|Wealth and Want|
|... because democracy alone is not enough to produce widely shared prosperity.|
|Home||Essential Documents||Themes||All Documents||Authors||Glossary||Links||Contact Us|
Everett Gross: Explaining Rent
H.G. Brown: Significant Paragraphs from Henry George's Progress & Poverty: 11 Effect of Remedy Upon the Sharing of Wealth (in the unabridged P&P: Part IX Effects of the Remedy — Chapter 2: Of the Effect Upon Distribution and Thence Upon Production
The proposition that the rental value of land should be collected by governments and used for public purposes has a powerful moral rationale: Since no one made the land, no one can properly claim to own it. There is a simple efficiency rationale as well: Social collection of the rental value of land does not interfere with incentives to be productive. If governments do not collect the rental value of land, then they will levy taxes that discourage productive activity.
When "government" is not a monolith but a collection of entities with responsibilities in different geographic and functional areas, these rationales for land value taxation leave unanswered the question of how the rental value of land should be allocated among governments. That question is addressed in this paper.
Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894) — Appendix: FAQ
Nic Tideman: The Morality of Taxation: The Local Case
From a moral perspective, taxation is dubious or worse. We tell our fellow citizens that if they do not pay taxes that we say they owe, their property will be seized or they will be sent to prison. Why do we treat people this way? Is there a justification?
The dubiousness of taxation increases when we consider its origins. Government seems to have originated as roving bandits who learned that total destruction was less profitable than protecting their victims from other bandits and allowing them to keep a fraction of what they produced (Olson, 1993). In time, scheduled partial plunder evolved into taxation. Over the centuries, regimes that started as tyrannies evolved into democracies. The public sector evolved from an apparatus for implementing the will of despots into a mechanism for carrying out democratic decisions. But public finance continues to rely on the power of tax collectors, developed under early tyrants, to coerce citizen to pay taxes. The wrath that citizens feel toward tax collectors is probably the strongest antagonistic feeling that citizens have toward a governmental institution. Why do we allow ourselves to do this to one another?
There is a gentler side of taxation that provides some explanation of our tolerance of this coercion. Taxation can be the way that people achieve their common purposes. People may agree to be taxed so that there will be money to pay for public services that they want. From this perspective, taxation may be considered no more than the dues for belonging to a club that provides people with things that they would rather pay their share of than do without. However, to make this "voluntary exchange" theory of taxation relevant, people must be able to choose freely whether or not to "join the club," to be a citizen of the taxing jurisdiction. With all land claimed by some taxing jurisdiction, the choice isn't exactly free.
The problem of morality in taxation is the following:
we would probably have a much more efficient public sector if every public expenditure required two-thirds approval in legislative bodies.
But to make taxation truly voluntary, the option to leave must be viable. If people could move costlessly from one jurisdiction to another, taking all of their belongings with them, then competition among jurisdictions would tend to eliminate oppressive taxation. This would leave only the fees that people were prepared to pay to have public services (Tiebout, 1956).
Of course, moving will always have some costs, so the ideal will not be attainable. But what can be imagined is a system in which all taxes were local taxes. Then people would not have to move nearly as far to escape from taxes that they regarded as oppressive. Higher levels of government would not need to disappear; if the services that they provide are desired, they could be financed by levies on lower levels of government. ...
...Thus communities would not be able to raise much revenue from income tax or taxes on capital before they would drive residents and investment away. It might seem that there would be no way that localities could finance themselves.
Such a conclusion would be unwarranted, because there is a very significant source of public revenue that can survive when localities compete for mobile residents. This source is land. When people are taxed in proportion to the land they possess, no land moves to another locality where taxes are lower. Thus two questions arise:
Thus local public services are financed efficiently when users are required to pay marginal costs, and the component of total cost that is not covered by marginal cost charges is financed by levies on land that collect the increases in rental value of land that result from provision of the service. If all citizens in a locality valued the service equally, then every increment in the level of the service that was worthwhile would have a cost that was less than or equal to the sum of the revenue that could be raised from charges for use equal to marginal cost and the increase in the rental value of land in the community that resulted from the availability of the service. When people value the service differently, the increase in the rental value of land that results from the provision of a service will be less than the value of the service to those who receive it. By a criterion of maximizing the real incomes of residents, the best outcome that covers the full cost of a service will involve a level of service somewhat lower than that for which marginal cost is equal to the sum of marginal benefits, along with charges that exceed somewhat the marginal cost of providing the service to additional persons. Still, in general, the combination of user fees approximately equal to marginal cost and taxes on land to finance the remainder of costs is capable of providing financing for local public services that is adequate and reasonably efficient.
