The Jerome Levy Economic Institute Conference: land, wealth and poverty

American Journal of Economics and Sociology, The,  July, 1996  by J. Ted Gwartney,  Nicolaus Tideman

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Next consider fairness. The fairness of such financing is the fairness of incremental decisions in an environment in which the initial allocation is fair. (It does not provide special opportunities for disadvantaged persons. They would need to be provided for by insurance that operated independently of the provision of public goods.) A person who is treated fairly in the absence of public goods cannot reasonably complain about being required to pay for a service according to its marginal cost, or about have to pay the value that is added to his land by the availability of a public service.

In the latter case, there is an argument that must be answered. A person may say, "It is true that the provision of this public service adds as much to the rental value of my land as I am being taxed, but that is what the service is worth to someone else who might use my land. It's not worth that to me. In fact, the 'service' reduces my well-being."

Here we have a difficulty. We have no way of identifying the value of a service that is provided to a person without his request. If we express a willingness to respond to such statements, people will have a motive for faking a lack of interest in the service in order to reduce their tax bills. If a person can point to some characteristic of his circumstances that would tend to support the claim that he does not value the service (for example, if the service is concerts in the park and the person is deaf, or if the services is a sewer line and the person just put in a new septic system), then we may have an obligation to compensate the person for raising his taxes to pay for something that he does not value. But when the person can point to no such special circumstances, he should bear the cost. People should understand that one of the risks of moving into a community is that their fellow citizens may decide to provide a local public service that most people value but they do not. At worst, the aggrieved person will have to bear the costs of moving (including the psychological costs). Thus if any compensation is offered to people who have characteristics that suggest that they do not value a public service that raises the value of their land, the compensation that they receive should have an upper limit of the loss in the value of things attached to the land (the septic system) plus the financial and psychological costs of moving. While we need to watch out for fakers, these are real costs, and a public service is only worthwhile if its benefits exceed its full costs, including losses in the value of capital and in the human satisfaction of those who did not want change.

The fairness of such a tax system might also be questioned from another perspective. If people are required to pay the costs of the public services that they use, then who will pay for schools?

There are two possible answers. One possibility is that people will agree on the value of living in a community where children are well educated, whether they have children or not, and they will find the presence of another child in the community to be a benefit for which the cost of educating the child is not too high a price to pay. In this case, educational expenditures add to the value of land throughout the community, and education can be financed efficiently by land taxes, without requiring students or their parents to pay. Those who pay will be receiving benefits that are equal to what they pay.