A Tax on
Land Value is Not Passed On to the Tenant
"A tax on rent falls wholly on the
landlord. There are no means by which he can shift the burden upon
anyone else. It does not affect the value or price of agricultural
produce, for this is determined by the cost of production in the most
unfavourable circumstances, and in those circumstances, as we have so
often demonstrated, no rent is paid. A tax on rent, therefore, has no
effect other than its obvious one. It merely takes so much from the
landlord and transfers it to the State." — John Stuart Mill
(1806-1873), English philosopher and social reformer, and an
acknowledged major intellectual figure of the 19th century (Section 2,
Chapter 3, Book 5, “Principles of Political Economy”)
Henry George: The Condition
of Labor — An Open Letter to Pope Leo XIII in response to Rerum
Novarum (1891)
Nor do we hesitate to say that this way of securing the equal right to
the bounty of the Creator and the exclusive right to the products of
labor is the way intended by God for raising public revenues. For we
are not atheists, who deny God; nor semi-atheists, who deny that he
has any concern in politics and legislation.
It is true as you say — a salutary truth too often forgotten — that “man
is older than the state, and he holds the right of providing for the
life of his body prior to the formation of any state.” Yet, as
you too perceive, it is also true that the state is in the divinely appointed
order. For He who foresaw all things and provided for all things, foresaw
and provided that with the increase of population and the development
of industry the organization of human society into states or governments
would become both expedient and necessary.
No sooner does the state arise than, as we all know, it needs revenues.
This need for revenues is small at first, while population is sparse,
industry rude and the functions of the state few and simple. But with
growth of population and advance of civilization the functions of the
state increase and larger and larger revenues are needed.
Now, He that made the world and placed man in it, He that pre-ordained
civilization as the means whereby man might rise to higher powers and
become more and more conscious of the works of his Creator, must have
foreseen this increasing need for state revenues and have made provision
for it. That is to say: The increasing need for public revenues with
social advance, being a natural, God-ordained need, there must be a right
way of raising them — some way that we can truly say is the way
intended by God. It is clear that this right way of raising public revenues
must accord with the moral law.
Hence:
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It must not take from individuals what rightfully belongs to individuals.
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It must not give some an advantage over others, as by increasing the
prices of what some have to sell and others must buy.
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It must not lead men into temptation, by requiring trivial oaths, by
making it profitable to lie, to swear falsely, to bribe or to take bribes.
-
It must not confuse the distinctions of right and wrong, and weaken
the sanctions of religion and the state by creating crimes that are not
sins, and punishing men for doing what in itself they have an undoubted
right to do.
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It must not repress industry. It must not check commerce. It must not
punish thrift. It must offer no impediment to the largest production
and the fairest division of wealth.
Let me ask your Holiness to consider the taxes on the processes and
products of industry by which through the civilized world public revenues
are collected — the octroi duties that surround Italian cities
with barriers; the monstrous customs duties that hamper intercourse between
so-called Christian states; the taxes on occupations, on earnings, on
investments, on the building of houses, on the cultivation of fields,
on industry and thrift in all forms. Can these be the ways God has intended
that governments should raise the means they need? Have any of them the
characteristics indispensable in any plan we can deem a right one?
All these taxes violate the moral law. They take by force what belongs
to the individual alone; they give to the unscrupulous an advantage over
the scrupulous; they have the effect, nay are largely intended, to increase
the price of what some have to sell and others must buy; they corrupt
government; they make oaths a mockery; they shackle commerce; they fine
industry and thrift; they lessen the wealth that men might enjoy, and
enrich some by impoverishing others.
Yet what most strikingly shows how opposed to Christianity is this system
of raising public revenues is its influence on thought.
Christianity teaches us that all men are brethren; that their true interests
are harmonious, not antagonistic. It gives us, as the golden rule of
life, that we should do to others as we would have others do to us. But
out of the system of taxing the products and processes of labor, and
out of its effects in increasing the price of what some have to sell
and others must buy, has grown the theory of “protection,” which
denies this gospel, which holds Christ ignorant of political economy
and proclaims laws of national well-being utterly at variance with his
teaching. This theory sanctifies national hatreds; it inculcates a universal
war of hostile tariffs; it teaches peoples that their prosperity lies
in imposing on the productions of other peoples restrictions they do
not wish imposed on their own; and instead of the Christian doctrine
of man’s brotherhood it makes injury of foreigners a civic virtue.
“By their fruits ye shall know them.” Can anything more
clearly show that to tax the products and processes of industry is not
the way God intended public revenues to be raised?
But to consider what we propose — the raising of public revenues
by a single tax on the value of land irrespective of improvements — is
to see that in all respects this does conform to the moral law.
Let me ask your Holiness to keep in mind that the value we propose to
tax, the value of land irrespective of improvements, does not come from
any exertion of labor or investment of capital on or in it — the
values produced in this way being values of improvement which we would
exempt. The value of land irrespective of improvement is the value that
attaches to land by reason of increasing population and social progress.
This is a value that always goes to the owner as owner, and never does
and never can go to the user; for if the user be a different person from
the owner he must always pay the owner for it in rent or in purchase-money;
while if the user be also the owner, it is as owner, not as user, that
he receives it, and by selling or renting the land he can, as owner,
continue to receive it after he ceases to be a user.
Thus, taxes on land irrespective of improvement cannot
lessen the rewards of industry, nor add to prices,* nor in
any way take from the individual
what belongs to the individual. They can take only the value that attaches
to land by the growth of the community, and which therefore belongs to
the community as a whole.
* As to this point it may be well to
add that all economists are agreed that taxes on land values
irrespective of improvement or
use — or
what in the terminology of political economy is styled rent, a term distinguished
from the ordinary use of the word rent by being applied solely to payments
for the use of land itself — must be paid by the owner and cannot
be shifted by him on the user. To explain in another way the reason given
in the text: Price is not determined by the will of the seller or the
will of the buyer, but by the equation of demand and supply, and therefore
as to things constantly demanded and constantly produced rests at a point
determined by the cost of production — whatever tends to increase
the cost of bringing fresh quantities of such articles to the consumer
increasing price by checking supply, and whatever tends to reduce such
cost decreasing price by increasing supply. Thus taxes on wheat or tobacco
or cloth add to the price that the consumer must pay, and thus the cheapening
in the cost of producing steel which improved processes have made in
recent years has greatly reduced the price of steel. But land has no
cost of production, since it is created by God, not produced by man.
