Tax Design

by on January 26, 2018 at 12:31 pm in Economics, History, Law | Permalink

Dutch canal houses are another classic example of how rules and regulations can shape structures. Taxed on their canal frontage rather than height or depth, these buildings grew in tall and thin. In turn, this typology evolved narrower staircases, necessitating exterior hoist systems to move furniture and goods into and out of upper floors.

That’s from an excellent post by Kurt Kohlstedt at 99% Invisible who gives many other examples of taxes having long-lasting effects on the built environment.

Hat tip: Devon Zuegel.

1 Mulp January 26, 2018 at 12:39 pm

In NH, property is taxed on frontage, but zoning sets minimum lot sizes and set backs so that high tax revenues are ensured.


2 IVV January 26, 2018 at 2:08 pm

I suppose I shouldn’t bother asking, but wouldn’t the tax take be the same, regardless of the lot sizes? The amount of frontage remains the same. The only question is how many people you get to spread the tax burden over.


3 Ray Lopez January 26, 2018 at 1:05 pm

I vaguely recall in Rome they taxed by floor area, so the buildings got taller. Also in Chin dynasty China they taxed by number of axels, which is hard to get around if you reduce the number, literally speaking.


4 Nate January 26, 2018 at 1:08 pm

I doubt that taxes are the root cause here. At the time, canal frontage was by far the most important variable for value of a property. In this way taxes were correctly reflecting the value space. In other words, even without any taxes it is likely that the high purchase price of frontage would have resulted in the same building style. Don’t blame the tax man for correctly identifying the whims of those humans who like connection to the water.


5 IVV January 26, 2018 at 2:09 pm

Next stop: Mansard roofs.


6 Borjigid January 26, 2018 at 5:18 pm

The connection between canal frontage and property value probably holds true for any canal-based city, like Venice. On the other hand, the canal frontage tax is probably unique to Amsterdam.

I’m no expert on Venice, but a quick Google image search indicates that the buildings there are lower and wider, so I think that Alex/Kurt has a point.


7 Alex from Germany January 27, 2018 at 5:28 am

Nate, if every tour guide in Amsterdam says it’s because of the tax, and even the city itselfs claims this – then you and your doubt can rest assured: it’s because of the tax.


8 CorvusB January 27, 2018 at 7:32 am

You mean the drivel rolled out for the tourist hoi-polloi now qualifies as official history?


9 dan in philly January 26, 2018 at 1:18 pm

Reminds me of the window tax in England.


10 rayward January 26, 2018 at 1:33 pm

One of the myths about Charleston is that houses were built sideways to avoid taxes on property frontage. No, houses were built sideways due to space limitations. Similarly, Dutch canal houses were built up rather than out due to space limitations, the policy of taxation based on the width of the house intended to encourage a more efficient use of the limited space. Efficiency, it’s what economics is all about. Except when it isn’t.


11 A January 27, 2018 at 12:05 am

“Making an expensive thing more expensive doesn’t change Qd, especially when my priors are at risk.”


12 GW January 28, 2018 at 3:55 pm

rayward is right. Throughout Europe, the “property taxes” (the German Grundsteuer, for example) are based on frontage. This makes sense, for example, when the tax is related to sewage/storm drainage.


13 Cv January 26, 2018 at 1:53 pm

Is this really true? Every single old city I’ve been to in Western Europe has the same 5-6 story buildings.


14 spencer January 26, 2018 at 2:33 pm

5-6 stories was about the max for building before elevators came along near the end of the 1800s.


15 Alex from germany January 27, 2018 at 2:23 pm

It’s not about the height, it’s about the height-to-width ratio. This aspect is very unique to the Netherlands. You usually won’t find these nowhere else in europe.

Some houses in AMS even gain in width with every meter of distance to the front, leading to even weirder ground plans than normal in old town AMS.


16 Nick_L January 26, 2018 at 1:59 pm

In the Middle East, you will sometimes see unfinished houses, One of the reasons for this, is that for some places, taxation on property only begins when the house is ‘finished’. Leaving the rebar showing, is often used to demonstrate to inspectors that the work has yet to be completed – along with a small handout, of course. Westerners who do not understand this, sometimes come away with the impression that the housing situation is a mess.
Here would be an example:


17 Thor January 26, 2018 at 7:26 pm

Same in Eastern Europe. Same in southern Europe too, actually. Of course, in some cases especially in southern Europe, the remittances are still in the mail and thus the house isn’t quite done.


18 bob January 26, 2018 at 2:10 pm

I’m not certain if it is still true but at one point many houses in Barbados were left partially unpainted or unfinished. This qualified them as being under construction so that they could not be taxed.


19 Fazal Majid January 26, 2018 at 2:24 pm

I lived in such a house in Amsterdam, and yes, I had to have my couch winched in through the window (they have a service called “Freight Taxi” (Vrachttaxi) that does Uber-style moves, and they are proficient at the winching).

