Principles of Sound Taxation
As Have Evolved Over 200 and More Years
H. William Batt
Tax theorists typically measure revenue structures according to the
criteria of economic neutrality, efficiency, equity, administrability,
simplicity, stability, and sufficiency. These are explained in turn.
Tax neutrality refers to the influence (or absence of such) that any
particular design has on economic behavior. Typically taxes are
perceived as a damp on economic activity - taxing income reduces the
incentive to work, taxing sales discourages retail transactions, and
taxing savings reduces the propensity to save.
The more a tax is perceived to be neutral, the less the identifiable
distortions it imposes on the economy. The common assumption of most
tax theorists is that all taxes impose distortions; it's simply a
matter of which ones are least burdensome to economic health. A tax
which imposes no distortions is ideally best. Most of our
environmental problems stem from the fact that our tax designs impose
distortions on our economies.
Tax efficiency is much like tax neutrality, and is the measure of how
much shifting of behavior it imposes, resulting in what is called "excess
burden," or "deadweight loss" on the economy. Tax
economists usually hold that the best taxes are those that are shifted
little if at all. Because the elasticities (a technical word for the
slope of supply and demand curves) of each are very different, a tax
on land values and a tax on improvement values have very contrastive
effects on socioeconomic choices. Using a tax base that has little or
zero elasticity is the best way of assuring that taxes are not
shifted. Zero elasticity is another way of saying fixed supply, as,
earlier noted, land is.
The principle of equity is central to any discussion of tax design.
Tax design requires concern with both what is fair and the extent to
which it must sometimes be compromised to satisfy the other principal
criteria. Fairness can be evaluated according to what is termed "horizontal
equity" - -the extent to which those in similar circumstances
will pay similar tax burdens, and "vertical equity" -- how
well those indifferent classes bear different burdens in the tax
structure. It is this latter perspective that leads to the use of
terms like "proportional," "progressive," and "regressive"
in referring to tax structures. A tax is progressive with respect to
income if the ratio of tax revenue to income rises when moving up the
income scale, proportional if the ratio is constant, and regressive if
the ratio declines.
There is an ancillary question of whether taxing to reach greater
equity should employ measures of income or of wealth, difficult as
this is to measure. Such questions of equity are a matter particularly
central when discussing the property tax. This is because, as earlier
noted, people capitalize their income in the course of a lifetime --
frequently in property. Although claims are often made to the contrary
and really comprehensive studies have yet to be done, the consensus
opinion among experts now is that the property tax is really highly
progressive, especially for the land component.
Administrability refers to the ease with which a tax can be
administered and collected. Taxes which distort the economy are
inefficient but so are taxes that cost lots to administer. This is
measured not only in the direct costs of tax avoidance and accounting
expenses, but in the level of evasion and cheating, and by the cost of
government auditing and policing. When the taxpaying public perceives
that a taxis easily evaded, cumbersome, and unfair, it loses its
legitimacy and calls government itself into question.
This is why the principle of simplicity is important: The more
complex the tax design, the more lawyers and accountants will find
loopholes, encourage the appearance of unfairness, and drive up the
cost of its administration. People know that with simple taxes other
parties are also paying their fair share, and all this enhances the
legitimacy and therefore the compliance of the tax system. In recent
years it has become possible in principle to assess land value by
computer algorithms (called computer-assisted mass appraisal, or
CAMA), obviating the need for assessors altogether. Isobars can be
drawn on maps showing land values similar to how elevations in land
topography are shown on geographic maps.
Stability refers to the ability of a tax to produce revenue in the
face of changing economic circumstances. Income and sales taxes, for
example, vary greatly according to phases in the economic cycle; the
property tax, in contrast, is highly stable regardless of the state of
the economy. This is one reason why school administrators have
typically been supportive of using the property tax base rather than
some other tax to support school services.
In assessing the value of a tax it is also important, of course, to
understand its potential to bring in revenue for the purposes of
government, usually deemed revenue sufficiency. Income, sales and
property taxes, along with corporation taxes to a lesser extent, have
come to be regarded as the workhorses of the American revenue
structure. But, as anti-tax politicians are quick to note, the higher
these taxes are, the more they impose a drag on the economy. This is
why one should ponder whether to consider raising taxes which have
demonstrable distorting effects.
In contrast, a tax on land value alone, which is totally neutral,
measures up so well that it looks like the perfect tax! These criteria
support the claim that taxing land alone is a more appropriate
solution to spatial configuration issues and to tax issues than any