Great post. Small quibble: "Sales taxes create deadweight loss and destroy value in two ways". Deadweight loss is true by definition, but whether the taxes destroy value is debatable. If you believe that money in the hands of the government is worth more than money in the hands of whoever was buying or selling the thing that's being taxed (which is a reasonable belief because it can get used for redistribution, and the marginal value of a currency unit is higher to poorer people than richer people), and if the deadweight loss is small enough (i.e. the elasticities are small enough), then the net impact on overall value could be positive.
A) "if the deadweight loss is small enough" is a load bearing assumption, and the level of the tax rate compared with the magnitude of elasticities for normal goods (at least when talking about a general consumption tax) suggests large deadweight losses, B) since taxes on production raise prices by decreasing supply, redistribution is a form of trying to lift yourself by standing inside a bucket and pulling up on its handle, so someone may get income support but then have to pay higher prices than they would have had the tax not been levied... if someone has no income at all, then that would work for them, but you'd be hitting people with price increases as well as lower income if you are redistributing back to workers, and C) since we can tax land, which has no deadweight loss and reduces the price of land, there's no need to think about using sales/income taxes until such time that we are taxing land to its fullest.
I agree with you on C, so there's not much point in arguing about A and B. But you're wrong about B. The increase in prices won't be equal to the benefit from the redistribution. It'll be smaller for lower earners and larger for higher earners. (And slightly larger for the average, which is a point I accept. That's the deadweight loss.)
I did say that for persons with no income it would be good, and basic morality would suggest that we do redistribution for those too disabled to work, but for people who should be working, it's either a) counterproductive due to the higher prices or b) a transfer of one person's production to another for no other reason then the latter person just wants more despite producing less.
Once we have LVT, then we'll expect wages to raise so that a person's wage better reflects their production (plus a citizen's dividend to offset for a person being shunted to less productive land), but to expect after LVT that a person who gets less money at their job than another person in the same company should get an income transfer from the higher income person is frankly just stealing. Like sure, you can dress it up as the "marginal value of a currency unit is higher to poorer people than richer people" but it's just rationalizing someone stealing their manager's lunch from the break room refrigerator on the justification that they can afford to buy their lunch from Chipotle's.
I think the main quibble here is the definition of "value" because your definition is a (pun intended) value-free definition as it can cover anything from income transfers to a paraplegic incapable of producing income for themselves to income transfers to a thief poorer than their mark. When Lars says "destroys value," the "value" is definitionally the maximum amount of supply that can be produced for any particular item, so it's kind of sidestepping his argument when defining value as someone's personal utility, however it is obtained.
The transfer-tax section matches what buyers run into at the cheap end of rural land. On a $5,000 parcel the transfer tax itself is trivial, but the fixed costs around the sale - title work, recording, often a survey - act like a wedge of several percent, and owners respond the same way: they do not list, or they sell only off-market. On the holding side, rural counties often tax raw acreage very lightly, which may be part of why stale listings can sit for years at untested asking prices. Curious whether the German study, or any other, breaks the deadweight loss out by parcel size or value - whether it is proportionally worse at the low end.
The distinction between land existing and land being offered for sale is useful for rural buyers too. Your note that removing building taxes can offset the lower land price raises a practical question: how would you explain the shift to someone buying an unimproved parcel now but planning to build later? The purchase price and the future carrying cost seem worth showing side by side.
"Critics are right to point out that the Econ 101 textbook supply curve refers to the amount offered for sale, which changes in response to prices offered (my land is not for sale for $1, but certainly would be for $1 billion)."
Land value is constantly consumed, and is therefore constantly offered for sale, thus this "um, ackshually, the Econ 101 textbook says" retort from critics actually covers a land value tax. "But some land is not being sold!" Yes, it is constantly being sold by the owner-occupier landowner to themselves, learn about imputed rent and economic profit.
Also, the supply curve is specifically a curve that is formed by looking at costs. The reason why an increase in wood prices shifts the supply curve for pencils to the left, because less pencils will be produced if they cannot cover the cost of the pencils at a lower price. But land supply doesn't change because there is no input to land that is composing its cost menu for it to not be produced like a pencil would, so even before we get to talking about tax costs, the market supply curve for land cannot move because nothing actually sets the supply curve for land in the first place: it's all demand.
It's just like a collectibles market. The supply of original T206 Honus Wagner baseball cards is fixed, even though one could forge a T206 card or just make more Honus Wagner cards. The original cards have no cost menu for them to be supplied; they just exist and no more can be produced, even though substitutes exist, but those are subject to costs since you have to pay the costs associated with producing them.