In the excellent book “The Goal” by Eliahu Goldratt, you have examples of a company making suboptimal resource allocation decisions because they are optimizing for an accounting metric, and the accounting itself is ultimately influenced by the tax code. Things like producing excess inventory that is costly to warehouse and ultimately needs to be sold at a discount, simply because inventory is counted by accounting as an asset, not the liability it really is. I suspect the distortions in corporate behavior created by accounting cause far more damage than consumer choices.


20 Ali Choudhury January 26, 2018 at 4:09 pm

Accounting would stipulate the inventory held could only be stated at the lower of its cost and net realisable value so it would be illogical to accumulate excess stock to flatter results.


21 Matt2 January 26, 2018 at 5:51 pm

That was the most worthwhile reading I was assigned in my MBA program. Still have it on my desk.


22 carlospln January 27, 2018 at 12:50 am

Managing to accounting metrics has been the most destructive trend in corporate governance in the last thirty years: ‘The Capitalist’s Dilemma’, Clayton M. Christiansen, Derek van Bever; Harvard Business Review, June 2014


23 Charbes A, January 26, 2018 at 2:39 pm

That is why I will build a Gabriel’s Horn building. It yields infinite surface area. I will install decks outside and live like a king paying the taxes of a pauper and sublocate an infinite number of slots for cold, hard money.


24 Ben January 26, 2018 at 3:11 pm

Interesting. But is this tax policy optimal?

Seems like it may be as you are maximizing the number of people that get a view of the canal.


25 A.West January 26, 2018 at 3:26 pm

But but but I read a blog that said that Warren Buffett said that taxes don’t matter in investment decisions!


26 bxg January 26, 2018 at 7:24 pm

This is a clever comment.
Are you criticizing blogs, who oversimplify things into ridiculousness?
Are you criticizing Buffett (by ignoring any context or nuance from what he said)
Is this just snark for fun?
Who can tell? Very TC-escque. I applaud the fact that you waited until enough
comments established that, in the Dutch canal case, there are no good reasons to
think (based on the referred-to article) that taxes are particularly relevant.
Thus maximizing your comment’s ambiguity, as I assume you intended.


27 tinny January 26, 2018 at 3:46 pm

Canals are an expensive public project, so it seems efficient to tax by amount of access.


28 Bob Knaus January 26, 2018 at 4:18 pm

Similar logic was at work in the plantations along the lower Mississippi:


29 Borjigid January 26, 2018 at 5:28 pm

+1 thanks for the link


30 Aaron January 26, 2018 at 5:06 pm

Maybe I’m missing something, but it doesn’t look like the tax has had any effect on development at all. The tax is on canal frontage, but every inch of canal frontage is developed! If I’m understanding right, there’s no tax advtanage to building two skinny buildings instead of one larger one.


31 Anonymous January 26, 2018 at 10:38 pm

There is an advantage to the people living in the houses


32 Ricardo January 26, 2018 at 5:22 pm

Exactly! High taxes encourage crazy building patterns, creating shitholes like Amsterdam. Whereas low taxes encourage beauty and refinement, creating gems like Houston.


33 Borjigid January 26, 2018 at 5:30 pm

Alex isn’t presenting an argument about the level of taxes. He is presenting an argument about the unintended consequences of taxes.

It is possible to find the latter interesting and important while holding any possible opinion on the former.


34 txslr January 26, 2018 at 8:30 pm

Property taxes in Houston are quite high. And Amsterdam has been around a bit longer.


35 Ted F February 7, 2018 at 9:47 pm

Houston has much better fajitas and BBQ than Amsterdam.


36 Bill January 26, 2018 at 5:40 pm

In these types of questions, you have to ask: what metrics could tax personnel rely upon if not frontage to the canal. Or, what alternatives would you propose that would not involve potential for corruption: do you want the land owner to negotiate with a tax collector over what income, say, the owner earned from the canal building. Would that involve the potential for corruption? Is this a period in history where people kept records or income, or issued W-2 forms.

Things look different when you place yourself in the position of another person at a different time.

Sort of like asking a person in the 15th century why he didn’t use his cell phone to communicate with a distant neighbor.


37 Charbes A. January 26, 2018 at 6:02 pm

Actually he did, but the neighbour replied “‘Wherefore this demonic inſtrument? By what ſorcery does it produce ſuch ſounds?”


38 Melmoth January 27, 2018 at 1:41 am

You should visit Vietnam for far more extreme examples of narrow and tall housing. Its like something out of Dr Seuss. Taxation there is also by frontage.


39 Jaunty Rockefeller January 27, 2018 at 7:03 am

Was the tax designed before or after the land was divided? It seems possible the government divided the land in a way that maximized the number of tenants w/ frontage, and the tax was subsequently designed to encourage the planned development. Seems like an empirical question, not a theoretical one.


40 Miguel Madeira January 27, 2018 at 5:45 pm

Supposedly, taxes by area (instead of by volume or height) are non-distortionary (after all, you pay the same taxa independently of the type of building there); a tax by canal frontage is, in pratice, very similar with a tax by area, meaning that probably that, without taxes, the design will be similar.


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