Next consider fairness. The fairness of such financing is the fairness of incremental decisions in an environment in which the initial allocation is fair. (It does not provide special opportunities for disadvantaged persons. They would need to be provided for by insurance that operated independently of the provision of public goods.) A person who is treated fairly in the absence of public goods cannot reasonably complain about being required to pay for a service according to its marginal cost, or about have to pay the value that is added to his land by the availability of a public service.
In the latter case, there is an argument that must be answered. A person may say, "It is true that the provision of this public service adds as much to the rental value of my land as I am being taxed, but that is what the service is worth to someone else who might use my land. It's not worth that to me. In fact, the 'service' reduces my well-being."
Here we have a difficulty. We have no way of identifying the value of a service that is provided to a person without his request. If we express a willingness to respond to such statements, people will have a motive for faking a lack of interest in the service in order to reduce their tax bills. If a person can point to some characteristic of his circumstances that would tend to support the claim that he does not value the service (for example, if the service is concerts in the park and the person is deaf, or if the services is a sewer line and the person just put in a new septic system), then we may have an obligation to compensate the person for raising his taxes to pay for something that he does not value. But when the person can point to no such special circumstances, he should bear the cost. People should understand that one of the risks of moving into a community is that their fellow citizens may decide to provide a local public service that most people value but they do not. At worst, the aggrieved person will have to bear the costs of moving (including the psychological costs). Thus if any compensation is offered to people who have characteristics that suggest that they do not value a public service that raises the value of their land, the compensation that they receive should have an upper limit of the loss in the value of things attached to the land (the septic system) plus the financial and psychological costs of moving. While we need to watch out for fakers, these are real costs, and a public service is only worthwhile if its benefits exceed its full costs, including losses in the value of capital and in the human satisfaction of those who did not want change.
The fairness of such a tax system might also be questioned from another perspective. If people are required to pay the costs of the public services that they use, then who will pay for schools?
There are two possible answers.
But is such a tax fair? Consider first a case in which everyone has the same number of children. Then the taxation of land value to finance education is equivalent to the assertion of an equal claim of everybody to land. And there is a good basis for such a claim. No one made the land. The titles to land that we recognize today generally originated in conquest. Our affection for the words of the Declaration of Independence, that "All men are created equal," in conjunction with the recognition that titles to land are privileges that are created by government, should lead us to the implication that we have an obligation to share the benefits of land equally. As Henry George pointed out (1960 , 403-407), the sensible way to assert equal rights to land is not to divide the land equally, but rather to collect the rent of land and use it for public purposes. A tax on land takes for public purposes only what nature, public services, and the growth of communities produce, unlike taxes on labor and capital, which take what people produce and which people may properly resent having taken from them. Thus, at least when everyone has the same number of children, it is fair to finance education by taxing land.
Now consider how the situation changes when people have different numbers of children. Consider two possibilities.
"But wait!" you may say. "Many people will not be able to afford to pay the cost of educating their children. How can you expect them to do so?"
I would like to turn the question around. If people cannot be expected to pay for educating the children that they ought to be able to have, doesn't that mean that there is some fundamental unfairness in the starting conditions? Is it not the combination of past injustice and current unequal access to natural opportunities that makes us reluctant to require people to pay the full costs of having children? In my conception of justice, we have not adequately compensated for past injustice until we have put people in a position where we are content to oblige them to pay the full costs of their choices.
