Difference between revisions of "Ad valorem tax" - New World Encyclopedia

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An '''''ad valorem tax''''' ([[Latin]] for "according to value") is a [[tax]] based on the value of [[real estate]] or [[personal property]].
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An '''''ad valorem'' tax''' ([[Latin]] for "according to value") is a [[tax]] based on the '''value''' of a transaction or of [[property]], which may be [[real estate]] or [[personal property]]. An ''ad valorem'' tax is levied as a '''percentage''' of the value of the item it is imposed on, and not on the item's quantity, size, weight, or any other such factor. This can be contrasted with direct taxes, such as [[excise]] tax, which charges a fixed rate for each unit of goods produced (for example the specific tax on [[gasoline]] or [[tobacco]]).
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Charges of ''ad valorem tax'' are levied as a percentage of the '''value''' of the item it is imposed on, and not on the item's quantity, size, weight, or any other such factor.  
 
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An ''ad valorem'' tax is typically assessed when [[property]] is purchased, in the form of a [[sales tax]] or [[value added tax]] (VAT), although it may be levied later on a set basis, such as once a year or once a quarter. ''Ad valorem'' taxes can also be assessed on [[estate]]s, [[import]]s in the form of [[tariff]]s, and in other circumstances where property of value changes hands, such as [[inheritance tax]]. It may also be charged on [[land (economics)|land]] alone, known as [[land value tax]].
 
An ''ad valorem'' tax is typically assessed when [[property]] is purchased, in the form of a [[sales tax]] or [[value added tax]] (VAT), although it may be levied later on a set basis, such as once a year or once a quarter. ''Ad valorem'' taxes can also be assessed on [[estate]]s, [[import]]s in the form of [[tariff]]s, and in other circumstances where property of value changes hands, such as [[inheritance tax]]. It may also be charged on [[land (economics)|land]] alone, known as [[land value tax]].
  
 
==Types of ''Ad Valorem'' taxes==
 
==Types of ''Ad Valorem'' taxes==
 
''Ad valorem'' taxes can be based on ownership of a real asset, such as [[property tax]]es, or they can be "transactional taxes," such as [[sales tax]]es. While property taxes are determined and levied annually, transactional taxes are levied only at the time of a transaction.
 
''Ad valorem'' taxes can be based on ownership of a real asset, such as [[property tax]]es, or they can be "transactional taxes," such as [[sales tax]]es. While property taxes are determined and levied annually, transactional taxes are levied only at the time of a transaction.
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The most common ''ad valorem'' taxes today are [[property tax]]es levied on [[real estate]]. ''Ad valorem'' property taxes are typically a major, if not the major, revenue source for both state and municipal governments. Municipal ''ad valorem'' property taxes are commonly referred to as simply "property taxes."
 
  
 
===Property tax===
 
===Property tax===
 
{{Main|Property tax}}
 
{{Main|Property tax}}
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''Ad valorem'' [[property tax]]es are levied on real or personal property by local government units including counties, municipalities, school districts, and special taxing districts. Real estate, real property, or realty are all terms for the combination of land and improvements.  
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''Ad valorem'' [[property tax]]es are levied on real or personal property by local government units including counties, municipalities, school districts, and special taxing districts. Real estate, real property, or realty are all terms for the combination of land and improvements. ''Ad valorem'' property taxes are typically a major, if not the major, revenue source for both state and municipal governments. Municipal ''ad valorem'' property taxes are commonly referred to as simply "property taxes."
  
 
An owner of [[real estate]] or other [[property]] pays this [[tax]] on the value of the property. The revenue is used by the local governments in developed countries to supply [[public services]] which range from those that exhibit mainly private goods characteristics, such as [[water]], [[sewage|sewers]], solid [[waste management|waste collection and disposal]], [[public transport|public transit]], public [[recreation]], to those that exhibit mainly public goods characteristics, including local streets and [[road]]s, street lighting, fire and [[police]] protection, neighborhood parks, and so forth (Kitchen 2003).  
 
An owner of [[real estate]] or other [[property]] pays this [[tax]] on the value of the property. The revenue is used by the local governments in developed countries to supply [[public services]] which range from those that exhibit mainly private goods characteristics, such as [[water]], [[sewage|sewers]], solid [[waste management|waste collection and disposal]], [[public transport|public transit]], public [[recreation]], to those that exhibit mainly public goods characteristics, including local streets and [[road]]s, street lighting, fire and [[police]] protection, neighborhood parks, and so forth (Kitchen 2003).  
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[[Land value taxation]] (LVT) (or site value taxation) is an ''ad valorem'' tax where only the value of [[land (economics)|land]] itself is taxed. This ignores [[building]]s, improvements, and personal property. Because of this, LVT is different from other property taxes on [[real estate]] — the combination of land, buildings, and improvements to land. Every jurisdiction that has a real estate property tax has an element of land value tax, because land value contributes to overall property value (Ginsberg 1997).
 
[[Land value taxation]] (LVT) (or site value taxation) is an ''ad valorem'' tax where only the value of [[land (economics)|land]] itself is taxed. This ignores [[building]]s, improvements, and personal property. Because of this, LVT is different from other property taxes on [[real estate]] — the combination of land, buildings, and improvements to land. Every jurisdiction that has a real estate property tax has an element of land value tax, because land value contributes to overall property value (Ginsberg 1997).
  
