Nic Tideman:   The Case for Taxing Land

Both for reasons of social justice and for reasons of economic efficiency, site value rating deserves a continued place in the programme of the Liberal Party.

The case for site value rating in terms of social justice is founded on two understandings: first, that the value of land in the absence of economic development is the common heritage of humanity, and second, that increases in the rental value of land arising from economic development and government expenditures should be collected by governments to finance those activities. What is meant by "land" is the unimproved value of sites and the value of extractable natural resources such as North Sea oil.

While there may someday be institutions capable of implementing a recognition of land as the heritage of all humanity on a worldwide basis, in the absence of such institutions each nation should implement a recognition that land within its boundaries is the common heritage of its citizens. This is accomplished not by making the nation a gigantic Common or by instituting government management of all land, but rather by requiring all persons and corporations that are granted the use of land to pay a fee or tax equal to what the rental value of the land they control would be if it were in an unimproved condition.

The case for site value rating in terms of economic efficiency is founded on the fact that a tax on resources that are not produced by human effort is one of the few sources of government revenue that does not reduce incentives for people to be productive. Two other revenue sources that have this virtue are taxes on other government-granted privileges such as exclusive use of radio frequencies and taxes on activities with harmful consequences, such as polluting the air. An economy will be more efficient if revenue sources that do not diminish productivity are employed to the greatest possible extent before any use is made of taxes that impede productivity.

What makes a tax efficient is that the amount of tax that is due cannot be reduced by reducing productive activities. When incomes are taxed, people can reduce the amount of taxes owed by working less. They do so, and the productivity of the economy falls. When houses are taxed, people can reduce the amount of taxes owed by building fewer house and smaller houses. They do so, and the housing shortage worsens. But when the unimproved value of land is taxed, there is no resulting diminution in the quantity of land. Thus taxes can be levied on land without diminishing the productivity of an economy. And shifting taxes from other, destructive bases to land will improve the productivity of an economy.

Subsequent sections explain in more detail these social justice and efficiency arguments for site value rating, describe procedures for implementing such a tax system, and explain why a variety of potential objections are without merit. ...

Site value rating embodies the principle that people are allowed to keep what they produce and must pay annually for the value of the naturally occurring and socially created resources they use. This principle can be extended to take account of individual actions that have noticeable effects on the rental value of land surrounding that which individuals use themselves. When land is used in such a way as to raise the rental value of surrounding land, as by providing parking near a commercial center or by providing improvements that are beautiful to see, the person who creates that value should receive it. Correspondingly, when people use land in such a way as to lower the value of surrounding land, by generating noise, noxious smells, air pollution, or unsightly views, they should be charged according to the reduction in the rental value of the surrounding land that results from their activity. The opportunity to be paid for adding to the value of surrounding land will generally make land more valuable. And the requirement to pay for harmful consequences of land use will tend to inhibit such uses of land. ... Read the whole article

Bill Batt: Painless Taxation

Abstract
Real tax reform could do away with those taxes that are resented by the large proportion of our population. We could replace all taxes on wages and on interest by instead taxing economic rent. Rent is windfall income; it is income that arises not from the efforts of any person or corporation; it comes about as a surplus gain from common social enterprise. There is ample moral warrant for society to lay claim to that which it has created, as well as to that which no individual or party has earned. Analysis increasingly makes clear that economic rent in all its forms is far larger than official government figures indicate; in fact it is likely sufficient to supplant all current taxes on labor and capital (wages and interest) which are acknowledged to have so many negative effects. Recovering economic rent in all its manifestations by taxing its various bases actually can foster economic performance and yield other benefits that make it the natural source of revenue for governments. Such a tax is essentially painless. ...

Tax Principles

The starting points should be the lessons that have been learned over the course of the past three hundred and more years about what is a good tax. Most basic textbooks in public finance enumerate them in very clear form, and they constitute benchmarks against which to measure the soundness of any particular tax. They are listed as few as three or as many as eight such principles but little disagreement exists as to their substance, regardless of ideology or government. Most commonly enumerated are neutrality, efficiency, equity, administrability, simplicity, stability, sufficiency.[3] Tax theorists typically measure revenue structures according to any or all of these criteria: ...