But there is another potential inequality that needs to be addressed. What if different communities have different amounts of land value per person? Here a distinction in sources of land value must be made. If a community has higher land value because it has built itself into a wonderful place, then it should be allowed to keep that value for itself. On the other hand, if a community has a higher-than-average natural endowment per citizen, then it owes something to communities with lower-than-average natural endowment per citizen. A program of payments among communities to equalize natural endowments per citizen will be both efficient and fair. It will be efficient because in the absence of such a program, people would gravitate to the communities with higher-than-average natural endowments (like Alaska) even when it was socially uneconomic for them to go there. It is fair because it accords with an equal right of all to natural opportunities.
Thus just and efficient local taxation is achieved by the combination of public collection of rent, marginal cost charges for public services, and a program of transfers among communities to equalize natural endowment per citizen. ... Read the whole articleHerbert J. G. Bab: Property Tax -- Cause of Unemployment
... The shortcomings of property taxes as revenue producers have been obvious for a long time and are widely known. The main difficulty is that revenues from property taxation do not keep pace with the ever-increasing requirements of local governments. Every county, every city official and every school administrator will testify, that there are not enough funds available to meet the requirements of local governments.
The inability of local government to raise enough revenues from property taxation has forced them to borrow at an ever-increasing rate. The debts of local governments have increased from about $16 billions in 1947 to over $61 billions in 1963, an increase of about 382%. During the same period private debt increased by 279% and federal debt by only 26%. ...
Under our property tax system wealthy communities with expensive homes or with heavy concentration of industry will have a large tax basis and low tax rates. Schools will be good and public services will be adequate. Yet in a poor community the tax base will be much smaller, tax rates will be much higher and still it will be found impossible to provide for good schools and adequate public services.
In a pamphlet entitled Paying for better schools the Committee for Economic Development came to the conclusion that "where a child happens to live is likely to be important in determining the quality of his education. In some areas children are taught by meagerly qualified teachers in substandard schools with inadequate equipment. The school session is shorter and the school leaving age is lower than the national average."
A defect of our property tax system that is seldom mentioned is that it puts a premium on obsolescence and penalizes new housing. This is so because property taxes are ad valorem taxes. Every piece of real estate except land is subject to depreciation. Thus the owners of old and obsolete real estate will pay little in taxes, while newly constructed buildings will bear the brunt of the tax.
This characteristic of the property tax is obscured by the rising trends of land values, which in many cases offset the loss in value of the improvement. Increases in tax rates and differences in assessment procedures and practices further hide the fact that ad valorem taxes favor obsolete real property. ...
Professor Galbraith and others have expressed concern about the poverty of the public sector of our economy as compared to the affluence of the private sector. The appearance of our cities, the inadequate financial support we give our schools and poor public services seem to support this view. Yet, I can not agree with Professor Galbraith's conclusion that we need more public revenues to meet these needs. It seems to me that the spreading out of our cities over wider and wider metropolitan areas has immeasurably increased the financial burden of local governments. In other words, wasteful use of land caused by our property tax system is the real reason of the poverty of the public sector.
It stands to reason that the spreading out of our cities into wider and wider metropolitan areas is a very costly venture. For instance it was found that in the New York region suburbs have to make capital outlays of $68 per capita for new housing, while only $44 was required for new housing in the central cities and only $38 in the non-metropolitan area. Another survey found that it costs $80 per household to provide water in the outlying suburbs against $30 in the city.
The administration of the property tax leaves very much to be desired. Assessment procedures and practices are in many cases erroneous, arbitrary and widely variant. So is the ratio of assessed value to full market or cash value. In many states no public records are available indicating assessed values and the taxpayer has no of knowing what his tax bill will be.
The most serious defect in the administration of property taxation is the continuous, widespread and enormous underassessment of land. A survey made recently found that in 9 California counties, vacant lots and acreage were assessed at only 5.3% of the cash value, while residential property was assessed at 19.3% of its value. The illegal underassessment of land deprives local governments of millions of dollars of revenues. Moreover, it further aggravates the serious defects of property taxation.
We have analyzed the effects of property taxation on improvements as distinguished from those caused by the incidence of these taxes on land.
The paradox of property taxation consists in the fact that lower rates on improvements produce the same results as higher rates on land and conversely higher rates on improvements produce the same results as lower rates on land. Read the whole articleNic Tideman: The Morality of Taxation: The Local Case
to email this page to a friend: right click, choose "send"
Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper