Tuesday, July 30, 2019

Part 10 of my Housing Affordability series at Mercatus

Property Taxes Can Be a Tax on Monopoly Power.

"If politically maintained monopoly power is going to remain, claiming monopolist profits through taxes is an improvement. The fact that the tax doesn’t affect rents is a sign of efficiency. If rents must be elevated, better that they go to local public services than to the real estate cartel."

The series will continue each Monday with discussion of the effect of various regulations and taxes on housing costs.


  1. Nice! Are you working your way up to a more Georgist slant?

    You are already implying that a tax on location but not lumber and gypsum board (and construction labour!) would avoid all the problems. But you wisely let the reader finish the thought for themselves.

    There's an interesting twist, that I think Silvio Gesell pointed out, that if the local property taxes go to fund local infrastructure improvements rents go up (by the same mechanism as if the landlords invested in those improvements themselves: people are willing to bid higher for more desirable locations.)

    Another benefit of the silent partner is that the incentive for the landlords to work for their de facto cartel goes down

    1. Thanks Matthias. Gesell's point is valid, but I think one of the tricky things in today's context is separating intrinsic market value from monopolistic profits. The intrinsic market value would rise because of those improvements, so you're right, it could be that raising property taxes would increase the value of the property. But, the reason closed access prices are so high is because of monopoly profits - landlords capturing what would be consumer surplus. It's a tricky thing to untangle.

      In less constrained markets, I think it could be true, but there, it depends on if property taxes create more valuable amenities, or if they just change the funding from another tax to property tax. In that case, the value of properties would decline.

      William Fischel has an interesting theory that Prop. 13 in California was a reaction against the decoupling of property taxes from local amenities. Since state legal changes were taking property taxes away from localities, those localities voted to limit the tax.

      I'm afraid you may be disappointed in my lack of Georgist conclusions. I think the property tax gets us most of the way there. And, I think real consumption of shelter is highly sensitive to income and elastic, in terms of physical amenities, so increasing the cost of gypsum board just makes homes somewhat smaller over the long term. I don't think the housing affordability problem has much to do with the cost of materials. It has to do with location. So, I don't think it matters that much if the tax happens to be imposed on materials along with the land. The more important effect is in the cities, where land or location is the more important part of valuations.