Tax efficiency is much like tax neutrality, and is the measure of how much shifting of behavior it imposes, resulting in what is called "excess burden," or "deadweight loss" on the economy. Tax economists usually hold that the best taxes are those that are shifted little if at all. Because the elasticities (a technical word for the slope of supply and demand curves) of each are very different, a tax on land values and a tax on improvement values have very contrastive effects on economic choices. Using a tax base that has little or zero elasticity is the best way of assuring that taxes are not shifted. Zero elasticity is another way of saying fixed supply. ... read the whole article

Fred Foldvary:  The Rent, the Whole Rent, and Nothing but the Rent

If people were concerned only with efficiency, this would be a fine reason to use land value taxation. But people are also concerned with issues of justice, or fairness. And so the question arises of whether taxing land values is fair. The fairness of taxing land values is generally defended on the basis of the postulate that natural opportunities are everyone's common heritage; collecting the value of exclusive use of these opportunities and using the proceeds for public purposes is a way of sharing the value of these opportunities while retaining the efficiency of private control of resources. ... Read the entire article

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894)

4. CONFORMITY TO GENERAL PRINCIPLES OF TAXATION

The single tax conforms most closely to the essential principles of Adam Smith's four classical maxims, which are stated best by Henry George 19 as follows:

The best tax by which public revenues can be raised is evidently that which will closest conform to the following conditions:

1. That it bear as lightly as possible upon production — so as least to check the increase of the general fund from which taxes must be paid and the community maintained. 20
2. That it be easily and cheaply collected, and fall as directly as may be upon the ultimate payers — so as to take from the people as little as possible in addition to what it yields the government. 21
3. That it be certain — so as to give the least opportunity for tyranny or corruption on the part of officials, and the least temptation to law-breaking and evasion on the part of the tax-payers. 22
4. That it bear equally — so as to give no citizen an advantage or put any at a disadvantage, as compared with others. 23

19. "Progress and Poverty," book viii. ch.iii.

20. This is the second part of Adam Smith's fourth maxim. He states it as follows: "Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury in the four following ways: . . . Secondly, it may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes. While it obliges the people to pay, it may thus diminish or perhaps destroy some of the funds which might enable them more easily to do so."

21. This is the first part of Adam Smith's fourth maxim, in which he condemns a tax that takes out of the pockets of the people more than it brings into the public treasury.

22. This is Adam Smith's second maxim. He states it as follows: "The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax gatherer."

23. This is Adam Smith's first maxim. He states it as follows: "The subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities, that is to say, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation."

In changing this Mr. George says ("Progress and Poverty," book viii, ch. iii, subd. 4): "Adam Smith speaks of incomes as enjoyed 'under the protection of the state'; and this is the ground upon which the equal taxation of all species of property is commonly insisted upon — that it is equally protected by the state. The basis of this idea is evidently that the enjoyment of property is made possible by the state — that there is a value created and maintained by the community; which is justly called upon to meet community expenses. Now, of what values is this true? Only of the value of land. This is a value that does not arise until a community is formed, and that, unlike other values, grows with the growth of the community. It only exists as the community exists. Scatter again the largest community, and land, now so valuable, would have no value at all. With every increase of population the value of land rises; with every decrease it falls. This is true of nothing else save of things which, like the ownership of land, are in their nature monopolies."

Adam Smith's third maxim refers only to conveniency of payment, and gives countenance to indirect taxation, which is in conflict with the principle of his fourth maxim. Mr. George properly excludes it.

a. Interference with Production

Indirect taxes tend to check production and cause scarcity, by obstructing the processes of production. They fall upon men as they work, as they do business, as they invest capital productively. 24 But the single tax, which must be paid and be the same in amount regardless of whether the payer works or plays, of whether he invests his capital productively or wastes it, of whether he uses his land for the most productive purposes 25 or in lesser degree or not at all, removes fiscal penalties from industry and thrift, and tends to leave production free. It therefore conforms more closely than indirect taxation to the first maxim quoted above.

24. "Taxation which falls upon the processes of production interposes an artificial obstacle to the creation of wealth. Taxation which falls upon labor as it is exerted, wealth as it is used as capital, land as it is cultivated, will manifestly tend to discourage production much more powerfully than taxation to the same amount levied upon laborers whether they work or play, upon wealth whether used productively or unproductively, or upon land whether cultivated or left waste" — Progress and Poverty, book viii, ch. iii, subd. I.

