How Land Value Taxes Can Reduce Inequality

David Callahan's points about the inequality-widening effects of technological change add up to a strong argument that wealth taxes should play a bigger role in the progressive project of reducing inequality.

The progressive movement has focused a good deal of attention on the narrow issue of income inequality, but as David and others have pointed out, it's capital that's soaking up most of the wealth produced by technological change. It's not just that wealthy people are getting bigger paychecks - they also tend to have more and higher value assets. Labor-saving technological trends seem likely to allocate more and more unearned wealth to owners of assets, and less and less to labor.

David offers a few ideas for how we might remedy this problem at the federal level, and I'd like to add two ideas for local government to the list. 

At the local level, wealth taxes are already one of the primary tools for financing municipal governments and school boards. The property tax is one kind of wealth tax.

But the property tax is really a tax on two things - a building and a piece of land. The building itself depreciates in value with age, like a car or a dishwasher. It's the land that's earning economic rent. And there are some good reasons to think that land rents may be one of the more gluttonous types of capital eating the fruits of economic growth.

Nobody needs to persuade Congress to do anything about this. A city or school board concerned about reducing wealth inequality could choose to pay for local services primarily with a land value tax (LVT), instead of the usual mix of regressive taxes on buildings, improvements, wages, sales, and assorted fees. The LVT is a tax only on the land portion of a piece of real estate. Some municipalities split their millage rate out into two rates - one for land and one for buildings - and set the millage rate for land several times higher than the rate for buildings.

This is a distributionally progressive tax, and it is an especially good way to fund public transportation, as it encourages compact walkable development. The LVT is sometimes referred to as "value capture" financing, when it's used as a dedicated revenue source for transit, since it works by capturing back some of the land value windfall that nearby private landowners reap from public investment in transit. 

This leads us to another idea for the local government agenda on inequality - shifting the burden of transit funding onto land near transit stations, and away from regressive user fees. A few American and international cities have experimented with making transit free to users. The varying results call for more research and policy experimentation, particularly with regard to issues like disruptive passengers and maintenance. But there's no question that shifting the transit funding burden off of transit riders and onto transit-adjacent landowners would have a progressive impact on the distribution of wealth. Transit users' real wages would increase as fares shrink or disappear as a household expense. 

If more and more of the economy's rewards are going to accrue to assets as unearned wealth, then policymakers at all levels of government will increasingly need to look to unearned wealth as a source of funding for public services.