Its price therefore is fixed —
1 (monopoly rent), where land is held in close monopoly, by what the
owners can extract from the users under penalty of deprivation and consequently
of starvation, and amounts to all that common labor can earn on it beyond
what is necessary to life;
2 (economic rent proper), where there is no special monopoly, by what
the particular land will yield to common labor over and above what may
be had by like expenditure and exertion on land having no special advantage
and for which no rent is paid; and,
3 (speculative rent, which is a species of monopoly rent, telling particularly
in selling price), by the expectation of future increase of value from
social growth and improvement, which expectation causing landowners to
withhold land at present prices has the same effect as combination.
Taxes on land values or economic rent can therefore never be shifted
by the landowner to the land-user, since they in no wise increase the
demand for land or enable landowners to check supply by withholding land
from use. Where rent depends on mere monopolization, a case I mention
because rent may in this way be demanded for the use of land even before
economic or natural rent arises, the taking by taxation of what the landowners
were able to extort from labor could not enable them to extort any more,
since laborers, if not left enough to live on, will die. So, in the case
of economic rent proper, to take from the landowners the premiums they
receive, would in no way increase the superiority of their land and the
demand for it. While, so far as price is affected by speculative rent,
to compel the landowners to pay taxes on the value of land whether they
were getting any income from it or not, would make it more difficult
for them to withhold land from use; and to tax the full value would not
merely destroy the power but the desire to do so.
To take land values for the state, abolishing all taxes on the products
of labor, would therefore leave to the laborer the full produce of labor;
to the individual all that rightfully belongs to the individual. It would
impose no burden on industry, no check on commerce, no punishment on
thrift; it would secure the largest production and the fairest distribution
of wealth, by leaving men free to produce and to exchange as they please,
without any artificial enhancement of prices; and by taking for public
purposes a value that cannot be carried off, that cannot be hidden, that
of all values is most easily ascertained and most certainly and cheaply
collected, it would enormously lessen the number of officials, dispense
with oaths, do away with temptations to bribery and evasion, and abolish
man-made crimes in themselves innocent.
But, further: That God has intended the state to obtain the revenues
it needs by the taxation of land values is shown by the same order and
degree of evidence that shows that God has intended the milk of the mother
for the nourishment of the babe.
See how close is the analogy. In that primitive condition ere
the need for the state arises there are no land values. The products
of labor
have value, but in the sparsity of population no value as yet attaches
to land itself. But as increasing density of population and increasing
elaboration of industry necessitate the organization of the state,
with its need for revenues, value begins to attach to land. As
population
still increases and industry grows more elaborate, so the needs
for public revenues increase. And at the same time and from the
same causes land
values increase. The connection is invariable. The value of things
produced by labor tends to decline with social development, since
the larger scale
of production and the improvement of processes tend steadily to
reduce their cost. But the value of land on which population
centers goes up
and up. Take Rome or Paris or London or New York or Melbourne.
Consider the enormous value of land in such cities as compared
with the value
of land in sparsely settled parts of the same countries. To what
is this due? Is it not due to the density and activity of the
populations of
those cities — to the very causes that require great public
expenditure for streets, drains, public buildings, and all the
many things needed
for the health, convenience and safety of such great cities? See
how with the growth of such cities the one thing that steadily
increases
in value is land; how the opening of roads, the building of railways,
the making of any public improvement, adds to the value of land.
Is it not clear that here is a natural law — that is to say
a tendency willed by the Creator? Can it mean anything else than
that He who ordained
the state with its needs has in the values which attach to land
provided the means to meet those needs? ... read the whole letter
H.G. Brown: Significant
Paragraphs from Henry George's Progress & Poverty:
10. Effect of Remedy Upon Wealth Production (in the unabridged P&P: Part
IX — Effects of the Remedy: Chapter 1 — Of the effect
upon the
production of wealth)
And to shift the burden of taxation from production and exchange to the
value or rent of land would not merely be to give new stimulus to the production
of wealth; it would be to open new opportunities. For under this system
no one would care to hold land unless to use it, and land now withheld
from use would everywhere be thrown open to improvement.
The selling price of land would fall; land speculation would receive its
death blow; land monopolization would no longer pay.* Millions and millions
of acres from which settlers are now shut out by high prices would be abandoned
by their present owners or sold to settlers upon nominal terms. And this
not merely on the frontiers, but within what are now considered well settled
districts.
* The fact that a tax on the rental value of land cannot
be shifted by landowners to tenants, though recognized by all competent
economists, is sometimes a stumbling block to persons untrained in
economics. The reason such a tax cannot be shifted is that it cannot
limit the supply of land. Landowners are presumably, before the tax
is laid, charging all the rent they can get. There is nothing in a
tax on the rental value of land to make tenants willing to pay more
or to make land more difficult to hire. On the contrary, more land
will be on the market, because of such a tax, rather than less, since
the tax puts a heavy penalty on holding land out of use and unimproved
for mere speculation. The competition of former vacant land speculators
to get their land used will make land cheaper to rent rather than more
expensive. And since only the net rent remaining after the tax is subtracted
is capitalized into salable value, land will be very much cheaper to
buy. H.G.B.
And it must be remembered that this would apply, not merely to agricultural
land, but to all land. Mineral land would be thrown open to use, just as
agricultural land; and in the heart of a city no one could afford to keep
land from its most profitable use, or on the outskirts to demand more for
it than the use to which it could at the time be put would warrant. Everywhere
that land had attained a value, taxation, instead of operating, as now,
as a fine upon improvement, would operate to force improvement. Whoever
planted an orchard, or sowed a field, or built a house, or erected a manufactory,
no matter how costly, would have no more to pay in taxes than if he kept
so much land idle.
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The monopolist of agricultural land would be taxed as much as though
his land were covered with houses and barns, with crops and with stock.
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The owner of a vacant city lot would have to pay as much for the privilege
of keeping other people off of it until he wanted to use it, as his neighbor
who has a fine house upon his lot.
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It would cost as much to keep a row of tumble-down shanties upon valuable
land as though it were covered with a grand hotel or a pile of great
warehouses filled with costly goods.
Thus, the bonus that wherever labor is most productive must now be paid
before labor can be exerted would disappear.
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The farmer would not have to pay out half his means, or mortgage his
labor for years, in order to obtain land to cultivate;
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the builder of a city homestead would not have to lay out as much
for a small lot as for the house he puts upon it*;
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the company that proposed to erect a manufactory would not have to
expend a great part of its capital for a site.
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And what would be paid from year to year to the state would be in
lieu of all the taxes now levied upon improvements, machinery, and stock.