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In 1879 [[Henry George]] published ''Progress and Poverty''in which he promoted a single tax on land, the "land value tax," based on the unimproved value of the land, namely the value that the land would have in its natural state. His idea was based on [[David Ricardo]]'s theory of [[rent]]. George argued that this tax would be sufficient to support all government programs, thus being the "single tax." The idea was to tax the rent of land and natural opportunities—that is, to recapture rent for public use—rather than to tax [[labor]] and [[capital]]. He noted that generally taxes stifle productive behavior: A tax on income reduces people’s incentive to earn income, a tax on wheat would reduce wheat production, and so on. But a tax on the unimproved value of land is different. The value of land comes from two components, its natural value and the value that is created by improving it (by building on it, for example). Because the value of the unimproved land is unearned, neither the land’s value nor a tax on the land’s value can affect productive behavior (Hooper 2008).
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In 1879 [[Henry George]] published ''Progress and Poverty'' in which he promoted a single tax on land, the "land value tax," based on the unimproved value of the land, namely the value that the land would have in its natural state. His idea was based on [[David Ricardo]]'s theory of [[rent]], and it was not a new idea, having been embraced by many important figures including: [[John Locke]], [[Adam Smith]], [[Thomas Paine]], [[Thomas Jefferson]], and more recently, [[Milton Friedman]].  
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George argued that this tax would be sufficient to support all government programs, thus being the "single tax." The idea was to tax the rent of land and natural opportunities—that is, to recapture rent for public use—rather than to tax [[labor]] and [[capital]]. He noted that generally taxes stifle productive behavior: A tax on income reduces people’s incentive to earn income, a tax on wheat would reduce wheat production, and so on. But a tax on the unimproved value of land is different. The value of land comes from two components, its natural value and the value that is created by improving it (by building on it, for example). Because the value of the unimproved land is unearned, neither the land’s value nor a tax on the land’s value can affect productive behavior (Hooper 2008).
  
 
===Sales tax===
 
===Sales tax===
 
{{Main|Sales tax}}
 
{{Main|Sales tax}}
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A [[sales tax]] is a [[consumption tax]] charged at the [[point of purchase]] for certain [[goods]] and [[services]]. The tax is usually set as a [[percentage]] of the value of the item by the government charging the tax. There is usually a list of [[tax exemption|exemption]]s. The tax can be included in the price ([[tax-inclusive]]) or added at the point of sale ([[tax-exclusive]]).
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A [[sales tax]] is a [[consumption tax]] charged at the [[point of purchase]] for certain [[goods]] and [[services]]. The tax is set as a [[percentage]] of the value of the item by the government charging the tax. There is usually a list of [[tax exemption|exemption]]s. The tax can be included in the price ([[tax-inclusive]]) or added at the point of sale ([[tax-exclusive]]).
  
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Most sales taxes are collected by the seller, who pays the tax over to the government which charges the tax. The economic burden of the tax usually falls on the purchaser, but in some circumstances may fall on the seller. Sales taxes are commonly charged on sales of goods, but sales taxes may also be charged on sales of services.  
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Types of sales tax include:
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*Seller or Vendor Taxes: Percentage added to each sale; vendors sell to both, manufacturers and consumers
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*Consumer Excise Tax: Commonly included in the price of a product, such as cigarettes or alcohol, as well as in the price of an activity, often gambling; mostly specific tax, rarely ''ad valorem'')
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*Retail Transaction Taxes: Imposed on the retail sale transaction itself, with the primary liability for paying the tax falling upon both the sellers and the purchasers. Sellers are responsible for collecting and paying the tax, and purchasers are responsible for paying the tax that the sellers must collect and pay. In essence, this type of sales tax is a hybrid of the other two types. Operationally, however, it's closer to a consumer excise tax because sellers are not given the option to absorb the tax.
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*Value-Added Taxes (see below for details)
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Most sales taxes are collected by the seller, who pays the tax over to the government. The economic burden of the tax usually falls on the purchaser, but in some circumstances may fall on the seller. Sales taxes are commonly charged on sales of goods, but sales taxes may also be charged on sales of services.  
  
 
Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged exactly once on any one item, and is simple to calculate and simple to collect. A conventional or retail sales tax attempts to achieve this by charging the tax only on the final end user, unlike a [[gross receipts tax]] levied on the intermediate [[business]] who purchases materials for production or ordinary operating expenses prior to delivering a service or product to the marketplace. This prevents so-called tax "cascading" or "pyramiding," in which an item is taxed more than once as it makes its way from production to final retail sale.
 
Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged exactly once on any one item, and is simple to calculate and simple to collect. A conventional or retail sales tax attempts to achieve this by charging the tax only on the final end user, unlike a [[gross receipts tax]] levied on the intermediate [[business]] who purchases materials for production or ordinary operating expenses prior to delivering a service or product to the marketplace. This prevents so-called tax "cascading" or "pyramiding," in which an item is taxed more than once as it makes its way from production to final retail sale.
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The [[Value Added Tax]] (VAT) is a form of [[consumption tax]] that taxes all business profit and labor. It was invented in 1954 by French economist, [[Maurice Lauré]], joint director of the French tax authority. By the end of the twentieth century it had been adopted throughout the [[European Union]] and in many countries in Africa, Asia, and South America. Notably, the United States did not follow suit.
 