25. It is common, besides taxing improvements, as fast as they are made, to levy higher taxes upon land when put to its best use than when put to partial use or to no use at all. This is upon the theory that when his land is used the owner gets full income from it and can afford to pay high taxes; but that he gets little or no income when the land is out of use, and so cannot afford to pay much. It is an absurd but perfectly legitimate illustration of the pretentious doctrine of taxation according to ability to pay.

Examples are numerous. Improved building lots, and even those that are only plotted for improvement, are usually taxed more than contiguous unused and unplotted land which is equally in demand for building purposes and equally valuable. So coal land, iron land, oil land, and sugar land are as a rule taxed less as land when opened up for appropriate use than when lying idle or put to inferior uses, though the land value be the same. Any serious proposal to put land to its appropriate use is commonly regarded as a signal for increasing the tax upon it.

b. Cheapness of Collection

Indirect taxes are passed along from first payers to final consumers through many exchanges, accumulating compound profits as they go, until they take enormous sums from the people in addition to what the government receives.26 But the single tax takes nothing from the people in excess of the tax. It therefore conforms more closely than indirect taxation to the second maxim quoted above.

26. "All taxes upon things of unfixed quantity increase prices, and in the course of exchange are shifted from seller to buyer, increasing as they go. If we impose a tax on money loaned, as has been often attempted, the lender will charge the tax to the borrower, and the borrower must pay it or not obtain the loan. If the borrower uses it in his business, he in his turn must get back the tax from his customers, or his business becomes unprofitable. If we impose a tax upon buildings, the users of buildings must finally pay it, for the erection of buildings will cease until building rents become high enough to pay the regular profit and the tax besides. If we impose a tax upon manufactures or imported goods, the manufacturer or importer will charge it in a higher price to the jobber, the jobber to the retailer. and the retailer to the consumer. Now, the consumer, on whom the tax thus ultimately falls, must not only pay the amount of the tax, but also a profit on this amount to everyone who has thus advanced it — for profit on the capital he has advanced in paying taxes is as much required by each dealer as profit on the capital he has advanced in paying for goods." — Progress and Poverty, book viii, ch. iii, subd. 2.

... read the book

Bill Batt: Who Says Cities are Poor? They Just Don't Know How to Tax Their Wealth!

The Perfect Tax

In the final analysis, a tax should be evaluated according to the tenets of sound tax theory that have evolved over the course of recent centuries, and much of what has been said above is recaptured by a review of those principles. These measures of what is a "good" tax or a "bad" tax are often listed differently in textbooks, but they are largely agreed upon. Failure to conform to these venerable benchmarks is by itself sufficient cause to explain an economy's faltering — a particularly noteworthy example today is the city of Philadelphia which appears to have done everything backward! It taxes income, sales, building capital and even business privilege, the result being that its fisc is destitute.[20] The principles by which to measure tax design are enumerated here so as to make quite clear how recapturing economic rent in the form of taxes — in all the several forms where 'land' can be identified — constitutes the best method of financing government services and the most advantageous to cities.[21]

The first measure of a good tax is its neutrality. A neutral tax in no way alters the behavior of its partners from what would transpire were there no tax at all. A simple example illustrates the case: today many consumers will travel to alternate jurisdictions to avoid paying a sales tax on particular items, be they food, medication, clothing, or whatever. Taxes fully absorbed ("capitalized") in a market price such as land taxes in no way distort behavior, the volume of transactions, or gross prices. They are neutral.

A tax should also be efficient. To be sure, efficiency has many meanings even in economics. But here, rather than speaking of the administrative efficiency of its collection as will be addressed below, the measure is whether and how much it constitutes an excess burden on the economy, thereby slowing down performance and market vitality. Many taxes, as was mentioned earlier, exert so much drag on market transactions that they are destructive, however much revenue is brought to government coffers. Because land has a fixed supply there is no excess burden at all.

People are frequently most concerned about the fairness of a tax, which is typically measured according to both horizontal and vertical equity. Horizontal equity means that those in similar circumstances will bear similar burdens. Vertical equity prescribes that those with greater resources will pay more. Although studies have yet to show this, land taxes are likely the most "progressive" of any levy, as tenants bear no passed-through burden at all.[22] Not only does no household or office tenant bear any tax burden, locational sites distant from the urban core, mostly homeowners and farmers, typically find their burden reduced. Vacant or underused lots in high value areas pick up the difference, employing a design that employs an alternate criterion of equity: taxing according to use. "Paying for what you take and not for what you make" encourages efficient consumption of space and resources in an automatic and non-coercive manner. The one-third of households that own no land are relieved of all taxes, and residential and non-residential property owners split the rest. Farmers, whose land is typically of inconsequential value relative to sites in urban areas, are likely to pay little if anything even if they are not already protected by other save-harmless provisions. By eliminating taxes on building improvements they typically enjoy savings just as do other businesses.

