Would the implementation of a land value tax be reasonable in a small country with a tourism-based economy?

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Question: 

Would the implementation of a land value tax be reasonable in a small country with a tourism-based economy? For example, a country such as the Bahamas has low levels of industrial output and exports. The country relies heavily on tourism (specifically the hotel industry), foreign investment and the banking industry to generate revenue. Also, there is a growing sentiment that the low levels of innovation and productivity in the private sector are due to various taxes on imports needed to start and grow a private business. Therefore, would a single tax (the land value tax proposed by Henry George) be beneficial? Also, can the reply possibly contain some details pertaining to an ideal tax rate for the land value tax and can some arguments be included in regard to providing certain methods to properly implement the land value tax in the case of a nation such as the Bahamas?

Answer: 

Economists generally agree with Henry George that land value taxes promote efficient use of land. A small country with a tourism-based economy seems like an excellent case for the efficiency of a land value tax. The bigger issues concern equity and politics. Equity concerns are both horizontal and vertical. 

Horizontal equity means that the government should tax similar properties at the same effective rate, which requires good information on actual land values.  Unfortunately, undeveloped land transactions are infrequent, and no two pieces of land are identical, so there will be some error in assessing land values. There would presumably be some appeal process that needs to be simple, fair, and transparent. A corrupt appeal process could undermine the efficiency benefits of land value taxation. A complicated one would benefit the legal profession and also erode efficiency.

Vertical equity is very subjective, but a common principal is that those with more ability to pay should pay more. In practice, this could mean that the government grants exemptions or lower rates for small landowners with low incomes and low wealth. 

People/voters do not like paying taxes, especially property taxes. Voters may be more accepting if the other taxes they pay decrease, but maybe not. Exemptions for small landholders with low income and low wealth may be politically necessary. The optimal land tax rate for wealthier landowners depends on how the additional revenue will be used. If it is used to replace some previous distortionary taxes or increase spending in much needed government services, relatively high rates could be justified. However, wealthy landowners are a special interest group that may lobby government to keep rates low or carve out exemptions for themselves. They will come up with excuses like “we can’t tax hotels because tourism is the lifeblood of our economy.” That argument is wrong, but it can be quite persuasive to risk-averse politicians, especially those in need of campaign donations for reelection. Inevitably, the political process is likely the biggest obstacle.

Answered by:
Dr. John Winters
Associate Professor
Last updated on October 14, 2020