Saturday, November 18, 2006

What's wrong with the property tax

Taxes aren't just for raising money: they also serve to discourage activities that are undesirable to the public by raising their prices. A government subsidy, on the other hand, can be thought of as a "negative tax", something that encourages certain purchases and investments for the public good. Thus we have high taxes on things like cigarettes and booze, and low taxes and subsidies for things like affordable housing and some types of health care.

So what about property taxes? The property tax is almost always thought of exclusively as a fundraising tool for local municipalities. But a tax of its magnitude will inevitably have a big economic effect, by effectively increasing the costs of landownership. Thus, the property tax acts as an incentive for big landowners (say, farmers and woodlot proprietors) to subdivide and sell off their land in smaller parcels.

The property tax made a certain amount of sense in colonial times, when the amount of land a family owned was a good measure of how rich they were. And in some cases, the value of a property might still be a good indicator of wealth (if, for example, an appraiser values a big McMansion on five acres as worth more than a working farm on a hundred). But other taxes - like an income tax, gasoline tax on commuting, or - best of all - a progressive consumption tax would be more effective and fair.

In more ways than one, property taxes are too expensive for New England.

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