The [[Value Added Tax]] (VAT) is a form of [[consumption tax]] that taxes all business profit and labor. It was invented in 1954 by French economist, [[Maurice Lauré]], joint director of the French tax authority. By the end of the twentieth century it had been adopted throughout the [[European Union]] and in many countries in Africa, Asia, and South America. Notably, the United States did not follow suit.
  
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The tax is levied on the value added to the product at each stage of its manufacturing cycle as well as the price paid by the final consumer. Commonly, the seller at each stage subtracts the sum of taxes paid on items purchased from the sum of taxes collected on items sold; the net tax liability is the difference between tax collected and tax paid. The cost of materials, subcomponents, tools, equipment, facilities, supplies, and so forth, and any services purchased from other businesses, are not retaxed under the VAT. Those purchases would have already been subjected to the VAT by the supplying businesses.
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VAT is an indirect tax because the retailer is responsible for paying the tax, though the consumer will pay higher prices. VAT is different from [[sales tax]] in that VAT is charged to the consumer only on the value added by the retailer. The tax is levied on the value added to the product at each stage of its manufacturing cycle as well as the price paid by the final consumer. Commonly, the seller at each stage subtracts the sum of taxes paid on items purchased from the sum of taxes collected on items sold; the net tax liability is the difference between tax collected and tax paid.
  
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The burden of VAT, like other consumption taxes, tends to be passed on to the consumer. Additionally, since this is a [[regressive tax]], lower income people have the greatest burden. To offset this, necessities are often taxed at a lower rate than luxury items. Advocates of the VAT contend that it is an efficient method of raising revenue, and would permit concomitant reductions in income tax. Opponents argue that, as a regressive tax, it puts too much burden on those who are least able to afford it.
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So, for instance, if the cost is $10, and the selling price is $25, the retailer is only responsible for paying VAT on the extra $15. The manufacturer is also due to pay VAT on the value added by their stage of production. The tax is levied on the value added to the product at each stage of its manufacturing cycle as well as the price paid by the final consumer. The cost of materials, subcomponents, tools, equipment, facilities, supplies, and so forth, and any services purchased from other businesses, are not retaxed under the VAT. Those purchases would have already been subjected to the VAT by the supplying businesses.
  
 
==Positive and negative aspects==
 
==Positive and negative aspects==
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Let us start with Henry George’s single tax theory. George was right that other taxes may have stronger disincentives, but economists now recognize that the single land tax is not innocent, either. Site values are created, not intrinsic. Why else would land in [[Tokyo]] be worth so much more than land in [[Mississippi]]? A tax on the value of a site is really a tax on productive potential, which is a result of improvements to land in the area. Henry George’s proposed tax on one piece of land is, in effect, based on the improvements made to the neighboring land (Hooper 2008).
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Let us start with [[Land value tax]]. As there is a belief that markets generally allocate resources efficiently, the best tax is one which creates the least distortion of market incentives. A tax on the value of land meets this criterion. Furthermore, the benefits of local government services will be reflected in the value of land within the locality. Therefore, it may be deemed fair that landowners pay taxes to finance these services in proportion to the value of the benefits they receive. [[Henry George]] was right that other taxes may have stronger disincentives, but economists now recognize that the single land tax is not innocent, either. Site values are created, not intrinsic. Why else would land in [[Tokyo]] be worth so much more than land in [[Mississippi]]? A tax on the value of a site is really a tax on productive potential, which is a result of improvements to land in the area. Henry George’s proposed tax on one piece of land is, in effect, based on the improvements made to the neighboring land (Hooper 2008).  
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The collection of land rent for public revenue reconciles the individual and the community. The community and its government no longer intrude into the individual’s private life and stifle his or her pursuit of economic well being. The tax on land value is not a tax in substance, but only in the form of payments to government. In substance, the payment is a sharing of the benefits provided by community and nature, and a payment for the services that generate the value of the land. If this payment is not made by the landholder, the services become a subsidy, producing a value not returned to the community.
 
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The public collection of land rent can induce an efficient use of land. Land value taxation gives land a “carrying cost,” inducing title holders to put their land to its most productive current use, rather than hold it awaiting higher prices. With the price of land thus kept low, banks would lend for productive investments rather than to buy land (Foldvary 2006).
 
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Finally, [[William Vickrey]] believed that "removing almost all business taxes, including property taxes on improvements, excepting only taxes reflecting the marginal social cost of public services rendered to specific activities, and replacing them with takes on site values, would substantially improve the economic efficiency of the jurisdiction." (Vickrey 1996) Thus, he had been well aware of the famous ''Rothbards’ axiom'' that  the conventional criteria of justice in taxation are invalid (Rothbard 2004).
 
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NOTE: '''''Rothbards’ axiom''''' in a nutshell,  has made it clear that the only possible objective criterion for the just price is the market price. For the market price is, at every moment, determined by the voluntary, mutually agreed-upon actions of all the participants in the market. The "just price" was thus, to certain extend,  abandoned in favour of the market price. “…''But…can the "just tax" be abandoned in favour of the market tax? Clearly not, for on the market there is no taxation, and therefore no tax can be established that will duplicate market patterns….. there is no such thing as a "neutral tax" — a tax that will leave the market free and undisturbed — just as there is no such thing as neutral money…''.”( Rothbard 2004).
 
