soil, and other forms of land. There could also be user fees for services specific to users, fines for violating traffic rules, and profits from enterprises.”
My particular interest regarding the matter at hand is economic efficiency. In hearing on any tax plan or modifications of existing tax plans, one necessarily encounters two key implications: incentives and deadweight loss. My interest today is the latter.
For anyone unfamiliar with the term, deadweight loss may adequately be defined as the costs to society created by an inefficiency in the market. Empirical research has proven that a tax on any goods or services with an elastic market supply curve (regardless of the degree of elasticity) necessarily incurs some deadweight loss. This is obviously a bad thing for society. A tax system that collects revenues while incurring 0 additional cost to society resulting from any disincentives is indeed conceivable as the literature indexed above may suggest. However, a necessary condition of this possibility is that the good or service produced have a perfectly inelastic supply curve (meaning the supply for the good or service is fixed). And where in the market can we find such an instance? That's right, you thought of it and your landlord may fight it routinely in city-planning hearings: housing.
It appears that a tax on rent creates 0 dead weight loss. A causal reason given in support of this observational finding is that landlords do not earn the money they collect. It is hard to argue even for the conceivability of the preceding idea as the truth, as landlords must tend to maintenance issues and initially accumulate enough capital to purchase the units which they later offer for rent. All of this, of course, would qualify as some sort of work. Nevertheless, even if it were somehow argued that landlords really do not work, it is hard if not impossible to find a consequent 0DWL to society from tax on rent solely because of landlords' not earning their income. Simply put, the antecedent mentioned above does nothing to resolve the paradox.
A better reason given in support of the finding concerns the nature of the good's (housing's) supply. Simply put, since housing is fixed, any amount of taxation that still gives room for total revenues to exceed total costs will have landlords producing (or renting out) the same number of units.

1 comment:

  1. The 0 Dead Weight Loss anomaly occurs only because the housing supply curve is theoretically vertical. However, this does not only apply to rent tax. It has historically been applied to land tax as a whole using the same logic: a landowner does not work the land. (This would of course fail when it comes to agriculture, but that can remain an exception.) Economists, even those of libertarian philosophy, have supported taxing land (and rent) while removing all other types. Justification has been that land tax is much less intrusive, particularly compared to income tax. One issue that has been raised in the debate is similar to the problem rent control: transfer of ownership from land "owners" to the renters. Such issue is evident in Santa Monica, CA today and also historically San Francisco. However, the comparison between rent control and rent tax is debatable.

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