Named after economist Arnold Harberger, Harberger taxation introduces a scheme in which the owner of a good pays a continuous tax based on the self-assessed value of that good, and at any time, someone else can buy the good from the owner at the taxed price.
If the owner tries to lower their tax burden by publicly undervaluing the asset relative to their true value, they risk losing the asset to another buyer. Posner and Glen Weyl point out that the scheme dampens monopoly power over property because an owner who tries to “hold out” for a high sale price must pay taxes on the high price while they wait.
The downside of this model is that owners have less incentive to invest in their property to increase its value. Imagine that you buy a house where you intend to reside indefinitely, and you remodel the kitchen, increasing its effective worth by $50k. Now you have to pay taxes on that marginal $50k indefinitely, even though you don’t intend to sell.
The rate of the tax moderates the balance between “allocative efficiency” (i.e. buyers can purchase a good when they value it more than a seller) and “investment efficiency” (i.e. increases in values to both buyer and seller are captured by seller).
Q. What is investment efficency?
A. A seller captures the increases in value to an asset (as agreed upon by both seller and buyer)
Q. What is allocation efficiency?
A. A buyer can purchase a good when they value it more than a seller.
Q. Why does high Harberger taxation discourage investment in property?
A. A seller pays taxes on improvements they make to the property, lowering investment efficiency.
Q. Why do traditional property markets discourage allocation efficiency?
A. Sellers have asymmetric power, can cheaply “hold out” for high prices from buyers.
Q. In Harberger taxation, where does the price basis for the tax come from?
A. Self-assessed by seller, a price at which they’d agree to sell the good
Posner, E. A., & Weyl, E. G. (2017). Property Is Only Another Name for Monopoly. Journal of Legal Analysis, 9(1), 51–123. https://doi.org/10.1093/jla/lax001
Posner, E. A., & Weyl, E. G. (2018). Radical Markets: Uprooting Capitalism and Democracy for a Just Society. Princeton University Press.