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Secondly, Murray Rothbard (Rothbard 2004) and Hans Hoppe (Hoppe 2001, 13) made an excellent case that a free-market society can operate without a government. Hoppe contrasts the theoretical model of unrestrained democracy with that of absolutism. He claims that an absolute monarchy gives the king property rights over the entire country: he owns everything. Since he has an interest in keeping the value of the property up, he and his staff will be forward-thinking, and pass policies that will not wreck the economy because he will suffer as a result of this. He mentions that the first French kings considered themselves to be in debt to the people for justice (Hoppe 2001, 20), and finally he claims that: “In a regime of universal suffrage, combined with the fact that some people earn more than others and that the ability to acquire real riches is confined to a small minority, it's only a matter of time before the general public figures out that they can use the franchise to take the wealth out of the rich people's pocket. This makes the political exploitation worse because under democracy, there's no authorities above the fray that the target can run to for protection”(Hoppe 2001).
 
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Thirdly, for those who believe markets generally allocate resources efficiently, the best tax is one which creates the least distortion of market incentives. A tax on the value of land meets this criterion. Furthermore, the benefits of local government services will be reflected in the value of land within the locality. Therefore, it may be deemed fair that landowners pay taxes to finance these services in proportion to the value of the benefits they receive. Although Henry George advocated a tax on land values as the "single tax" to replace all other taxes, a tax on land value seems especially appropriate for municipal governments. If a complete shift from the current property tax to a tax on land value alone seems too radical, municipal governments might reduce the property tax rate on improvements while imposing a higher tax rate on the value of land. But that’s not Henry George any more.
 
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And finally, let us  hear [[Jean-Baptiste Say]], who contributed considerably more to economics than [[Say's Law]]. Say was under no illusion that taxation is voluntary nor that government spending contributes productive services to the economy. Say pointed out that, in taxation:
 
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“……''The government exacts from a taxpayer the payment of a given tax in the shape of money. To meet this demand, the taxpayer exchanges part of the products at his disposal for coin, which he pays to the tax-gatherers''……” (Say 1880).
 
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Eventually, the government spends the money on its own needs, so that in the end
 
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“. . . ''this value is consumed; and then the portion of wealth, which passes from the hands of the taxpayer into those of the tax-gatherer, is destroyed and annihilated''….” (Say 1880).
 
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Note, that as is the case with many later economists, such as Murray Rothbard, Say sees that taxation creates two conflicting classes, the taxpayers and the tax-gatherers:
 
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“……''Were it not for taxes, the taxpayer would have spent his money on his own consumption. As it is, the state. . enjoys the satisfaction resulting from that consumption''…..” (Say 1880).
 
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Taxation, then, for Say is the transfer of a portion of the national products from the hands of individuals to those of the government, for the purpose of meeting the public consumption of expenditure:
 
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“……..''It is virtually a burthen imposed upon individuals, either in a separate or corporate character, by the ruling power... for the purpose of supplying the consumption it may think proper to make at their expense…..” (Say 1880, 446).
 
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But taxation, for Say, is not merely a zero-sum game. By levying a burden on the producers, he points out, "taxes, over time, cripple production itself''."
 
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“……''Taxation deprives the producer of a product, which he would otherwise have the option of deriving a personal gratification from, if consumed... or of turning to profit, if he preferred to devote it to an useful employment... Therefore, the subtraction of a product must needs diminish, instead of augmenting, productive power''…..” (Say 1880, 447).
 
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J. B. Say's policy recommendation was crystal clear and consistent with his analysis and that of various comments on VAT:
 
  
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Rothbard (2004) argued that there is no such thing as a "neutral tax" — a tax that will leave the market free and undisturbed. [[Consumption tax]]es, such as [[sales tax]] and [[VAT]], are [[regressive tax|regressive]], with the result that lower income people have the greatest burden. To offset this, necessities are often taxed at a lower rate than luxury items. Advocates of such taxes contend that it is an efficient method of raising revenue, and would permit concomitant reductions in [[income tax]]. Opponents argue that, as a regressive tax, it puts too much burden on those who are least able to afford it. On the other hand, when the burden of taxation is placed on the producers, a the French economist, [[Jean-Baptiste Say]], has pointed out: "taxes, over time, cripple production itself." (Say 1880, 447).
  
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".....The best scheme of [public] finance is, to spend as little as possible; and the best tax is always the lightest..." (Say 1880)
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Nevertheless, given that some form of taxation is necessary—to finance government and government run programs which exist to benefit society—such taxation should be fair and efficient. As the above discussion has revealed, ''ad valorem'' taxes tend to be relatively high on efficiency, being hard to avoid and easy to collect, but there are issues of fairness, such as the regressive nature of consumption taxes and the issue of how to place a value on land.  
  
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Amen.
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As Say (1880) noted, "the best scheme of [public] finance is, to spend as little as possible; and the best tax is always the lightest." The challenge, therefore, is to ensure that ''ad valorem'' taxes cause the least possible damage to society as a whole, or at least are less damaging than alternative forms of taxation such as [[income tax]].
  