*Many persons, and among them some professional
economists, have never succeeded in getting a thorough comprehension
of this point. Thus, the editor has heard the objection advanced
that the greater cheapness of land is no advantage to the poor
man who is trying to save enough from his earnings to buy a piece
of land; for, it is said, the higher taxes on the land after it
is acquired, offset the lower purchase price. What such objectors
do not see is that even if the lower price of land does no more
than balance the higher tax on it, (and this overlooks, for one
thing, the discouragement to speculation in land), the reduction
or removal of other taxes is all clear gain. It is easier to save
in proportion as earnings and commodities are relieved of taxation.
It is easier to buy land, because its selling price is lower, if
the land is taxed. And although the land, after its purchase, continues
to be taxed, not only can this tax be fully paid out of the annual
interest on the saving in the purchase price, but also there is
to be reckoned the saving in taxes on buildings and other improvements
and in whatever other taxes are thus rendered unnecessary. H.G.B.
Consider the effect of such a change upon
the labor market. Competition would no longer be one-sided, as now.
Instead of laborers competing with
each other for employment, and in their competition cutting down
wages to the point of bare subsistence, employers would everywhere
be competing
for laborers, and wages would rise to the fair earnings of labor.
For into the labor market would have entered the greatest of all competitors
for
the employment of labor, a competitor whose demand cannot be satisfied
until want is satisfied — the demand of labor itself. The
employers of labor would not have merely to bid against other employers,
all
feeling the stimulus of greater trade and increased profits, but
against the ability
of laborers to become their own employers upon the natural opportunities
freely opened to them by the tax which prevented monopolization.
... read the whole chapter
Louis Post: Outlines of Louis
F. Post's Lectures, with Illustrative Notes and Charts (1894)
II. THE SINGLE TAX AS A FISCAL REFORM
1. DIRECT AND INDIRECT TAXATION
Taxes are either direct or indirect; or, as they
have been aptly described, "straight" or "crooked." Indirect
taxes are those that may be shifted by the first payer from himself
to others; direct taxes are those that cannot be shifted.5
5. "Taxes are either direct or indirect.
A direct tax is one which is demanded from the very persons who,
it is intended or desired, should pay it. Indirect taxes are
those which are demanded from one person in the expectation and
intention that he shall indemnify himself at the expense of another." — John
Stuart Mill's Prin. of Pol. Ec., book v, ch. iii, sec. I.
"Direct taxes are those which are levied
on the very persons who it is intended or desired should pay
them, and which they cannot put off upon others by raising the
prices of the taxed article.. . . Indirect taxes on the other
hand are those which are levied on persons who expect to get
back the amount of the tax by raising the price of the taxed
article." — Laughlin's Elements, par. 249.
Taxes are direct "when the payment is made
by the person who is intended to bear the sacrifice." Indirect
taxes are recovered from final purchasers. — Jevons's
Primer, sec. 96.
"Indirect taxes are so called because they
are not paid into the treasury by the person who really bears
the burden. The payer adds the amount of the tax to the price
of the commodity taxed, and thus the taxation is concealed under
the increased price of some article of luxury or convenience." — Thompson's
Pol. Ec., sec. 175.
The shifting of indirect taxes is accomplished by means of their
tendency to increase the prices of commodities on which they fall.
Their magnitude and incidence 6 are thereby disguised. It was for
this reason that a great French economist of the last century denounced
them as "a scheme for so plucking geese as to get the most feathers
with the least squawking."7
6. Jevons defines the incidence of a tax as "the
manner in which it falls upon different classes of the population." — Jevons's
Primer, sec. 96.
Sometimes called "repercussion," and refers "to the real as
opposed to the nominal payment of taxes." — Ely's Taxation,
p. 64.
7. Though his language was blunt, the sentiment
does not essentially differ from that of "statesmen" of
our day who meet all the moral and economic objections to indirect
taxation with the one reply that the people would not consent
to pay enough or the support of government if public revenues
were collected from them directly. This means nothing but that
the people are actually hoodwinked by indirect taxation into
sustaining a government that they would not support if they knew
it was maintained at their expense; and instead of being a reason
for continuing indirect taxation, would, if true, be one of the
strongest of reasons for abolishing it. It is consistent neither
with the plainest principles of democracy nor the simplest conceptions
of morality.
Indirect taxation costs the real tax-payers much more than the government
receives, partly because the middlemen through whose hands taxed
commodities pass are able to exact compound profits upon the tax,8
and partly on account of extraordinary expenses of original collection;9
it favors corruption in government by concealing from the people
the fact that they contribute to the support of government; and it
tends, by obstructing production, to crush legitimate industry and
establish monopolies.10 The questions it raises are of vastly more
concern than is indicated by the sum total of public expenditures.
8. A tax upon shoes, paid in the first instance
by shoe manufacturers, enters into manufacturers' prices, and,
together with the usual rate of profit upon that amount of investment,
is recovered from wholesalers. The tax and the manufacturers'
profit upon it then constitute part of the wholesale price and
are collected from retailers. The retailers in turn collect the
tax with all intermediate profits upon it, together with their
usual rate of profit upon the whole, from final purchasers — the
consumers of shoes. Thus what appears on the surface to be a
tax upon shoe manufacturers proves upon examination to be an
indirect tax upon shoe consumers, who pay in an accumulation
of profits upon the tax considerably more than the government
receives.
The effect would be the same if a tax upon their
leather output were imposed upon tanners. Tanners would add to
the price of leather the amount of the tax, plus their usual
rate of profit upon a like investment, and collect the whole,
together with the cost of hides, of transportation, of tanning
and of selling, from shoe manufacturers, who would collect with
their profit from retailers, who would collect with their profit
from shoe consumers. The principle applies also when taxes are
levied upon the stock or the sales of merchants, or the money
or credits of bankers; merchants add the tax with the usual profit
to the prices of their goods, and bankers add it to their interest
and discounts.
For example; a tax of $100,000 upon the output
of manufacturers or importers would, at 10 per cent as the manufacturing
profit, cost wholesalers $110,000; at a profit of 10 per cent
to wholesalers it would cost retailers $121,000, and at 20 percent
profit to retailers it would finally impose a tax burden of $145,200 — being
45 per cent more than the government would get. Upon most commodities
the number of profits exceeds three, so that indirect taxes may
frequently cost as much as 100 per cent, even when imposed only
upon what are commercially known as finished goods; when imposed
upon materials also, the cost of collection might well run far
above 200 percent in addition to the first cost of maintaining
the machinery of taxation.
