A tax on land market value: a Swiss Army knife for ecological transition in the housing sector

 

When an economist starts talking about taxes, the fear - not always unfounded, let’s face it, given the current debate in France - is that he will be recommending higher taxes. Not us. Our proposal for tax reform, presented in the book we co-authored with Etienne Wasmer, Le grand retour de la terre dans les patrimoines, published by Odile Jacob, does not advocate tax increase.

The core of our argument, general in its scope, is that the tax bases currently used in France may not be the right ones, nor at the right level. We build our case from three perspectives: economic efficiency, fairness, and the transition to a sustainable economy.

First, let’s look at the efficiency argument. It’s an argument that has a long lineage in the history of economic thought, yet it hasn’t lost its relevance. When a good is taxed, either the producer produces less of it or the consumer consumes less of it, and often both occur simultaneously. This results in the size of the economy shrinking, to a lesser or greater degree depending on the value of some elasticities. However, there is one good that can be taxed without its production and utilization decreasing at the macro level. Land is not produced; it is a gift from nature. If land is taxed at the same rate regardless of its use, it will always be utilized, although its use may change.

Another important feature, particularly compared to financial assets, is that land cannot be moved. Its owner may decide to move abroad, but if she chooses to remain the owner, she will still be liable for the tax. If she decides to sell the property, then the new buyer will have to pay the tax.

In our book, we propose taxing the value of land at a fixed rate. At a minimum, it would be appropriate to tax it at 1% and replace all existing taxes on real estate with this single tax. Imposing a 2% tax on land value, with progressivity, would generate additional revenue that would allow the taxation of capital and labor to be reduced. This argument can be viewed as reminiscent of Georgism, based on Henry George’s best-seller « Progress and Poverty » 1879. But George proposed taxing all land returns, which raises the question of whether there should still be private landowners, at least in a stationary state. Our proposal can also be likened to that of Maurice Allais (L’impôt sur le capital et la réforme monétaire, 1979), who proposed taxing all physical capital at a rate of 2%, and abandoning the taxation of income. Our proposal differs from Allais’ in that it concerns only land.

The second argument for a tax on land value relates to fairness. The value of all land in France is three times the GDP. Agricultural land represents only about 10% of this total value, while 90% of the land value comes from non-agricultural use. This is largely due to the fact that the most valuable land is located in the centers of major cities. Why is this land so expensive, for example in inner Paris? Simply because of agglomeration effects. In fact, the first description of them can be found in George’s book, well in advance of Alfred Marshall, in a beautiful passage where he describes how the transformation of a savannah into a city will considerably enrich the first settlers. These increasing returns based on the size of the city are capitalized into the value of the land. Urban land is a receptacle for the possibility of creating wealth, but it is not in itself a factor that creates agglomeration effects. The landowner has done nothing to enhance returns, so taxing the value of the location is akin to taxing luck, the luck of owning a property (often inherited) in the right place and contemplating its price rise. Taxing land is, therefore, the opposite of taxing effort, talent, and risk-taking, which, in various ways, are the sources of a country’s growth and wealth. Effort, talent and risk-taking also matter when it comes to the built part of a property. Think of all those DIY enthusiasts who devote leisure hours to improving their homes!

The third reason is new, at least from a historical perspective. Supporting the idea of a tax on land value is related to the global challenge of quickly achieving a transition to a model that is more resource-efficient and generates fewer waste emissions of all kinds, including of course CO2 emissions. Natural land (wood) absorbs CO2, and as we restrict our meat consumption, we will need more agricultural land. Hence the idea of zero net land take (ZAN), now enshrined in law. The land tax we are calling for is clearly part of this strategy. More precisely, it provides an instrument to align landowners’ incentives with ZAN’s. Property owners only taxed on the value of the land on which their property is built will naturally seek to limit the surface area of their property, which will serve the objective of reducing urban land use, with the corollary of increasing density. From the perspective of the transition to a lowcarbon economy and to a low-carbon real-estate park, this tax offers additional advantages. The tax would affect the net yield of urban land by capturing a third of its gross return. The value of the land asset is therefore likely to fall, a welcome effect. Low-carbon construction implies higher construction costs. If, on top of this, buyers have to contend with the very high land prices partially fostered by ZAN’s objective of reducing the supply of building land in urban areas, the risk is that lowcarbon new constructions will not be affordable for many buyers, particularly first-time buyers.

The single tax on land value will reduce the land price through two mechanisms. First, the tax on land ownership will encourage fewer investors to own land, thus exerting downward pressure on land prices. Second, this single tax will replace all existing taxes on real estate, including onerous transfer duties (DMTO). This represents a saving of almost 6% on the purchase of land. Overall, it seems certain that the cost of land per m2 (incl. taxes) will fall, thus loosening the economic equation of buying low-carbon properties. The tax would likely have generated €70 billion for the French Treasury in 2019, not far short of income tax revenues. Indeed, the value of all the land in France was €7,000 billion that year. Today, it would yield much more, around €90 billion. The value of land will fall a little this year, under the effect of rising real estate interest rates, but wiping out all the increase since 2019 would take a 22% drop! There is nothing to suggest such a collapse, simply because the French savings rate is very high, over 17% in the first quarter of 2023, so sellers should be able to wait for a better time.

So, just another utopia? «There is no more dreadful punishment than futile and hopeless work», says Camus in The Myth of Sisyphus. When we stop dreaming about the transition to a sustainable economy and start looking at the least costly ways of achieving it, this tax will be a natural addition to the range of instruments chosen.

 

→ This article was issued in AMSE Newletter, Summer 2023.