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logo    The Foolish Property Tax


Tax critics often complain about the regressivity of sales taxes, but no scheme of taxation is immune from that complaint, since any tax can be made regressive by altering the rate structure and providing exemptions to select groups. I have never heard any tax critic take on the property tax, however, and I wonder why. It is, after all, the most unjust tax of all, and its unjustness has been known at least since the eighteenth century.

In Book V, Chapter II, Part II of the Wealth of Nations, Adam Smith provides an analysis of taxation. He claims that taxation should only be applied to sources of income, and he cites only three of these: rents, profits, and wages. The property tax, is of course, not a tax on any of these. As a matter of fact, it is difficult to determine exactly what is being taxed by it.

Oh, it seems clear enough. One is taxed on the current market value of the property. But the current market value is neither a source of income nor even an asset. If you own a one-hundred thousand dollar house but have a mortgage whose payoff is eighty thousand dollars, you have only a twenty-thousand dollar asset. So when the homeowner is taxed on the current market value, he is being taxed for the mortgage holder's asset as well as his own. And that certainly is unfair.

But assets, if not invested, are not income producing anyhow, and given Smith's analysis of taxation, they should not be taxed at all. And if a homestead is to be taxed, he claims it should only be taxed in relation to the rent that could be derived from it if it were rented. He writes, "The rent of houses might easily be ascertained with sufficient accuracy, by a policy . . . which would be necessary for ascertaining the ordinary rent of land. Houses not inhabited ought to pay no tax. A tax upon them would fall altogether upon the proprietor, who would thus be taxed for a subject which afforded him neither convenience nor revenue. Houses inhabited by the proprietor ought to be rated, not according to the expense which they might have cost in building, but according to the rent which an equitable arbitration might judge them likely to bring, if leased to a tenant." In other words, Smith wants to tax property as though it were income producing.

But a homeowner living in a mortgaged property would thus be able to deduct from the estimated rent the costs associated with maintaining the property, including the mortgage payment, just as any other landlord would. But that would reduce the state's income derived from property taxes to such an extent that they would hardly be worth collecting.

So why havent both economists and tax critics taken on the property tax? It is not only unjust, it flies in the face of good economic theory. Since the Wealth of Nations is the economic bible of free enterprise economics, I can only conclude that our free-enterprise economists are hypocrites, and that our tax critics have their heads in the sand. 5/24/2005)