It must not be supposed, however, that the recovery
of indirect taxes from the ultimate consumers of taxed goods
is arbitrary. When shoe manufacturers, or tanners, or merchants
add taxes to prices, or bankers add them to interest, it is not
because they might do otherwise but choose to do this; it is
because the exigencies of trade compel them. Manufacturers, merchants,
and other tradesmen who carry on competitive businesses must
on the average sell their goods at cost plus the ordinary rate
of profit, or go out of business. It follows that any increase
in cost of production tends to increase the price of products.
Now, a tax upon the output of business men, which they must pay
as a condition of doing their business, is as truly part of the
cost of their output as is the price of the materials they buy
or the wages of the men they hire. Therefore, such a tax upon
business men tends to increase the price of their products. And
this tendency is more or less marked as the tax is more or less
great and competition more or less keen.
It is true that a moderate tax upon monopolized
products, such as trade-mark goods, proprietary medicines, patented
articles and copyright publications is not necessarily shifted
to consumers. The monopoly manufacturer whose prices are not
checked by cost of production, and are therefore as a rule higher
than competitive prices would be, may find it more profitable
to bear the burden of a tax that leaves him some profit, by preserving
his entire custom, than to drive off part of his custom by adding
the tax to his usual prices. This is true also of a moderate
import tax to the extent it falls upon goods that are more cheaply
transported from the place of production to a foreign market
where the import tax is imposed than to a home market where the
goods would be free of such a tax — products, for instance,
of a farm in Canada near to a New York town, but far away from
any Canadian town. If the tax be less than the difference in
the cost of transportation the producer will bear the burden
of it; otherwise he will not. The ultimate effect would be a
reduction in the value of the Canadian land. Examples which may
be cited in opposition to the principle that import taxes are
indirect, will upon examination prove to be of the character
here described. Business cannot be carried on at a loss — not
for long.
9. "To collect taxes, to prevent and punish
evasions, to check and countercheck revenue drawn from so many
distinct sources, now make up probably three-fourths, perhaps
seven-eighths, of the business of government outside of the preservation
of order, the maintenance of the military arm, and the administration
of justice." — Progress and Poverty, book iv,
ch: v
10. For a brief and thorough exposition of indirect
taxation read George's "Protection or Free Trade," ch.
viii, on " Tariffs for Revenue."
Whoever calmly reflects and candidly decides upon the merits of
indirect taxation must reject it in all its forms. But to do that
is to make a great stride toward accepting the single tax. For the
single tax is a form of direct taxation; it cannot be shifted.11
11. This is usually a stumbling block to those
who, without much experience in economic thought, consider the
single tax for the first time. As soon as they grasp the idea
that taxes upon commodities shift to consumers they jump to the
conclusion that similarly taxes upon land values would shift
to the users. But this is a mistake, and the explanation is simple.
Taxes upon what men produce make production more difficult and
so tend toward scarcity in the supply, which stimulates prices;
but taxes upon land, provided the taxes be levied in proportion
to value, tend toward plenty in supply (meaning market supply
of course), because they make it more difficult to hold valuable
land idle, and so depress prices.
"A tax on rent falls wholly on the landlord.
There are no means by which he can shift the burden upon anyone
else. . . A tax on rent, therefore, has no effect other than
its obvious one. It merely takes so much from the landlord and
transfers it to the state." — John Stuart Mill's
Prin. of Pol. Ec., book v, ch. iii, sec. 1.
"A tax laid upon rent is borne solely by
the owner of land." — Bascom's Tr., p.159.
"Taxes which are levied on land . . . really
fall on the owner of the land." — Mrs. Fawcett's
Pol. Ec. for Beginners, pp.209, 210.
"A land tax levied in proportion to the rent
of land, and varying with every variation of rents, . . . will
fall wholly on the landlords." — Walker's Pol.
Ec., ed. of 1887, p. 413, quoting Ricardo.
"The power of transferring a tax from the
person who actually pays it to some other person varies with
the object taxed. A tax on rents cannot be transferred. A tax
on commodities is always transferred to the consumer." — Thorold
Rogers's Pol. Ec., ch. xxi, 2d ed., p. 285.
"Though the landlord is in all cases the
real contributor, the tax is commonly advanced by the tenant,
to whom the landlord is obliged to allow it in payment of the
rent." — Adam Smith's Wealth of Nations, book
v, ch. ii, part ii, art. i.
"The way taxes raise prices is by increasing
the cost of production and checking supply. But land is not a
thing of human production, and taxes upon rent cannot check supply.
Therefore, though a tax upon rent compels land-owners to pay
more, it gives them no power to obtain more for the use of their
land, as it in no way tends to reduce the supply of land. On
the contrary, by compelling those who hold land on speculation
to sell or let for what they can get, a tax on land values tends
to increase the competition between owners, and thus to reduce
the price of land." — Progress and Poverty, book
viii, ch. iii, subd. i.
Sometimes this point is raised as a question
of shifting the tax in higher rent to the tenant, and at others
as a question of shifting it to the consumers of goods in higher
prices. The principle is the same. Merchants cannot charge higher
prices for goods than their competitors do, merely because they
pay higher ground rents. A country storekeeper whose business
lot is worth but few dollars charges as much for sugar, probably
more, than a city grocer whose lot is worth thousands. Quality
for quality and quantity for quantity, goods sell for about the
same price everywhere. Differences in price are altogether in
favor of places where land has a high value. This is due to the
fact that the cost of getting goods to places of low land value,
distant villages for example, is greater than to centers, which
are places of high land value. Sometimes it is true that prices
for some things are higher where land values are high. Tiffany's
goods, for instance, may be more expensive than goods of the
same quality at a store on a less expensive site. But that is
not due to the higher land value; it is because the dealer has
a reputation for technical knowledge and honesty (or has become
a fad among rich people), for which his customers are willing
to pay whether his store is on a high priced-lot or a low-priced
one.
Though land value has no effect upon the price
of good, it is easier to sell goods in some locations than in
others. Therefore, though the price and the profit of each sale
be the same, or even less, in good locations than in poorer ones,
aggregate receipts and aggregate profits are much greater at
the good location. And it is out of his aggregate, and not out
of each profit, that rent is paid, For example: A cigar store
on a thoroughfare supplies a certain quality of cigar for fifteen
cents. On a side street the same quality of cigar can be bought
no cheaper. Indeed, the cigars there are likely to be poorer,
and therefore really dearer. Yet ground rent on the thoroughfare
is very high compared with ground rent on the sidestreet. How,
then, can the first dealer, he who pays the high ground rent,
afford to sell as good or better cigars for fifteen cents than
his competitor of the low priced location? Simply because he
is able to make so many more sales with a given outlay of labor
and capital in a given time that his aggregate profit is greater.