You're such a great writer and thinker Lars. Thank you.
very nice breakdown and nice emojis :beginner: :xoxo:
Great post. Small quibble: "Sales taxes create deadweight loss and destroy value in two ways". Deadweight loss is true by definition, but whether the taxes destroy value is debatable. If you believe that money in the hands of the government is worth more than money in the hands of whoever was buying or selling the thing that's being taxed (which is a reasonable belief because it can get used for redistribution, and the marginal value of a currency unit is higher to poorer people than richer people), and if the deadweight loss is small enough (i.e. the elasticities are small enough), then the net impact on overall value could be positive.
A) "if the deadweight loss is small enough" is a load bearing assumption, and the level of the tax rate compared with the magnitude of elasticities for normal goods (at least when talking about a general consumption tax) suggests large deadweight losses, B) since taxes on production raise prices by decreasing supply, redistribution is a form of trying to lift yourself by standing inside a bucket and pulling up on its handle, so someone may get income support but then have to pay higher prices than they would have had the tax not been levied... if someone has no income at all, then that would work for them, but you'd be hitting people with price increases as well as lower income if you are redistributing back to workers, and C) since we can tax land, which has no deadweight loss and reduces the price of land, there's no need to think about using sales/income taxes until such time that we are taxing land to its fullest.
I agree with you on C, so there's not much point in arguing about A and B. But you're wrong about B. The increase in prices won't be equal to the benefit from the redistribution. It'll be smaller for lower earners and larger for higher earners. (And slightly larger for the average, which is a point I accept. That's the deadweight loss.)
I did say that for persons with no income it would be good, and basic morality would suggest that we do redistribution for those too disabled to work, but for people who should be working, it's either a) counterproductive due to the higher prices or b) a transfer of one person's production to another for no other reason then the latter person just wants more despite producing less.
Once we have LVT, then we'll expect wages to raise so that a person's wage better reflects their production (plus a citizen's dividend to offset for a person being shunted to less productive land), but to expect after LVT that a person who gets less money at their job than another person in the same company should get an income transfer from the higher income person is frankly just stealing. Like sure, you can dress it up as the "marginal value of a currency unit is higher to poorer people than richer people" but it's just rationalizing someone stealing their manager's lunch from the break room refrigerator on the justification that they can afford to buy their lunch from Chipotle's.
I think the main quibble here is the definition of "value" because your definition is a (pun intended) value-free definition as it can cover anything from income transfers to a paraplegic incapable of producing income for themselves to income transfers to a thief poorer than their mark. When Lars says "destroys value," the "value" is definitionally the maximum amount of supply that can be produced for any particular item, so it's kind of sidestepping his argument when defining value as someone's personal utility, however it is obtained.
The transfer-tax section matches what buyers run into at the cheap end of rural land. On a $5,000 parcel the transfer tax itself is trivial, but the fixed costs around the sale - title work, recording, often a survey - act like a wedge of several percent, and owners respond the same way: they do not list, or they sell only off-market. On the holding side, rural counties often tax raw acreage very lightly, which may be part of why stale listings can sit for years at untested asking prices. Curious whether the German study, or any other, breaks the deadweight loss out by parcel size or value - whether it is proportionally worse at the low end.
The distinction between land existing and land being offered for sale is useful for rural buyers too. Your note that removing building taxes can offset the lower land price raises a practical question: how would you explain the shift to someone buying an unimproved parcel now but planning to build later? The purchase price and the future carrying cost seem worth showing side by side.
"Critics are right to point out that the Econ 101 textbook supply curve refers to the amount offered for sale, which changes in response to prices offered (my land is not for sale for $1, but certainly would be for $1 billion)."
Land value is constantly consumed, and is therefore constantly offered for sale, thus this "um, ackshually, the Econ 101 textbook says" retort from critics actually covers a land value tax. "But some land is not being sold!" Yes, it is constantly being sold by the owner-occupier landowner to themselves, learn about imputed rent and economic profit.
Also, the supply curve is specifically a curve that is formed by looking at costs. The reason why an increase in wood prices shifts the supply curve for pencils to the left, because less pencils will be produced if they cannot cover the cost of the pencils at a lower price. But land supply doesn't change because there is no input to land that is composing its cost menu for it to not be produced like a pencil would, so even before we get to talking about tax costs, the market supply curve for land cannot move because nothing actually sets the supply curve for land in the first place: it's all demand.
It's just like a collectibles market. The supply of original T206 Honus Wagner baseball cards is fixed, even though one could forge a T206 card or just make more Honus Wagner cards. The original cards have no cost menu for them to be supplied; they just exist and no more can be produced, even though substitutes exist, but those are subject to costs since you have to pay the costs associated with producing them.