All this makes for a far simpler and more comprehensible system of taxation. Land taxes are totally transparent, impossible to evade, and therefore much more administrable. This further engenders the legitimacy of taxation and of government itself. What it also does is assure stability to the tax system, for the reason that land values are not subject to the variations and vacillations that other tax bases frequently have. Indeed, the removal of economic rent from locational sites discourages speculative bubbles and the related economic cycles that are associated with them. This greater stability and reliability is to the advantage of every sector of the economy — private, public, and non-profit.

A tax that collects economic rent offers a win-win proposition to every sector of the community — except to those who speculate in land. But who wants to favor land speculators? They are not held in high regard anywhere; their destructive behavior is the bane of cities, recognized everywhere for what it is: parasitic and passive. Speculators provide no added value to a community's well-being, and taxing rent is a foolproof means by which to eliminate it. Land speculation is highest where the most rent can be privately captured, but it forces those who choose to develop to look to sub-optimal locations when the primary locations they hoped for are held off the market for opportunistic gain. By collecting rent, primary choice locations become available for use and to facilitate the development of land use configurations ideal for the economic health and efficient allocation. Urban ambience is improved, public sector service costs are reduced, and sprawl development is stemmed. ... read the whole article

There were many arguments to be made for the classical tradition, the result of which would be to rely upon payment of rent of land according to its value to society. George recognized that land value is largely a function of how society has elected to invest in any general neighborhood; there is no argument for any one titleholder to reap the reward of what others have invested. Gaffney points out that, from the standpoint of economic theory, the framework had the following virtues:

• It reconciled common land rights with private tenure, free markets and modern capitalism, a growing and persistent problem as the industrial society took hold.
• It enabled the lowering of taxes on labor without raising taxes on capital.
• It reconciled equity and efficiency. It constituted a progressive tax because land is concentrated so much among the wealthy and because the tax cannot be shifted. It was efficient because it is neutral among different land-use options.
• It constituted no disincentive to business location or population settlement. In this way it encouraged the most efficient land use and discouraged sprawl.
• It created jobs without inflation, and raised government revenue without any penalty upon its base.
• It strengthened public revenues and at the same time promotes economy in government.

Those economists who today still persistently hold to the view that there is something special about land that make it unwise to treat as a form of capital are known as Georgists. They represent a small minority of the economics profession, but, little known as they are, they are among its most esteemed members. ...

Tax efficiency is much like tax neutrality, and is the measure of how much shifting of behavior it imposes, resulting in what is called "excess burden," or "deadweight loss" on the economy. Tax economists usually hold that the best taxes are those that are shifted little if at all. Using a tax base that has little or zero elasticity is the best way of assuring that taxes are not shifted. Zero elasticity is another way of saying fixed supply, as, earlier noted, land is.... read the whole article

• the first is to preclude the entitlement of windfall gains to those who have unfairly captured monopoly control of parts of what are rightfully the public commons.
• A second reason is to enhance the efficiency of economic productivity which the failure to collect rent prevents. It is not just that monopoly control of commons sites drives less attractive and less valuable land into production because the primary choices are unavailable; it is also that the use of alternative taxes leads to a deadweight loss in the economy which reduces the wealth of every citizen except the monopoly titleholder.The proper collection of land rent leads to increases in economic efficiency in a way that wages are not artificially depressed and more opportunities arise in the labor market.

Frank Stilwell and Kirrily Jordan: The Political Economy of Land: Putting Henry George in His Place

One might expect such arguments to have led to the advocacy of land nationalisation. But George thought this unnecessary because a tax on land could be effective in capturing the economic surplus arising from land ownership. This tax would generate all the revenue necessary to fund public expenditures. George thought that such a land tax would permit the removal of other taxes on labour and capital, which he regarded as inherently inefficient. He argued that taxes on incomes, sales, and payrolls, for example, acted as disincentives to production and active endeavour, thereby stifling economic growth and creating a barrier to full employment. A land tax, by contrast, would be both economically efficient and more equitable in its distributional effects. ... read the whole article