 
==References==
 
==References==
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*Au, C.C. and J.V. Henderson, “How migration restrictions limit agglomeration and productivity in China,” ''Journal of Development Economics'' 80, 2006, pp.350-388.
 
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*Arnott, R.J. “Does the Henry George Theorem provide a practical guide to optimal city size?,” ''American Journal of Economics and Sociology'' 63, 2004, pp.1057-1090.
 
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*Bahl, Roy, “Land Taxes Versus Property Taxes in Developing and Transition Countries,” in Dick Netzer, ''Land Value Taxation: Can it and will it work today?,.:'' Lincoln Institute of  Land Policy, Cambridge, Mass.,1998, p. 144.
 
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*Bickley, James “A Value-Added Tax Contrasted with a National Sales Tax,” Congressional Research Service, March 23, 2005
 
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*Bird, Richard and Enid Slack, ''Urban Public Finance in Canada'', 2nd edition, Wiley, Toronto, 1993
 
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*Engen, Eric M. and Jonathan Skinner, “Fiscal Policy and Economic Growth,” National Bureau of Economic Research Working Paper No. 4223, 1992.
 
 
*Fisher, Glenn W. 2002. [https://eh.net/encyclopedia/history-of-property-taxes-in-the-united-states/ "History of Property Taxes in the United States"] ''EH.Net Encyclopedia'', edited by Robert Whaples. Retrieved October 21, 2016.
 
*Fisher, Glenn W. 2002. [https://eh.net/encyclopedia/history-of-property-taxes-in-the-united-states/ "History of Property Taxes in the United States"] ''EH.Net Encyclopedia'', edited by Robert Whaples. Retrieved October 21, 2016.
 
*Foldvary Fred E. 2006. [http://foldvary.net/works/policystudy.pdf "The Ultimate Tax Reform: Public Revenue from Land Rent"] ''CSI Policy Study'', Civil Society Institute, Santa Clara University. Retrieved October 28, 2016.
 
*Foldvary Fred E. 2006. [http://foldvary.net/works/policystudy.pdf "The Ultimate Tax Reform: Public Revenue from Land Rent"] ''CSI Policy Study'', Civil Society Institute, Santa Clara University. Retrieved October 28, 2016.
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*Genetski, Robert J., Debra J. Bredael, and Brian S. Wesbury, “The Impact of a Value-Added Tax on the U.S. Economy,” ''Stotler Economics'', December 1988.
 
 
*George, Henry. [1879] 1997. ''Progress and Poverty''. Robert Schalkenbach Foundation. ISBN 978-0911312584
 
*George, Henry. [1879] 1997. ''Progress and Poverty''. Robert Schalkenbach Foundation. ISBN 978-0911312584
 
*Ginsberg, Steven. 1997. [https://www.thefreelibrary.com/Two+cheers+for+the+property+tax%3A+everyone+hates+it,+but+the+property...-a019898072 Two cheers for the property tax: everyone hates it, but the property tax has some good attributes that make it indispensible], ''Washington Monthly'',  October, 1997. Retrieved October 21, 2016.
 
*Ginsberg, Steven. 1997. [https://www.thefreelibrary.com/Two+cheers+for+the+property+tax%3A+everyone+hates+it,+but+the+property...-a019898072 Two cheers for the property tax: everyone hates it, but the property tax has some good attributes that make it indispensible], ''Washington Monthly'',  October, 1997. Retrieved October 21, 2016.
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*Grier, Kevin B. and Gordon Tullock, “An Empirical Analysis of Cross-National Economic Growth, 1951–80,” ''Journal of Monetary Economics'', Vol. 24, No. 2 (September 1989), pp. 259–276.
 
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*Guseh, James S. 1997. Government Size and Economic Growth in Developing Countries: A Political-Economy Framework. ''Journal of Macroeconomics'' 19(1):175–192.
 
 
*Hooper, Charles L. 2008. [http://www.econlib.org/library/Enc/bios/George.html Henry George (1839-1897)] ''The Concise Encyclopedia of Economics''. Retrieved October 28, 2016.
 
*Hooper, Charles L. 2008. [http://www.econlib.org/library/Enc/bios/George.html Henry George (1839-1897)] ''The Concise Encyclopedia of Economics''. Retrieved October 28, 2016.
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*Hoppe, Hans-Hermann, Democracy—the god that failed, 2001, ISBN 0765808684 
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*Kitchen, Harry. 2003. “Local Taxation in Selected Countries: A Comparative Examination.” Prepared for: The Consortium for Economic Policy Research and Advice, Association of Universities and Colleges of Canada.
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*Kanemoto, Y., T. Ohkawara, and T. Suzuki, “Agglomeration economies and a test for optimal city sizes in Japan,” ''Journal of the Japanese and International Economies'' 10, 1996: 379-398.
 
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*Kitchen, Harry. “Local Taxation in Selected Countries: A Comparative Examination,” a paper prepared for CEPRA II, part C, 2003
 
 
*Netzer, Dick. 1993. "Property Taxes: Their Past, Present, and Future Place in Government Finance," in ''Urban Finance Under Siege'', Thomas R. Swartz and Frank J. Bonello (eds.), Routledge, 51-78.
 
