Market urbanism and tax incidence

I put some of my worries about market urbanism being overrated by its proponents in an earlier post, and I thought I would clarify a bit.  I fully agree that we should deregulate building in major cities such as San Francisco, and just as importantly (or more so) stop rising cities such as Atlanta or Houston from going down that same route.  That said, I’m still not happy with how market urbanists handle the distributional implications of their proposals.  Let’s try putting the argument in terms of tax incidence.

If urban land currently reaps monopoly rents, a new tax on building largely will fall on the value of land.  Both Ricardo and Henry George understood that.

Similarly — and here is the important point — the gains from removing taxes/restrictions on building largely will be captured by landowners for exactly the same reason.  More stuff will be built, urban output will expand, land still will be the scarce factor, and by the end of the process rents still will be high.

In other words, if we deregulate building, landowners will capture a big chunk of the benefits.  I’m fine with that, it is a Pareto improvement and I am not a capuchin monkey.  But as I read market urbanists, many are more prone to talk about making various major cities affordable again as part of a broader reformicon program.  I’m not convinced that will happen, or if so the case has not yet been made.

Just think of urban space as “a license to produce in a high MP of labor area.”  As long as the city is not hitting diminishing returns, issuing more licenses probably will not lower their marginal value and thus will not lower rents.

Maybe — maybe, maybe, maybe — if you remove so many building restrictions, land won’t be the scarce factor any more and the gains from the tax reduction will be distributed in many directions.  Alternatively, you may have a less simple model of tax incidence than the “first order effect” I laid out above (try this pdf too).  Great, let’s try to figure that out, but then building restrictions may not much raise rents!…let’s be consistent.

In any case, I think the above is the basic dilemma facing market urbanists.  It can do much to enhance efficiency and productivity, with attendant trickle-down benefits, yet without much solving the distributional problem in any direct way, as it is sometimes advertised as doing.


By the way, have I mentioned that I love landowners?  My school, George Mason University, is a significant landowner.  So were the people who built up the northern Virginia area, such as Til Hazel.  Great stuff, great efforts, great people.  Landowners, love ’em or leave ’em.

p.s. I also love trickle-down benefits.  Most benefits are trickle-down benefits.


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