What is the logic behind charging tax _in the form of money_ for owning property when the property does not produce money?

Question

I know that people living in comunities cooperate with each other when it comes to expenses to maintain the comunity.

From what I understand, taxing property is a practice that started since before recorded history.

Wikipedia - History of property tax:

"Taxation has existed since the existence of civilization. Originally before the presence of monetary system, taxes were mostly paid as a percentage of crops raised.."

The difference between then and now is that governments in the past have always taxed property (land for example) according to what it was producing. If your land was producing apples, you'd be required to give some apples to the government. From what I know people were never required to give pears or diamonds if their land was producing apples.
Now we have to pay money if we own a house, a car or other things even if those things do not produce money (meaning they do not bring any income to the owner)

Can someone please explain how I could make sense of this? What would be a logical explanation (other than "because we need it")

Possible explanations and the reasons why I have a hard time making sense of them:

• If you sell your house with a profit, then your house "produces" money.

  • The question that should follow would be: "Why not wait until I sell it? Why charge tax every year?"

• You could rent part of your house.

  • If that is the case, wouldn't an "income tax" make more sense? (We would avoid charging people that do not have enough to sustain themselves)

• People need government services (schools, roads..). People also need houses. That means people have to pay for those services according to the value of the house. (This argument was brought by one of the commentators below)

  • This sounds a bit like an "Association" type of logical fallacy. What am I missing?

• A nice house is a good indication that the owner is rich.

  • Not necessarily. Maybe the owner just spent his last penny (and maybe his health) to buy, build or renovate that house.

• (In the US) Homeowners have to pay (practically under threat of eviction) for the public schools because they benefit from everyone being educated

  • The argument implies that:
    1 - Somehow the homeowners benefit from other people's kids' education more than the kids themselves and their families. (Homeowners pay, students don't)
    2 - Public education is more important than the rights to ownership.

If a location is needed for the question to be complete, please pick a country of your choosing (out of the 99% of the countries where the governments charge money for owning property / assets), although the United States law is what made me ask this question.

Answer 1

Firstly, I think there is some flawed logic in the OP's premise that, historically, the purpose of taxation was to tax the production of something. When a person earns a salary, they are not producing money - money is being given to them in exchange for their labor/expertise. Money is only 'produced' by a central bank or national mint, so by the OP's logic, we should be taxing the bank/mint, as they are the ones that are 'producing' the money. The OP's objection would also apply to taxing someone's income. A tax on income is really a tax on a transaction.

Regarding property, I think Denis de Bernardy's answer is very good. However, there is something else worth mentioning, in terms of the 'justification' for taxing property:

A house, in particular, isn't just an isolated entity - it is usually part of a town, city (or other jurisdiction), where it (or, more precisely, the people living there) will often be benefiting from shared infrastructure and services. Those need to be paid for somehow, so it seems logical that one possible way to pay those 'shared costs' is by taxing the owner/occupants based on the value of the property.

Examples of such shared services might be roads, sewer system, electrical power infrastructure, fire department, police/security, courts/judicial system, town/city management services, legislative bodies to make laws and decide policy, etc.

Edit:

I have rewritten the answer to be more general, as a few commenters seemed to be taking issue with the specific details of the example that I had chosen (USA).

Some commenters also pointed out that it is not the 'house' that is using the shared services, but the people living there. Of course, that is true; however, people tend to live in houses and so there is a strong correlation between the two. Besides, some of the 'shared services' I mentioned would be needed, even if the house were sitting empty, such as roads for access, fire department, police/security.

I also want to make it clear that the purpose of my answer is not to advocate for taxing based on property value, but simply to describe a possible justification that could be used for doing so. Of course, there are other ways that costs for shared services can be distributed, such as utility bills or taxing income.

Also, some of the comments seemed to be based on disagreement with the principle of taxing property to pay for shared services. Again, I am not advocating this form of taxation and such disagreements don't change the fact that shared services can be used as a possible justification.

Answer 2

There are two issues with your question. The first is that you're approaching this from a wrong angle. The question is not how or whether a property tax is justifiable or justified, but rather how or whether its modern variation came into existence with any kind of sensible rational. The second is that your idea of there being some kind of barter system is misguided.

