What is a Harberger tax?

A proposed system in which owners declare for themselves the price at which they would be willing to part with their property, and pay tax in proportion to it. If someone offers to buy at that price, they must sell. It aims at honest valuations and at moving idle assets to people who want to use them.

Imagine a prime plot of land by a railway station that has stood empty for years. Some people would like to use it, but the owner won't sell. Or a railway line is planned, and the whole project stalls because the last landowner refuses to sell. The Harberger tax is a proposal that tries to answer this problem of property that is held but not used, through the design of a tax.

In short

The owner of a house or land declares the price at which they would be willing to let it go, and pays tax in proportion to that amount. But if someone offers to buy at that price, the owner must sell [1][2].

Declare a low price and your tax is low, but your property is easier to buy away from you. Declare a high price and you can keep it, but your tax goes up. This double bind aims at two things at once: honest valuations, and moving unused assets into the hands of people who want to use them [2]. The book ⿻ Plurality names the economist Arnold Harberger as one of those who proposed the idea [1]. In the book Radical Markets it was called COST (Common Ownership Self-Assessed Tax) [2][3].

For example

A worked example (made-up numbers for illustration). Say the tax rate is 5% a year. If you declare your house to be worth $1,000,000, your tax is $1,000,000 × 0.05 = $50,000 a year. If you declare $800,000 to cut your tax, it falls to $800,000 × 0.05 = $40,000 a year. But if someone says, "I'll buy it for $800,000", you have to sell. To save $10,000 in tax, you run the risk of losing a house you care about at a low price.

Sun Yat-sen and land in Taiwan. According to ⿻ Plurality, thinkers including "Founder of the Chinese Republic Sun Yat-Sen" and the economist Arnold Harberger proposed, as a way to overcome the difficulties of administering land taxes, "having owners self-assess the value of their property under penalty of having to sell at this self-assessed value". The book writes that this has long been used for land in Taiwan [1]. The book's traditional Chinese edition adds the term 平均地權制度 (the system of equalization of land rights) at this point [4].

Art works on the blockchain. The book writes that the mechanism "is particularly easy to enforce in digital asset registries, such as blockchains", and so has spread in recent years, especially for NFT (one-of-a-kind digital token) art works [1]. A record of a January 2024 question-and-answer session with Audrey Tang and Glen Weyl contains a reply saying that there are small examples but no large-scale implementation yet, and that Taiwan is one of the countries closest to adopting it. However, this record is a machine translation with no speaker labels, so it cannot be confirmed which of the two said it [5].

Considered and rejected at ENS. According to Vitalik Buterin, the founder of Ethereum, an almost identical proposal was considered for ENS, the naming system on Ethereum. It was turned down, because some names have legitimate owners with little money while also being risky names that fraudsters would want (such as the names of wallet services) [6].

How it works

A tug of war between two kinds of efficiency

According to Buterin's 2018 explanation, if all property were taken away every year and resold to the highest bidder, everything would end up with whoever could use it best. But nobody would build a house if it could be taken away six months later. Efficiency in getting things to the people who use them best clashes with efficiency in encouraging investment [2].

The 19th-century thinker Henry George tried to avoid this by taxing only the value of land, and not improvements such as buildings. Buterin writes that Posner and Weyl, judging this hard to do in practice, proposed a self-assessed property tax instead [2].

Why declare honestly?

Buterin explains it this way. If the tax rate equals the probability that the property will be sold within a year, then raising your declared price slightly increases your tax by exactly as much as it increases what you can expect to get when someone buys. So there is no reason to declare anything other than the true value [2].

Buterin also describes another property: if the tax rate is set lower than that, the incentive to invest improves, while the loss in getting things to the best users is smaller than the gain [2].

In a 2018 interview, Weyl himself explained that the aim is a state in which things can always be bought at a reasonable price. This, he said, could reduce the problem of the last holdout when land is assembled for railways or development, and the need for the state to take land by compulsion [7].

From Radical Markets to Plurality

The proposal was one of the central ideas of Radical Markets (2018), the book by Eric Posner and Weyl [2][3].

In a 2020 essay, Weyl looked back on that book critically. He writes that although it said the value of property comes from the efforts of the community, it built in almost no community structures or public goods: it pictured taxing individuals and a large global organization handing the money back to individuals. Since real wealth is held by groups such as companies and nations, Weyl writes, many groups should, nested within one another, each own part of it in common, and the revenue should fund the public goods that are the source of the assets' value [3].

Chapter 5-7 of Plurality presents this as "partial common ownership". The book writes that it "has the simultaneous effect of forcing truthful valuations for taxation and of forcing turnover of underutilized or monopolized assets to broader publics" [1].

The book goes on to describe how the money raised could be used. It cites the "Henry George Theorem", which "states, roughly, that the taxes that can be raised from correctly designed common ownership taxes can fund all the subsidies required to fund supermodular investments" (investments in supermodularity, where doing things together makes them more valuable). The book gives the example of "the way that building better local public schools tend to raise land values". It then sketches "circular investment" that channels such revenue into these activities, and allocating it across boundaries with methods related to Quadratic Funding [8].

What is debated

The effort of thinking (Buterin, 2018). People are not experts in valuing property. Working out what to declare for your home takes time and effort, and if you carelessly declare too low and lose your home, there will be strong resentment. Extend it to smaller possessions and you would be saddled with countless valuations, Buterin worries [9].
What about people who don't want to move? (2018 interview). The interviewer Russ Roberts asked whether someone who doesn't want to move would simply have to declare a high price. Weyl answered that the value here is not an appraised price, but how much staying there matters to you, and that if tax revenue is returned as a dividend, ordinary households would come out ahead. Roberts also doubted whether the dividend would really be paid [10].
Would it concentrate wealth? (a French review, 2019). A review in Le Grand Continent makes several criticisms: in a downturn, people with money could buy up assets that had been declared cheaply; declaring assets as a bundle could protect the wealthy; big companies could buy out rivals; and the system ignores sentimental value, such as that of a family home [11].
The book's own reservations. The book also writes that "partial common property schemes are an interesting start", but that "they need to be paired with tools that can recognize and protect common interests in the way and stability with which land and other assets are used" [8].

Where it fits in Plurality

In the book, it appears as the first item of "Social markets tomorrow" in chapter 5-7, "Social Markets" [1]. This builds on the ideas of Henry George in chapter 3-2 (that land value is created by the community, so it does not belong to the individual) and on Sun Yat-sen's principle of 民生/Mínshēng ("civil livelihood") in chapter 2-1 [12][13].

In chapter 4-4, "Property and Contract", the book mentions, for broadcasting spectrum, "proposals by leaders in the space for even more radical designs that would mix elements of rental and ownership", and refers the reader to chapter 5-7 [14]. The book then carries the idea further, to "⿻ property systems" that combine partial common ownership with voting mechanisms [8].

Sources

Plurality, 5-7 "Social markets tomorrow", item on partial common ownership — https://www.plurality.net/v/chapters/5-7/eng/ ［CC0］
Vitalik Buterin, "On Radical Markets" (2018), section on Harberger taxes — https://vitalik.eth.limo/general/2018/04/20/radical_markets.html
E. Glen Weyl, "Why I Am not a Market Radical" (2020) — https://www.radicalxchange.org/updates/blog/why-i-am-not-a-market-radical/
Plurality, traditional Chinese edition, 5-7 "社會市場" (in Chinese) — https://www.plurality.net/v/chapters/5-7/zh-tw/ ［CC0］
2024-01-08 Audrey and Glen Weyl Q&A (machine translation into Japanese, excerpt) — https://scrapbox.io/plurality-japanese/2024-01-08%20Audrey%20and%20Glen%20Weyl%20Q%26A
Vitalik Buterin, "On Radical Markets" (paragraph on ENS) — https://vitalik.eth.limo/general/2018/04/20/radical_markets.html
Glen Weyl on EconTalk (2018-05-21) — https://www.econtalk.org/glen-weyl-on-radical-markets/
Plurality, 5-7 "Frontiers of social markets" — https://www.plurality.net/v/chapters/5-7/eng/ ［CC0］
Vitalik Buterin, "On Radical Markets" (paragraph on the effort of valuation) — https://vitalik.eth.limo/general/2018/04/20/radical_markets.html
Glen Weyl on EconTalk (2018-05-21, around 21:37) — https://www.econtalk.org/glen-weyl-on-radical-markets/
Le Grand Continent, "Radical Markets : abolir la propriété pour libérer le capitalisme" (2019, in French) — https://legrandcontinent.eu/fr/2019/12/25/radical-markets-abolir-la-propriete-pour-liberer-le-capitalisme/
Plurality, 3-2, section "Henry George and the networked value" — https://www.plurality.net/v/chapters/3-2/eng/ ［CC0］
Plurality, 2-1 "A View from Yushan" — https://www.plurality.net/v/chapters/2-1/eng/ ［CC0］
Plurality, 4-4, section "⿻ real property" — https://www.plurality.net/v/chapters/4-4/eng/ ［CC0］

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