This is due to the advantage of his location, and for that advantage
he pays a premium in higher ground rent. But that premium is
not charged to smokers; the competing dealer of the side street
protects them. It represents the greater ease, the lower cost,
of doing a given volume of business upon the site for which it
is paid; add if the state should take any of it, even the whole
of it, in taxation, the loss would be finally borne by the owner
of the advantage which attaches to that site — by the landlord.
Any attempt to shift it to tenant or buyer would be promptly
checked by the competition of neighboring but cheaper land.
"A land-tax, levied in proportion to the
rent of land, and varying with every variation of rent, is in
effect a tax on rent; and as such a tax will not apply to that
land which yields no rent, nor to the produce of that capital
which is employed on the land with a view to profit merely, and
which never pays rent; it will not in any way affect the price
of raw produce, but will fall wholly on the landlords." — McCulloch's
Ricardo (3d ed.), p. 207 ...
Q20. Would not the single tax increase the rent of houses?
A. No. It takes taxes off buildings and materials, thus making
it cheaper to build houses. How can house rent go up as the cost
of building houses goes down? Read pp. 5 to 8 and the related
notes.
Q23. Would not the merchant shift his land value tax by adding
it to the price of his goods?
A. No. Read note 11. .. read the book
Charles B. Fillebrown: A
Catechism of Natural Taxation, from Principles of Natural
Taxation (1917)
Q28. How are landlords privileged?
A. Because, in so far as their land tax is an "old" tax,
it is a burdenless tax, and because their buildings' tax is shifted
upon their tenants; most landlords who let land and also the tenement
houses and business blocks thereon avoid all share in the tax burden.
Q34. Why does not an increase in ground rent tend to cause an increase
in prices?
A. Usually sales increase faster proportionately than rent, thus
reducing the ratio of rent to sales. The larger the product, the
lower the individual costs. The larger the gross sales, the lower
the competitive prices.
Q38. What are the three legs of the tripos, the threefold support
upon which the single tax rests?
A. They are:
(1) The social origin of ground rent -- that the site value of land
is a creation of the community, a public or social value.
(2) The non-shiftability of a land tax -- that no tax, new or old,
on the site value of land can be recovered from the tenant or user
by raising his rent.
(3) The ultimate burdenlessness of a land tax -- that the selling
value of land, reduced as it is by the capitalized tax that is imposed
upon it, is an untaxed value. Whatever lowers the income from land
lowers proportionately its selling price, so that whether the established
tax upon it has been light or heavy, it is no burden upon the new
purchaser, who buys it at its net value and thus escapes all part
in the tax burden which he should in justice share with those who
now bear it all.
Q45. Why tax $1,000 invested in a vacant lot while exempting
$1,000 invested in New York Central stock?
A. Because: (1) the land is made worth $1,000 and so maintained at public expense
without any contribution from the owner; (2) the $1,000 New York Central stock
adds nothing to the public expense, but a tax upon it, if collected at the source,
falls directly on the road and thence upon the public, and so adds to the cost
of living.
Q51. Does not a land tax increase house rent or store rent?
A. The landlord, as a rule, exacts the full ground rent for the use
of his land. Neither by taking three dollars nor $30 per thousand
in taxation can land to be made worth any more for use.
Q55. How would the single tax effect the tenant?
A. It would neither increase nor decrease his land rent. It would
reduce his house rent by the amount of the house tax. ... read the whole article
Brian Kavanaugh: Why a landlord can
not just pass on the cost of LVT to the renter
quotes from 11 economists
suggest there is wide agreement on this.
Fred E. Foldvary — The
Ultimate Tax Reform:
Public Revenue from Land Rent
Some may wonder why anyone would own land if most of the rent is taxed
away. One would own land for the same reason people rent land: in order
to use it. Ownership also gives the title holder rights of possession,
the ability to control the use of the site indefinitely.
Today there is also a speculative motive for owning land, to profit
from the increase in its price. With most of the geo-rent tapped for
public revenue, the speculative motive would be dampened. That would
benefit the economy, since with a lower price of land, funds that now
go to buy land would instead go to build more capital goods, hire more
labor, or provide better training.
The tax on the geo-rent would be borne by the owner, not the tenant.
If a landlord, who was already charging what the market could bear,
tried to pass on the tax, he would face vacancies. Some say that since
the tax would be invisible to renters, the link between using public
services and paying for them would be broken. But productive public
services increase the geo-rent, so that link is there. If government
revenue is wasted, then indeed this does not generate rent, and a land
value tax without corresponding benefits would reduce land value. Pressure
for a productive use of public revenue would come from the landowners
more than from the tenants. But that is no different than the situation
today; poor folks pay little or no income tax and no property tax,
and typically they get government assistance. This is an argument not
against the use of rent, but in favor of privatizing government programs.
In the private sector, the link between ownership and control is stronger.
... read the whole document
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. ... read the whole article
Henry George: Why The Landowner
Cannot Shift The Tax on Land Values (1887)
A VERY common objection to the
proposition to concentrate all taxes on Land Values is that the
landowner would add the increased tax on the value of his land to the
rent that must be paid by his tenants. It is this notion that increased
Taxation of Land Values would fall upon the users, not upon the owners
of land, that more perhaps than anything else prevents men from seeing
the far-reaching and beneficent effects of doing away with the taxes
that now fall upon labor or the products of labor, and taking for
public use those values that attach to land by reason of the growth and
progress of society.
That taxes levied upon Land Values, or, to use the
politico-economic term, taxes levied upon rent, do not fall upon the
user of land, and cannot be transferred by the landlord to the tenant
is conceded by all economists of reputation. However much they may
dispute as to other things, there is no dispute upon this point.
Whatever flimsy reasons any of them may have deemed it expedient to
give why the tax on rent should not be more resorted to, they all admit
that the taxation of rent merely diminishes the profits of the
landowner, cannot be shifted on the user of land, cannot add to prices,
nor check production. ...
The reason of this will be clear to everyone who has grasped the
accepted theory of rent — that theory to which the name of Ricardo
has been given, and which, as John Stuart Mill says, has but to be
understood to be proved. And it will be clear to everyone who will
consider a moment, even if he has never before thought of the cause
and nature of rent. The rent of land
represents a return to ownership
over and above the return which is sufficient to induce use — it
is a premium paid for permission to use. To take, in taxation, a part
or the whole of this premium in no way affects the incentive to use
or the return to use; in no way diminishes the amount of land there
is to use, or makes it more difficult to obtain it for use. Thus
there is no way in which a tax upon rent or Land Values can be
transferred to the user. Whatever the State may demand of this
premium simply diminishes the net amount which ownership can get for
the use of land, or the price it can demand as purchase money, which
is, of course, rent or the expectation of rent, capitalized. ...
To put the matter in a form in
which it can be easily
understood, let us take two cases. The one, a country where the
available land is all in use, and the competition of tenants has
carried rents to a point at which the tenant pays the landlord all he
can possibly earn save just enough to barely live. The other, a
country where all the available land is not in use and the rent that
the landlord can get from the tenant is limited by the terms on which
the tenant can get access to unused land. How, in either case, if the
tax were imposed upon Land Values (or rent), could the landlord
compel the tenant to pay it? ...
But a tax on Land Values does not
add to the cost of producing
land. Land is not a thing of human production. Man does not produce
land! He finds it already in existence when he comes into the world.
Its price, therefore, is not fixed by the cost of production, but is
always the highest price that anyone can give for the privilege of
using a particular piece. Land, unlike things that must be constantly
produced by labor, has no normal value based on the cost of
production, but ranges in value from nothing at all to the enormous
values that attach to choice sites in great cities, or to mineral
deposits of superior richness, when the growth of population causes a
demand for their use.
Hence a tax on Land Values,
instead of enabling the holder of
land to charge that much more for his land, gives him no power to
charge an additional penny. On the contrary, by making it more costly
to hold land idle, it tends to increase the amount of land which
owners must strive to secure tenants or purchasers for. Thus
the effect of a tax on Land Values is not to increase the rent that
the tenant must pay the owner for the use of the land, but rather to
reduce it. And since the tax must be paid out of what the land will
yield the owner, its effect would be to reduce the price for which
the land could be sold outright.
... read the whole article
Nic Tideman: The Case
for Site Value Rating
The Social Justice of Site Value
Rating
The Efficiency of Site Value Rating
How Valuations would be Made
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. ...
It has sometimes been alleged that
if site value rentals were
taxed, the owners of sites would simply pass the taxes on to the
users of sites. Such assertions generally come from a serious
misunderstanding of economics. An economic understanding of payments
for the use of land presumes that negotiations between owners of land
and potential users, over the terms on which land is to be used, are
conducted on the basis of each side doing as well for itself
financially as its position permits. Owners rent land for the most
they can get, and if one potential user is not prepared to pay what
the land is worth, then the owner will find someone else who is
prepared to pay that much. There are, nevertheless, two ways in which
site value rating could result in higher payments for the use of
land.
- One way is that there could be individuals who rent land
for amounts less than what the market will bear. If there are such
individuals, they would be able to raise the rents they charged, to at
least some extent, when they were required to pay site value ratings.
- The second way in which higher payments for the use of
land could come about from site value rating is that if site value
rating is accompanied by reductions in other taxes, as it ought to be,
then these tax reductions would make land more valuable. Where this
occurred, rents paid for the use of land would rise. But this does not
constitute "passing a tax on." There is no guarantee that the amounts
by which rental values would rise would correspond to the site value
ratings. And in any case, if land were taxed according to its full
rental value, all of what owners of land now collect in rents would be
collected by the government. ... Read the whole article
Karl Williams: Social Justice In
Australia: ADVANCED KIT
WHY
LVT CANNOT BE PASSED ON TO THE TENANT
"A
tax upon ground-rents would not raise the rents of houses. It would
fall altogether upon the owner of the ground-rent, who acts always as a
monopolist, and exacts the greatest rent which can be got for the use
of his ground." - Adam Smith, (1720 - 1790)
Adam Smith's statement above is the voice of authority. But we
are
going to prove what he just states. In this section we shall endeavour:
- To prove that a landlord cannot shift a tax levied on land
values on to a tenant
- To deepen your understanding of classical economics and
- To stimulate in you a bit of love for the understanding of
real economics, instead of thinking it as dry and dead boring.
With most commodities, the
imposition of taxes leads producers/traders
to pass on the tax to consumers, eventually resulting in higher prices
and lower sales. But land is something quite unique, as we've seen, and
doesn't behave like a mere commodity. ... Read the
entire article
Herbert J. G. Bab: Property
Tax -- Cause of Unemployment (circa 1964)
Let
us now turn to that part of the
tax that is assessed on land. Increases in population,
immigration from the farms and other forces have led to a rapid
increase in the population of our large cities and metropolitan areas. Population
pressure is bound to increase the value of urban land. Yet an adequate
system of land taxation could have prevented the steep rise in urban
land values.
Economists agree that taxes on land can not be shifted but are
capitalized. For instance a lot having a value of $10,000 -- will have
an imputed or expected income of $500 -- assuming a 5% rate of
capitalization. A 2-1/2% yearly "ad valorem" tax would reduce the
imputed income by $250 -- or 50%. Such a tax would naturally reduce the
value of the land by the same percentage. Read
the whole article
Henry George: Justice
the Object -- Taxation the Means (1890)
We do not propose a tax upon land,
as people who misapprehend us
constantly say. We do not propose a tax upon land; we propose a tax
upon land values, or what in the terminology of political economy is
termed rent; that is to say, the value which attaches to land
irrespective of any improvements — in or on it; that value which
attaches to land, not by reason of anything that the user or improver
of land does — not by reason of any individual exertion of labour,
but by reason of the growth and improvement of the community. A tax
that will take up what John Stuart Mill called the unearned
increment; that is to say, that increment of wealth which comes to
the owner of land, not as a user; that comes whether he be a resident
or an absentee; whether he be engaged in the active business of life;
whether he be an idiot and whether he be a child; that growth of
value that we have seen in our own times so astonishingly great in
this city; that has made sand lots, lying in the same condition that
they were thousands of years ago, worth enormous sums, without anyone
putting any exertion of labour or any expenditure of capital upon
them.
Now, the distinction between a
tax on land and a tax on land
values may at first seem an idle one, but it is a most important one.