With respect to the barter system thing, that only exists in economists' wet dreams. David Graeber in Debt the first 5000 years makes a rather interesting case that the sequence whereby barter preceded currency and then debt instruments is fantasy. Rather, the actual sequence was that debt instruments preceded both and that barter and currency (in equal measures to a large degree) then came in as units to settle those debts. And there is ample evidence that early currency instruments were basically fiat and really just records of IOUs.

As to the first problem, historically, authorities have taxed just about anything they could creatively tax, with the main two drivers for doing so being a) whether they could come up with a metric by which they'd tax it (and check it's being paid) and b) whether they'd end up with a revolt on their hands if they tried it.

In agrarian societies like the early Roman empire, at a superficial level there wasn't much to sensibly tax beyond wealth for owners (aka land) and labor for peasants (think serfdom). The metric for the latter was simple: a certain amount of time per year. For the former, it was more complex and revolved, as you suggest in your question, around how "well" the land was developed. But only to the extent that land that produced something deemed valuable was seen as worth more than land that didn't. And this was actually a debt obligation in principle, even though it may have looked like it took the form of barter in practice.

There is more, because the above is somewhat superficial. Then, and later, there were plenty of other very creative taxes -- some progressive, most regressive. Think public urinal tax (by an emperor after which the French sometimes call their urinals), salt tax (salt was a necessity until refrigeration), hearth tax, window tax, glass tax, brick tax, wallpaper tax, you name it. The guiding principle in each case was: if a tax assessor can easily count it, then you can tax it. It's only in the modern era that taxing flows, as in profits, income, and consumption, came about. Before that, taxing wealth was the rule.

And it's also worth noting that, in the past as now, there were "emergency" taxes that sometimes became routine. Charles I of England, for instance, worked around not wanting to call Parliament to get it to raise taxes by all sorts of measures -- some legal, some not (he was time limited for customs, but levied them anyway and merchants paid out of habit). The most colorful ones might be his declaring a state of emergency (there was none) to levy naval vessels from coastal communities (you'd pay the price of a boat if you couldn't provide one) and extending the levy to non-coastal communities (a first at the time); or unearthing a by then long forgotten tax on living outside of city walls. He even won court battles as he pushed this through. The English were so pissed at him that it triggered the English Civil War.

Anyway, back to your question:

Can someone please explain how I could make sense of this? What would be a logical explanation (other than "because we need it")

The simple answer is: because, then as now, you can readily tax it.

Answer 3

You're paying for the government to defend your property (among other things.)

One of the services that most governments provide is that of stopping invading armies and marauding gangs of criminals from marching in and taking your property away.

That is to your benefit, and your benefit is proportional to the value of that defended property.

As such, you pay a fee for these services rendered.

Answer 4

In the late 1980s in the UK, the Conservative government decided that they would break the traditional connection between property rental value and local taxation. Instead of people paying tax according to the value of their property, each person would pay a flat rate in return for the services provided in that district. It would be called the "community charge" (but soon became known as the "Poll Tax"), and each adult would pay the same.

The result was widespread public disorder and the Prime Minister (Margaret Thatcher) was removed by her own party. It was a massively unpopular taxation system.

It was also difficult and costly to collect, as people had to register for the tax. Whereas a house is a fixed structure, people tend to move around. It was an administrative nightmare to keep track.

It was unpopular because it meant that a millionaire in a mansion would pay the same as a single parent in two room apartment. The principle of progressive taxation is that one pays in proportion to your ability to pay, not in proportion to what you receive.

The logic behind taxing property is the strong correlation between the value of one's property and the ability to pay tax. People who are rich tend to buy valuable property. People who are poor tend to live in lower value housing. If you are taxing residents of a district, and you want to assess their ability to pay a tax, using the value of their home is a relatively simple way to do it.

The result was a return to a property tax, with every house being assessed and put into a band. Taxes would then be raised according to the band your house was in. So a person with the money to live in a mansion would pay more.

The political logic is that people are much happier to pay progressive taxes that take more money from those who are most able to pay.

Answer 5

Time4Tea's answer explains why property taxes are justified in a modern society with multiple potential alternative forms of taxation, as they pay for various government services that property owners presumably use. However there's an additional justification for property taxes that applies especially in the case of unproductive property, even for unused property that isn't actually using significant government services. Property taxes encourage property be put to productive use. It's harder to justify property you own go to waste if you have to pay taxes on it.

Back when I was high school student I used to walk to school through a field of corn. That may not sound remarkable, but I lived in suburban neighbourhood and went to suburban high school. There weren't any farms anywhere near me, yet across the street from my school, surrounded by houses and a shopping plaza there was a corn field. Some developer had bought it in order to put up townhouses, but for whatever reason waited a number of years to do so. For a few years the property sat unused, overgrown with weeds, serving no useful purpose. Eventually though, because the city actually charged higher taxes on undeveloped land than land being used for farming, the developer started renting it out to a farmer.

A more general example would be that property taxes encourage people who flip homes to rent them out while they wait for the price to appreciate. While many of these house flippers would anyways, that extra bill in the mail encourages those that rather not be landlords to do so as well. Without property taxes there'd be less housing available and more vacant properties sitting unused. In the extreme case of where an owner abandons their property, it allows the local government to seize the property for unpaid taxes. The government can then sell the property to someone who will hopefully put it to productive use.

Answer 6

I'd like to point out that I indeed think the question how a community (whether village/town, ..., state) collects the money it needs to provide its services to the citizens is to a large extent political. 4 ways come to my mind:

• collecting fees: a fee is collected to provide a certain (stated) service, good or right.
• In contrast, taxes are collected without a statement what this tax is going to be used for. The taxes go into the town/.../state budget and taxes together contribute to paying all the spending of that community.
  Taxes are frequently collected on:
  • income
  • wealth
  • purchase or ownership of particular goods/services (VAT, dog tax, salt tax, ...)
  • per capita

Two notes:

• the boundaries of taxing income vs. wealth may be a bit more blurred than it would seem at the first glance. E.g. IIRC in the Netherlands, wealth is taxed according to the income it could produce.
• wealth tax is also close to taxing the right to own or operate certain things such as land or a car.

Now, comparing different countries/legal or tax systems, the same or very similar tasks are often paid for by fees in one but taxes in another. Some examples:

• A US-based answer tells us that property taxes are collected to pay for roads etc. Where I live, if a town builds or renovates a road usually a fee is collected from the owners of the adjacent ground to pay for that particular road. We also have taxes on land, but those are much lower compared to what I've heard about the US property taxes.

• Where I live, health care is mostly paid for by (obligatory) fees. Some other countries nearby don't separate health care from other governmental services and use taxes instead of fees.

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Some thoughts that go into what to tax:

• @DenisdeBarnardy already pointed out that efficient tax collection also needs suffienctly easy ways to assess the amount and actual payment
  (There have been some proposals to reform the German property tax recently that have been critizised in that the assessment of taxes due would be so much work that the tax would hardly be a net gain)

• If there's neither income nor wealth, it's difficult (expensive, inefficient) to actually collect the tax. Similarly, purchasing a good or service is an indication that there happens to be money right here, so from collectin efficiency point of view, a good opportunity for a tax.

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Why tax wealth

• As I understand the discussion, property tax is usually discussed as wealth tax. On a closer look, I'd group it as tax on particular assets, though.

  Taxes on particular classes of assets are often following a logic that combines:

  • on the one hand particular services are related to that asset (e.g. dogs create an additional burden on city cleaning; cars need roads)
  • therefore (or for further reasons) there is a political decision to disincentivize this asset.
    (IIRC Italy has taxes on foreign assets)
  • On the other hand, the exact costs this asset caused may be rather expensive to calculate.
  • Thus, a "roughly fair" (i.e. not too upsetting to not too many citizens) but easy to administer tax may be far more efficient (best case it may even be cheaper for the citizen).

• maybe the prime political argument to tax wealth (as opposed to certain classes of assets that usually are very valuable) is to counteract wealth concentration, or related to that argument

• that neither taxing income but not wealth nor taxing wealth but not income would be good implementations of the principle that each citizen should contribute to the community tasks according to their ability.

• Wealth tax disincentivizes assets that do not produce income. If that's the political goal, wealth tax is the way to go.

• In case of a system like the Dutch wealth tax which argues the income that wealth could produce, one may argue that replacing some income tax by an easy-to-calculate wealth tax can save a lot of burocratic hassle (and may make some part income tax fraud a non-issue).

• Wealth tax differs from a collection of asset taxes in that asset taxes are due also if there's debt offsetting the wealth (i.e. the wealth actually isn't there).

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Some difficulties with wealth tax:

• OTOH, at least the German variety of wealth tax was the tax that required most administration, so not very efficient in terms of net revenue vs. costs to the community to collect. Estimates in the 1990s said that the total costs for collecting the wealth tax (including tax administration, tax payers costs for declaration etc. and enforcement costs) were around 1/3 of the collected tax*.
  This particular point is much easier for certain asset classes. Of course, also wealth tax may be subject to fewer and easier rules, but there are limits here as the respective tax law is required to not be too unjust/unfair:

• Collection of German wealth tax was discontinued after the federal consitutional court ruled that it can only be constitutional if all types of assets are subject to the same wealth tax. This can be quite difficult and thus costly to achieve.
  Again, taxes per asset class are not or less subject to this problem.

• Another side effect of wealth tax is that certain types of business may be pushed into insolvency by a wealth tax. Compare a freelancer who's working mostly with their brain (which is valuable, but not considered taxable wealth) and who has almost all sales being profit vs. a farmer who will easily need to be in the million €s for machinery, property and stock to produce a similar income.

* There are newer proposals who calculate much better tax revenue : cost ratio, but the ones that I've seen so far still suffer from the fact that e.g. claims to the governmental pension plan are excluded from taxation (these claims are notoriously difficult to compare to capital assets) whereas a business owner's pension savings (whether investments or business assets) would be subject to the full proposed wealth tax.

Answer 7

Property in the form of real estate is the best thing there is to tax, especially if you levy the tax on the undeveloped value of the land. Land can’t be concealed from the taxman. It can’t be moved offshore. The person paying the tax didn’t create the land from the sweat of their brow, and nor did the person they acquired it from (except in very limited circumstances like Dutch polders); they are using part of the common heritage of mankind and it’s reasonable to charge them for it. And unlike most taxes, it doesn’t reduce economic activity by disincentivising the activity that’s being taxed, except in extreme cases where the owner chooses to forfeit the land rather than paying the tax.

Answer 8

Tax, generally is taxation on an asset or an income. Many assets, especially in a modern world can be hard to track. Actual bricks and mortar property is usefully hard to move around, unlike say the sales that a multi-national corporation can make and then move around through its various branches, on-shore and off-shore, because of its large and opaque financial structure.

Its also justified say, on say a residential house, by the rough calculation that the larger a house is the more the people who live there will use local civic services: roads, schools, health clinics and the like. Buildings, on the other hand, which are used as the sites of businesses are judged differently as being profit centres and are also judged as using a larger proportion of services - for example an educated work-force for which they do not pay directly for, and so are taxed as such.

Answer 9

In the US, the most common forms of taxation are:

1. Taxes on income and investments.
2. Sales/use taxes.
3. Property taxes.
4. Business taxes.

Number 1 and 4 are generally levied by the federal and state governments, #2 is usually states (but some large cities, e.g. NYC, also have sales taxes). Cities and towns usually use #3, property taxes.

I think the logic is related to the types of services that local municipalities provide: police protection, fire departments, local infrastructure (often called "public works"), and public schools. Some of these directly protect property -- a fire would destroy your home, and police investigate crimes against property like burglaries, trespassing, etc. Good schools and public works make homes in the town more valuable.

Since the value of town services is closely tied to the value of your home, it's not unreasonable to make your share of the tax burden proportional to the home's value.

Services provided by other government levels, such as health care, military, welfare, are not so closely aligned with property. In this case, we use income and purchases as a proxy for wealth, and tax those transaction.

Answer 10

Property, in terms of physical possessions, is a very simple gauge of wealth.

Rich people tend to have expensive houses and expensive cars.

Average people tend to have modest houses and modest cars.

Property taxes are a simple way to get rich people to pay more.

Answer 11

Many good answers, I would just like to add that while most countries have property tax, a number of them (especially here in Europe), have tax exemption for a place of residence where the person actually lives, exemption usually subject to upper limit on size.

The question is actually a hot topic in Latvia at the moment, because Latvia does not have a provision for tax exemption for the abode, and the property taxes have skyrocketed in the past 3-5 years, forcing a number of (specifically elderly people who do not have high earnings) to sell their homes.

Answer 12

Many useful answers - but I didn’t see anyone making this point (I might have glossed over it):

To live somewhere, you either rent, or you own the property yourself. The fact that you are “paying rent to yourself” when you own the property gives you an invisible income (invisible in the sense that there is no formal entry in your bookkeeping, usually).

This concept is known as imputed rent.

You usually don’t get a credit for paying rent, but you get taxed for collecting rent. By not charging yourself rent, you are avoiding a taxable income. The rental income is of course offset by some expenses associated with owning a house (upkeep, local taxes) but if it wasn’t profitable there would be very few landlords...

In general any asset is capable of generating income. This is the justification used by some countries for charging an asset tax (typically about 1% of total “wealth”) - this in effect punishes people for sitting on a large pile of money without putting it to work in the economy.

Of course the justification for the taxation is well explained by many other answers - but the premise “it doesn’t generate income” is, in my opinion, false.

As an aside, I have a farm with multiple buildings on it. I actually rent part of the property out “to my business” which is conducted in some of the buildings. By doing this I can better shield myself from business-related liabilities (it’s an LLC), and what is an expense for my business reduces its profit while increasing my income. Tax-wise, that nets me zero (since business profit is added to my personal income as I am a sole proprietor). That makes the “paying yourself rent” argument a bit more visible, perhaps.

Answer 13

Because governments need money, and people need government services

As the title line says, governments need money to function so must acquire it somehow. Taxes are pretty much by definition how governments attain money, at least so long as we've ruled out invading foreign lands and stealing their gold and stuff. And the people need their government in varying (non-trivial) degrees with a number of (non-trivial) things. Water, electricity, sewage, roads and transportation etc. are things that are often covered by a government through its taxes; exactly what level of government depends on the jurisdiction in question. These are all things that tend to not be in individual interests—as individuals we pay a lot more for flush toilets and sewage systems than we reap from them in direct benefits—but are in the general public good—the community as a whole derives more from everyone having a good system for disposing their waste than the community as a whole puts into it.

That's why the government usually implements, regulates, and maintains such systems, and the individual members of the society agree to fund it via taxes. Exactly which taxes and in what amounts are used is dictated by local laws and constitution(s), and is otherwise a negotiation between the government and its peoples. In the US and (most?) every other democracy for example, the taxes are implemented via legislation enacted by elected representatives, or by a direct popular vote—in California, for example, it is currently required by the state constitution to put taxes to a public vote, but it used to be something the legislature could do alone.

So the simple answer to "why do we tax land in such and such ways for such and such reasons" is because the government asked the people to do so, and the people agreed. And they have continued to agree, otherwise they would demand the repeal and reworking of the taxes in some form or another.

Now in the US, the constitution actually prohibits direct taxes by the federal government, unless they are levied in proportion to state population (which makes no accounting on whether some states are richer than others). The 16th amendment has permitted the federal government to levy income taxes without regards to population. This settled an oscillating set of prior precedents from SCOTUS which had at one point ruled income taxes as unconstitutional direct taxes, and then later ruled that they were an indirect tax on a transaction (you give labor in exchange for cash, for example). That's why at the federal level you don't pay non-income related taxes on land (in the US). You just pay things like capital gains taxes, and other forms of gaining wealth/income via land.

However, direct taxes are not prohibited by the states and their municipalities by the US constitution. Individual state constitutions regulate this. In most cases, it is local municipalities like cities or counties that levy direct taxes on land. A large chunk of these tend to go towards paying for education: building and maintaining schools and paying the staff. Most of the rest of what the local governments deal with, like many utilities, are billed directly. Education, however, is a resource that not everyone uses individually and equally, but which everyone benefits from as a whole. That's why we don't bill directly for education (before college, at least): some people have disproportionate need, but everyone has approximately equal benefit as a community.

It fell to the courts ultimately to decide if local municipalities actually could tax land directly to fund such costs. But they did, and it has become almost universal in the US that local municipalities tax your land based on its assessed value, which go to maintain the local government and pay for communal resources like education. Everyone's accustomed to it, most people just accept it as a given and plan accordingly. If the courts had ruled against such taxes, then local governments would have simply found something else to tax until eventually something passed legal muster. You'd have ended up paying the same amount in taxes, some of it would just land on something else. And if they couldn't find something to tax, the local governments would start to collapse, key services that they funded and maintain would collapse, and the people and higher levels of government would be compelled to take action to rectify the situation; such as by rewriting laws or amending constitutions to allow a solution (probably by simply allowing a certain type of tax it had been ruled couldn't be levied).