*Netzer, Dick. 1993. "Property Taxes: Their Past, Present, and Future Place in Government Finance," in ''Urban Finance Under Siege'', Thomas R. Swartz and Frank J. Bonello (eds.), Routledge, 51-78.
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*Oates, Wallace E., and Robert M. Schwab, “The impact of Urban Land Taxation: The Pittsburgh Experience” ''The National Tax Journal'', vol.L, no. 1, 1997, pp. 1-21.
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*Rothbard, Murray. 2004. ''Man, Economy, and State'', Scholar's Edition. Auburn, AL: The Ludwig von Mises Institute. ISBN 978-0945466307
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*Oncken, Auguste (ed.). ''Oeuvres Economiques et Philosophiques de F. Quesnay'' , Joseph Baer, Paris, 1888, p. 331
 
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*Rothbard, Murray, ''Man, Economy, and State'', The Ludwig von Mises Institute, Scholar's Edition, Auburn, Alabama, 2004
 
 
*Rothbard, Murray. 1977. ''Power and Market: Government and the Economy''. Kansas City, KS: Sheed Andrews & McMeel. ISBN 0836207505
 
*Rothbard, Murray. 1977. ''Power and Market: Government and the Economy''. Kansas City, KS: Sheed Andrews & McMeel. ISBN 0836207505
 
*Say, Jean-Baptiste. [1880] 2007. A Treatise on Political Economy, 6th ed. Cosimo Classics. ISBN 978-1602061910
 
*Say, Jean-Baptiste. [1880] 2007. A Treatise on Political Economy, 6th ed. Cosimo Classics. ISBN 978-1602061910
 
*Schlatter, Richard. 1973. ''Private Property: The History of an Idea''. Russell & Russell. ISBN 978-0846216971  
 
*Schlatter, Richard. 1973. ''Private Property: The History of an Idea''. Russell & Russell. ISBN 978-0846216971  
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*Stiglitz, Joseph. "[http://www.wealthandwant.com/docs/Stiglitz_Oct02_interview.htm Joseph Stiglitz: October 2002 Interview,]" with Christopher Williams, of the Robert Schalkenbach Foundation, ''Geophilos'', Spring, 2003. Retrieved October 21, 2016.   
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*Stiglitz, Joseph. "[http://www.wealthandwant.com/docs/Stiglitz_Oct02_interview.htm Joseph Stiglitz: October 2002 Interview,]" with Christopher Williams, of the Robert Schalkenbach Foundation, ''Geophilos'', Spring, 2003. Retrieved October 21, 2016.   
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*Swartz, Thomas R., and Frank J. Bonello (eds.). Routledge, 1993. ISBN 978-1563242250
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*Swartz, Thomas R., and Frank J. Bonello (eds.). 1993. Routledge. ISBN 978-1563242250
 
*Vickrey, William. 1996. "The Corporate Income Tax in the U.S. Tax System,” ''Tax Notes'' 73, 597, 603.
 
*Vickrey, William. 1996. "The Corporate Income Tax in the U.S. Tax System,” ''Tax Notes'' 73, 597, 603.
  
 
==External links==
 
==External links==
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*[http://www.investopedia.com/terms/a/advaloremtax.asp Ad Valorem Tax]
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*[http://www.investopedia.com/terms/a/advaloremtax.asp Ad Valorem Tax] Investopedia
  
 
[[Category:Politics and social sciences]]
 
[[Category:Politics and social sciences]]
 
[[Category:Economics]]
 
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Latest revision as of 05:44, 15 June 2023

Taxation
Assorted United States coins.jpg
Types of Tax
Ad valorem tax ·  Consumption tax
Corporate tax ·  Excise
Gift tax ·  Income tax
Inheritance tax ·  Land value tax
Luxury tax ·  Poll tax
Property tax ·  Sales tax
Tariff ·  Value added tax
Tax incidence
Flat tax ·  Progressive tax
Regressive tax ·  Tax haven
Tax rate

An ad valorem tax (Latin for "according to value") is a tax based on the value of a transaction or of property, which may be real estate or personal property. An ad valorem tax is levied as a percentage of the value of the item it is imposed on, and not on the item's quantity, size, weight, or any other such factor. This can be contrasted with direct taxes, such as excise tax, which charges a fixed rate for each unit of goods produced (for example the specific tax on gasoline or tobacco).

An ad valorem tax is typically assessed when property is purchased, in the form of a sales tax or value added tax (VAT), although it may be levied later on a set basis, such as once a year or once a quarter. Ad valorem taxes can also be assessed on estates, imports in the form of tariffs, and in other circumstances where property of value changes hands, such as inheritance tax. It may also be charged on land alone, known as land value tax.

Types of Ad Valorem taxes

Ad valorem taxes can be based on ownership of a real asset, such as property taxes, or they can be "transactional taxes," such as sales taxes. While property taxes are determined and levied annually, transactional taxes are levied only at the time of a transaction.

Property tax

Main article: Property tax

Ad valorem property taxes are levied on real or personal property by local government units including counties, municipalities, school districts, and special taxing districts. Real estate, real property, or realty are all terms for the combination of land and improvements. Ad valorem property taxes are typically a major, if not the major, revenue source for both state and municipal governments. Municipal ad valorem property taxes are commonly referred to as simply "property taxes."

An owner of real estate or other property pays this tax on the value of the property. The revenue is used by the local governments in developed countries to supply public services which range from those that exhibit mainly private goods characteristics, such as water, sewers, solid waste collection and disposal, public transit, public recreation, to those that exhibit mainly public goods characteristics, including local streets and roads, street lighting, fire and police protection, neighborhood parks, and so forth (Kitchen 2003).

As ad valorem means a tax on goods or property expressed as a percentage of the sales price or assessed value, these are in the domain of assessed values (as it is the only way to get an estimate of the “sales price.”) There are three species or types of property:

  • Land,
  • Improvements to Land (immovable man made things), and
  • Personal property (movable man made things).

The taxing authority requires and/or performs an appraisal of the monetary value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions. Generally, ad valorem taxes are computed as a percentage of the assessed value of the property being taxed.

The assessed value of property generally means the annual determination of fair market value. "Fair market value" is usually defined as the price that a willing buyer would pay and a willing seller would accept for property, neither being under any compulsion to buy or to sell. It is also defined as the price at which property would change hands between a willing buyer and a willing seller when both have reasonable knowledge of all the facts necessary and neither is required to buy or sell. Most taxing authorities require periodic inspections of the subject property as part of the valuation process and establish appraisal criteria to determine fair market value.

However, there is no uniform tax base that applies everywhere. In some countries, the property tax is based on property value as determined by:

  • market value,
  • site value, and/or
  • rental value.

In other countries, the tax is based on building area and property area - this is referred to as unit value. A mix of these approaches may also be employed.

Land Value Tax

Main article: Land value tax

Land value taxation (LVT) (or site value taxation) is an ad valorem tax where only the value of land itself is taxed. This ignores buildings, improvements, and personal property. Because of this, LVT is different from other property taxes on real estate — the combination of land, buildings, and improvements to land. Every jurisdiction that has a real estate property tax has an element of land value tax, because land value contributes to overall property value (Ginsberg 1997).

In 1879 Henry George published Progress and Poverty in which he promoted a single tax on land, the "land value tax," based on the unimproved value of the land, namely the value that the land would have in its natural state. His idea was based on David Ricardo's theory of rent, and it was not a new idea, having been embraced by many important figures including: John Locke, Adam Smith, Thomas Paine, Thomas Jefferson, and more recently, Milton Friedman.

George argued that this tax would be sufficient to support all government programs, thus being the "single tax." The idea was to tax the rent of land and natural opportunities—that is, to recapture rent for public use—rather than to tax labor and capital. He noted that generally taxes stifle productive behavior: A tax on income reduces people’s incentive to earn income, a tax on wheat would reduce wheat production, and so on. But a tax on the unimproved value of land is different. The value of land comes from two components, its natural value and the value that is created by improving it (by building on it, for example). Because the value of the unimproved land is unearned, neither the land’s value nor a tax on the land’s value can affect productive behavior (Hooper 2008).

Sales tax

Main article: Sales tax

A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is set as a percentage of the value of the item by the government charging the tax. There is usually a list of exemptions. The tax can be included in the price (tax-inclusive) or added at the point of sale (tax-exclusive).

Types of sales tax include:

  • Seller or Vendor Taxes: Percentage added to each sale; vendors sell to both, manufacturers and consumers
  • Consumer Excise Tax: Commonly included in the price of a product, such as cigarettes or alcohol, as well as in the price of an activity, often gambling; mostly specific tax, rarely ad valorem)
  • Retail Transaction Taxes: Imposed on the retail sale transaction itself, with the primary liability for paying the tax falling upon both the sellers and the purchasers. Sellers are responsible for collecting and paying the tax, and purchasers are responsible for paying the tax that the sellers must collect and pay. In essence, this type of sales tax is a hybrid of the other two types. Operationally, however, it's closer to a consumer excise tax because sellers are not given the option to absorb the tax.
  • Value-Added Taxes (see below for details)

Most sales taxes are collected by the seller, who pays the tax over to the government. The economic burden of the tax usually falls on the purchaser, but in some circumstances may fall on the seller. Sales taxes are commonly charged on sales of goods, but sales taxes may also be charged on sales of services.

Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged exactly once on any one item, and is simple to calculate and simple to collect. A conventional or retail sales tax attempts to achieve this by charging the tax only on the final end user, unlike a gross receipts tax levied on the intermediate business who purchases materials for production or ordinary operating expenses prior to delivering a service or product to the marketplace. This prevents so-called tax "cascading" or "pyramiding," in which an item is taxed more than once as it makes its way from production to final retail sale.

Value-added tax (VAT)

Main article: Value-added tax

The Value Added Tax (VAT) is a form of consumption tax that taxes all business profit and labor. It was invented in 1954 by French economist, Maurice Lauré, joint director of the French tax authority. By the end of the twentieth century it had been adopted throughout the European Union and in many countries in Africa, Asia, and South America. Notably, the United States did not follow suit.

VAT is an indirect tax because the retailer is responsible for paying the tax, though the consumer will pay higher prices. VAT is different from sales tax in that VAT is charged to the consumer only on the value added by the retailer. The tax is levied on the value added to the product at each stage of its manufacturing cycle as well as the price paid by the final consumer. Commonly, the seller at each stage subtracts the sum of taxes paid on items purchased from the sum of taxes collected on items sold; the net tax liability is the difference between tax collected and tax paid.

So, for instance, if the cost is $10, and the selling price is $25, the retailer is only responsible for paying VAT on the extra $15. The manufacturer is also due to pay VAT on the value added by their stage of production. The tax is levied on the value added to the product at each stage of its manufacturing cycle as well as the price paid by the final consumer. The cost of materials, subcomponents, tools, equipment, facilities, supplies, and so forth, and any services purchased from other businesses, are not retaxed under the VAT. Those purchases would have already been subjected to the VAT by the supplying businesses.

Positive and negative aspects

Let us start with Land value tax. As there is a belief that markets generally allocate resources efficiently, the best tax is one which creates the least distortion of market incentives. A tax on the value of land meets this criterion. Furthermore, the benefits of local government services will be reflected in the value of land within the locality. Therefore, it may be deemed fair that landowners pay taxes to finance these services in proportion to the value of the benefits they receive. Henry George was right that other taxes may have stronger disincentives, but economists now recognize that the single land tax is not innocent, either. Site values are created, not intrinsic. Why else would land in Tokyo be worth so much more than land in Mississippi? A tax on the value of a site is really a tax on productive potential, which is a result of improvements to land in the area. Henry George’s proposed tax on one piece of land is, in effect, based on the improvements made to the neighboring land (Hooper 2008).

Rothbard (2004) argued that there is no such thing as a "neutral tax" — a tax that will leave the market free and undisturbed. Consumption taxes, such as sales tax and VAT, are regressive, with the result that lower income people have the greatest burden. To offset this, necessities are often taxed at a lower rate than luxury items. Advocates of such taxes contend that it is an efficient method of raising revenue, and would permit concomitant reductions in income tax. Opponents argue that, as a regressive tax, it puts too much burden on those who are least able to afford it. On the other hand, when the burden of taxation is placed on the producers, a the French economist, Jean-Baptiste Say, has pointed out: "taxes, over time, cripple production itself." (Say 1880, 447).

Nevertheless, given that some form of taxation is necessary—to finance government and government run programs which exist to benefit society—such taxation should be fair and efficient. As the above discussion has revealed, ad valorem taxes tend to be relatively high on efficiency, being hard to avoid and easy to collect, but there are issues of fairness, such as the regressive nature of consumption taxes and the issue of how to place a value on land.

As Say (1880) noted, "the best scheme of [public] finance is, to spend as little as possible; and the best tax is always the lightest." The challenge, therefore, is to ensure that ad valorem taxes cause the least possible damage to society as a whole, or at least are less damaging than alternative forms of taxation such as income tax.

References
ISBN links support NWE through referral fees

  • Fisher, Glenn W. 2002. "History of Property Taxes in the United States" EH.Net Encyclopedia, edited by Robert Whaples. Retrieved October 21, 2016.
  • Foldvary Fred E. 2006. "The Ultimate Tax Reform: Public Revenue from Land Rent" CSI Policy Study, Civil Society Institute, Santa Clara University. Retrieved October 28, 2016.
  • George, Henry. [1879] 1997. Progress and Poverty. Robert Schalkenbach Foundation. ISBN 978-0911312584
  • Ginsberg, Steven. 1997. Two cheers for the property tax: everyone hates it, but the property tax has some good attributes that make it indispensible, Washington Monthly, October, 1997. Retrieved October 21, 2016.
  • Hooper, Charles L. 2008. Henry George (1839-1897) The Concise Encyclopedia of Economics. Retrieved October 28, 2016.
  • Kitchen, Harry. 2003. “Local Taxation in Selected Countries: A Comparative Examination.” Prepared for: The Consortium for Economic Policy Research and Advice, Association of Universities and Colleges of Canada.
  • Netzer, Dick. 1993. "Property Taxes: Their Past, Present, and Future Place in Government Finance," in Urban Finance Under Siege, Thomas R. Swartz and Frank J. Bonello (eds.), Routledge, 51-78.
  • Rothbard, Murray. 2004. Man, Economy, and State, Scholar's Edition. Auburn, AL: The Ludwig von Mises Institute. ISBN 978-0945466307
  • Rothbard, Murray. 1977. Power and Market: Government and the Economy. Kansas City, KS: Sheed Andrews & McMeel. ISBN 0836207505
  • Say, Jean-Baptiste. [1880] 2007. A Treatise on Political Economy, 6th ed. Cosimo Classics. ISBN 978-1602061910
  • Schlatter, Richard. 1973. Private Property: The History of an Idea. Russell & Russell. ISBN 978-0846216971
  • Stiglitz, Joseph. "Joseph Stiglitz: October 2002 Interview," with Christopher Williams, of the Robert Schalkenbach Foundation, Geophilos, Spring, 2003. Retrieved October 21, 2016.
  • Swartz, Thomas R., and Frank J. Bonello (eds.). 1993. Routledge. ISBN 978-1563242250
  • Vickrey, William. 1996. "The Corporate Income Tax in the U.S. Tax System,” Tax Notes 73, 597, 603.

External links

All links retrieved June 15, 2023.

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