A tax on land that is to say, a tax upon all land — would
ultimately become a condition to the use of land; would therefore
fall upon labour, would increase prices, and be borne by the general
community. But a tax on land values
cannot fall on all land, because
all land is not of value; it can only fall on valuable land, and on
valuable land in proportion to its value; therefore, it can no more
become a tax on labour than can a tax upon the value of special
privileges of any kind. It can merely take from the individual, not
the earnings of the individual, but that premium which, as society
grows and improves, attaches to the use of land of superior
quality. Read the
entire article
Bill Batt: The Merits of
Site Value Taxation
To a land economist, the land
value and any building value must be
regarded separately: each has its own economic dynamic. As to the land
component, one must understand that the value of that site is due not
to how the owner uses it but rather due to the activity of the whole
neighborhood or even the region. Any value which a land parcel accrues
above the cost of its creation is due to the accretion of what
economists call economic rent. The word rent has a very different
meaning than that used in everyday discourse. Since the community is
responsible for the rise or fall in the value of a land site, or rather
of all those in the neighborhood, any increase in the value of that
location can be reclaimed by that community more than by the
titleholder alone. Were it not for the accretion of land rent on a
parcel, all land would have the same market value.
When one looks at the value of land in any broad way, its value
will be
highest at the center and falls as one looks out to the frontier. The
highest value land, that with the greatest accrued rent, is at the very
center of the city -- usually where the commercial parcels are located.
In the spring of 1998, one land parcel (the building was to be razed)
of less than an acre and split in two pieces in New York City's Times
Square was sold by Prudential Life to Disney for an estimated $240
million,19
more than the value of all the land and buildings together in the lands
north of the Mohawk River/Erie Canal in New York State. The highest
value land is
typically surrounded by a belt of residential areas, and with farmlands
starting at the fringe. The more valuable parcels are taxed, the more
their titleholders will find ways to recover their carrying costs. And
it cannot affect the behavior of tenants as any change in burden is not
passed through. In this sense,
land value taxation fosters clustered development and reverses the
egregious patterns of sprawl. Jessica Matthews, now with the Council on
Foreign Relations, recently wrote a syndicated piece observing that,
In a now familiar sequence, developers reach for the cheapest land, out
in the cow pastures. Government is left to fill in behind with
brand-new infrastructure -- roads, sewerage systems and schools -- paid
for in part by those whose existing roads and schools are left to
decline. Property values rise in a ring that marches steadily outward
from the city and fall in older suburbs inside the moving edge.
Because residential development can't meet the public bills, local
governments compete for commercial investment with tax discounts that
deplete their revenues still further. Property taxes then rise,
providing an incentive for new development.
Years of such leapfrogging construction devours land at an astonishing
pace.20
Taxing high value land parcels encourages their efficient use.
The
highest value parcels will then be settled at sufficient density that
public transportation services become economically viable -- experts
recognize that it typically takes at least 10-12 households per acre
for this to happen.21 This
both relieves dependency upon motor vehicle transportation and enhances
the livability of communities. Taxing land alone also removes the
penalty for titleholders who want to improve their properties. Under
current property tax structures, one is penalized if one adds a garage,
an extra wing of rooms, or in any way makes an upgrade. This is
perverse: when people maintain and improve their homes and other
buildings it is a social and economic benefit.
Taxing land by its value has many economic advantages. The first
is
that it is equitable: those who have title to the most land value will
pay the most taxes; those who have no land pay no taxes. Because a tax
on land alone cannot be passed on to tenants, this means that all those
households that do not own their own home will pay no taxes.
Nationally
only 65 percent of households are homeowners; in New York State, it's
only 52 percent.22
And since we know that it is typically the wealthier element of
the
society that owns there is a certain fairness in this. Of those parcels
that currently pay taxes on their real property, about half are
homeowners, and the remainder are commercial, industrial, and
agricultural titleholders. Agricultural
parcels typically have very little market value because their
location is so remote; they would have little if any tax burden. Commercial
parcels, in contrast, are usually sited in very high value
locations, and therefore would pay the most. A shift of taxes away from
buildings and onto land alone typically relieves homeowners, and adds
to the burden of high value parcels (usually in commercial cores) that
are underused relative to their value -- fully depreciated structures,
parking lots, drive-in banks, gas stations, fast food services, and so
on.... Read the whole piece
Bill Batt: The Nexus of
Transportation, Economic Rent, and Land Use
The one kind of tax where there
is no deadweight loss whatsoever is
that imposed upon an base with inelastic supply. Since land and some
other elements of nature cannot be increased in quantity resulting in a
completely vertical supply curve, no inefficiency is incurred by such a
tax. Consider two cases of a tax commonly found worldwide on real
estate. Because a real property tax is actually two taxes from the
standpoint of economic dynamics -- the tax on the land component and
the tax on the improvement component, each is considered here as a
separate case. In the first case, the tax on the land component alone
is illustrated. In the other case, the tax on the improvement component
(i.e. the building) is shown. What happens?
The tax on land alone is completely capitalized in the market
value of
the land parcel and is not passed forward to the tenant. This is
important, because when the roughly 1/3 of all American households that
rent rather than own their own homes are removed from the burden of
property taxation, it has the effect of making the land tax far more
progressive. Those land parcels that do pay taxes are split between
residential and non-residential titleholders. Even though the
residential households are likely to constitute the overwhelming number
of parcels in the tax base, they are likely to bear only about half the
taxes paid, the remaining share borne largely by commercial sites.
Agricultural parcels may in some instances represent a large area of
land, but it is likely to be of far lower market value and represent
less than five percent of the revenue paid. The land component of a tax
on real property then is actually highly progressive. ...
Consider now the tax on the improvement
portion of the property parcel.
Here, depending upon the slope of the supply curve and the demand
curve, the tax is likely to be passed forward to a greater or lesser
extent to the tenant. Very little of it in fact is typically borne by
the landlord. The existence of the tax on structures incurs a
depressing effect upon the rate of investment, just like all such taxes
with more than zero elasticity. And the greater scarcity of sites for
rent, either commercial or residential, has the impact of driving up
prices for their use. What is even more significant, as noted earlier,
is that the shift of taxes off improvements and onto landsites
encourages the use of those sites to the full extent of their
locational value, thereby halting and even reversing the centrifugal
forces of sprawl development. Greater investment in high value
landsites creates greater density and proximity in the community,
enhancing the accessibility of those sites to one another and reducing
the need for transportation mobility.... read
the whole article
Frank Stilwell and Kirrily Jordan: The
Political Economy of Land: Putting Henry George in His Place
The demand for land involves both use values and exchange
values. People seek land because the housing built on it provides
shelter
and security, but they also purchase it as a store of wealth and
a means of capital appreciation. A particularly important driver
of real estate prices has been the speculative demand, as investors
seek capital gains in the property market. In Australia, this has
been such common and longstanding practice that it has been referred
to as ‘the national hobby’ (Sandercock, 1979). By ‘creaming
off’ a part of this potential capital gain, a higher uniform
rate of land tax would act as a disincentive to this property speculation,
and could therefore be expected to exert a downward influence on
property prices. Georgists have always been emphatic that land
taxes are different from other taxes in this respect – they
depress prices because they reduce demand. So the usual fears that
a tax will be ‘passed on’ to customers (such as housing
tenants, in this case) do not apply.4 By making land less attractive
as an item to be purchased in the hope of making capital gains,
land tax can therefore be an important check on the inflationary
process. ... read the whole
article
Bill Batt: Comment on
Parts of the NYS Legislative Tax Study Commission's 1985
study “Who Pays New York Taxes?”
