Does land value tax logic apply to all goods which have fixed supply
Does land value tax logic apply to all goods which have fixed supply
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EraserDriver · External communityPost link
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Author: EraserDriver
Original post: https://economics.stackexchange.com/questions/59744
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The land value tax is called the "best" tax because it doesn't create inefficiencies. But if tomorrow Jerome Powell had a press conference where he credibly stated the US would stop creating dollars in all forms (notes, coins, QE, etc.) would a tax on holding the "unimproved value of the dollar" (whatever that means) be optimal in the same way LVT is? A key point in this is that the stoppage of money creation is absolutely credible.
I'm not asking if this would be a good or bad idea or if the government/economy would collapse but weather or not the same LVT logic applies to this.
What about if the NYSE and NASDAQ suddenly forbid new entries to the exchange and prevented companies from issuing new stock. Would a tax on the "unimproved value" of a stock also be optimal?
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1muflon1 · External communityPost link
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No the same logic does not apply. A tax on rent or alternatively increase in value of unimproved land is efficient because it would not change people’s incentives.
If someone earns rent on owned land, owning the land has no disadvantage, and its unimproved unmaintained land then the rent is also economic rent, or if the land increases in value it would also be considered an economic rent. An economic rent is an income for which no sacrifice has to be made. For example, suppose you are walking to local cinema to see a movie and you find 100 dollar bill on the pavement and pick it up. That extra 100 dollar income would be economic rent.
Now, since your decision to go to cinema was not contingent on you finding 100 dollar bill by pure chance on the pavement, if government taxes those 100 dollars away your behavior would not change and hence we would say that the tax doesn’t create distortions and hence is efficient.
The tax efficiency doesn’t come from fixed supply per se, it comes from the fact that land owners would not change their behavior. I think this is a bit of a misconception because in a static supply and demand model, often used in 101 courses, when supply is fixed, ad valorem tax on supplier doesn’t change supplier’s behavior (because supply is fixed). However, even when supply of something is not fixed you can get efficient taxation if you tax pure economic rents. For example, if a firm has rents from monopoly power, and if you could somehow determine exact value of rents derived from that monopoly power and tax them then, then you would get efficient taxation as well. Since the firm would produce the same quantity of products, with or without monopoly rent.
Hence this clearly doesn’t apply to stocks which represent ownership of an enterprise. Value of a stock depends on present and future profitability of the enterprise, and hence taxing increases in stock values will affect the behavior of owners. For example, founder CEOs would have less incentive to put extra hours into running the company if their returns would be taxed even if you would fix amount of stock.
Similarly, it doesn’t apply to holding money. Tax on holding money would have similar effect to inflation it would encourage people to spend more on goods and services. If behavior changes tax is no longer efficient (unless we are talking about Pigovian “sin” taxes which correct market prices).
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Quoted from Forex.com.bd-Editorial External answer — Economics Stack Exchange Author: 1muflon1 Source score (net votes, not local likes): 0 Original post: https://economics.stackexchange.com/a/59749 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. No the same logic does not apply. A tax on rent or alternatively increase in value of unimproved land is efficient because it would not change people’s incentives. If someone earns rent on owned land, owning the land has no disadvantage, and its unimproved unmaintained land then the rent is also economic rent, or if the land increases in value it would also be considered an economic rent. An economic rent is an income for which no sacrifice has to be made. For example, suppose you are walking to local cinema to see a movie and you find 100 dollar bill on the pavement and pick it up. That extra 100 dollar income would be economic rent. Now, since your decision to go to cinema was not contingent on you finding 100 dollar bill by pure chance on the pavement, if government taxes those 100 dollars away your behavior would not change and hence we would say that the tax doesn’t create distortions and hence is efficient. The tax efficiency doesn’t come from fixed supply per se, it comes from the fact that land owners would not change their behavior. I think this is a bit of a misconception because in a static supply and demand model, often used in 101 courses, when supply is fixed, ad valorem tax on supplier doesn’t change supplier’s behavior (because supply is fixed). However, even when supply of something is not fixed you can get efficient taxation if you tax pure economic rents. For example, if a firm has rents from monopoly power, and if you could somehow determine exact value of rents derived from that monopoly power and tax them then, then you would get efficient taxation as well. Since the firm would produce the same quantity of products, with or without monopoly rent. Hence this clearly doesn’t apply to stocks which represent ownership of an enterprise. Value of a stock depends on present and future profitability of the enterprise, and hence taxing increases in stock values will affect the behavior of owners. For example, founder CEOs would have less incentive to put extra hours into running the company if their returns would be taxed even if you would fix amount of stock. Similarly, it doesn’t apply to holding money. Tax on holding money would have similar effect to inflation it would encourage people to spend more on goods and services. If behavior changes tax is no longer efficient (unless we are talking about Pigovian “sin” taxes which correct market prices).
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