Analysis of “Who Pays?”
Sufficient time has passed, I think, that I can now freely make
observations on some work of the Tax Study Commission, particularly
both since I have more expertise on tax policy and because the Commission's
work really reflected the views of Professor Pomp and no one else.
Only one paper touched on the real property tax, and only in a few
passages. It was originally contracted to University of Missouri
Professor Donald Phares, and this draft was then rewritten by the
Commission (i. e., Rick Pomp) to be released as a working paper. “Who
Pays New York Taxes?” is accessible, by those with resources,
in major libraries at least in New York State. The most recent statistical
data available at that time was for 1980, and in only three paragraphs
of the thirty-three pages of text is the real property tax treated
explicitly. An additional seventy pages have occasional references
to it, with some rather interesting tables and graphics. All of these,
however, are somewhat misleading. Were Messrs. Phares and Pomp consciously
part of the confusion common in dealing with matters of property
taxation or were they simply unaware of the sleight-of-hand that
underlies most of the work in this area? My personal view is that
they were simply not interested in probing more deeply into an area
that was really beyond the Commission's scope. Still, the authors
recognized that “Property taxes are the fiscal mainstay of
local government. The incidence of the property tax is of substantial
consequence in evaluating the State's overall tax structure.”6
As for their treatment of the New York Local Property Tax, the authors
first identified seven separate categories of real property: owner-occupied,
rental, commercial, industrial, public utilities, farmland, and unimproved.
This is a somewhat unusual classification, different even than those
universally used in New York State.7 One can see immediately that
there will necessarily be some overlap – “unimproved” parcels
can sometimes be assigned in other categories according to their
zoning. And rental property is commercial, whomever the tenants may
be, whether households or businesses.
To their credit, however, the authors devoted considerable attention
to the issue of tax shifting, which is never an easy subject, including
a discussion of taxes on real property. They recognized that no shifting
occurs for vacant parcels and titleholders therefore bear the full
burden. So also for homeowners. For rental properties they assigned
50% of the burden to tenants, 25% to corporate stockowners, and 25%
to real estate owners. For commercial, industrial, farmers, and public
utility parcels, the shifting was put at 67%. In every instance where
shifting is recognized, the part never shifted, of course, is the
land component, and this is implicit in their assumption. These were
referred to as “consensus incidence assumptions regarding the
property tax.”8
A third consideration they recognized is the potential for tax exporting
to other states, more often important for classes other than residential
property but still significant. It occurs both on account of titleholders
being out-of-state and also because of what is known as the “federal
offset,” i.e., the deductibility of state and local taxes for
federal tax itemizing. For all New York State and local taxes taken
together, they estimated that roughly 10% percent of total revenue
is exported, but for real property taxes, the total exported is only
about half that.
Except in the implicit recognition involved in their analysis of
shifting, the distinction between land and improvements was opaque.
This is a remarkable oversight, because improvements typically depreciate
at the rate of 0.5 to 1.5 percent annually; only land values appreciate.9
And in view of the fact that assessments in New York localities have
historically been very infrequent, one can understand how the land
values are in reality a far higher proportion of parcel value than
assessments would suggest.10 This means that in a period of seven
years, for example, a property parcel could easily increase in price
by 50 percent, far more if recent real estate market history is to
be illustrative. Moreover real estate prices varied greatly in their
rates of change during this time span; upstate New York was largely
stable, but downstate localities experienced huge booms and busts.
Recognition of this would tend to favor what is known as the “new
view” of property tax incidence, an acceptance of the idea
that ”the burden of the tax on improvements remains with the
owners of capital in the form of a lower net return instead of being
shifted to users of property in the form of higher rents or prices.”11
Proponents point out that “the tax on improvements is essentially
a nationwide tax on capital . . . [and therefore] its incidence will
depend on the characteristics of supply and demand for capital nationally
rather than on a single market.”12 The effect of this is to
make the tax ”highly progressive.”13 Nonetheless, in
a small footnote, Messrs. Pomp and Phares elected to go with the “old
view” in stating that, “it seems most appropriate to
assume that the new view does not apply to the analysis of tax burdens
within one specific state (underlining in original). Thus, the old
or traditional view was adhered to in the analysis. . ; that is,
the excise effect of the tax was considered dominant.”14 The
ubiquity of New York's property tax, and that it has over 1,300 local
assessment and tax districts, may well have escaped their notice.
This point is significant because the authors took great pains on
several occasions to emphasize that the New York real property tax
was the “most regressive element in the State's tax structure.”15
In the Executive Summary, two of the thirteen bullets stressed that ”the
dominant influence in the tax system is the local real property tax,” and
that ”the local property tax is highly regressive, particularly
the owner-occupied component.”16
This was portrayed graphically, along with an accompanying table,
using fourteen separate tax brackets showing effective tax rates
ranging in a U, or a “reverse J curve,” from a high of
20.51 percent of income for the lowest group, to 3.37 percent for
the second to highest group.17 Nowhere in the Report is there an
indication of what income measure was employed – Federal Adjusted
Gross Income or Taxable Income, most likely. But it may also have
been household income. If so, this could well have excluded significant
income sources, particularly from those households receiving social
security income and/or retirement income for New York State or local
pensioners which is not taxable for state purposes. Whatever, this
was recognized implicitly in the observation that ”many persons
are only temporarily in the lowest class ($0 - $4,199 for 1980) because
of retirement, short-term unemployment, and so forth. If their income
were measured over a longer period of time, rather than on the basis
of only one year, they would not fall in the lowest class. Thus,
the [drastically high effective tax rate] figure for this class .
. . overstates the true burden on this group.”18
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