Little justification exists for taxing buildings, or improvements of any
sort, so this question is easily disposed of. The practice is explained
largely as a matter of historical inertia. Only in the recent century or
two have buildings represented any significant capital value; prior to
the rise of major cities, the value of real property lay essentially in
land. American cities today typically record aggregate assessed land values – at
least when the valuations are well-done – at about 40% to 60% of
total taxable value, that is, of land and buildings taken together.31 Skyscrapers
reflect enormous capital investment, and this expenditure is warranted
because of the enormous value of locational sites. Each site gets its market
price from the fact that the total neighborhood context creates an attractive
market presence and ambience. By taxing buildings, however, we impose a
penalty on their optimum development as well as on the incentives for their
maintenance. Moreover, taxes on buildings take away from whatever burden
would otherwise be imposed on sites, with the result that incentives for
their highest and best use is weakened. Lastly, the technical and administrative
challenges of properly assessing the value of improvements is daunting,
particularly since they must be depreciated for tax and accounting purposes,
evaluated for potential replacement, and so on. In fact most costs associated
with administration of property taxation and appeal litigation involve
disputes over the valuation of structures, not land values.
Land value taxation, on the other hand, overcomes all these obstacles. Locations
are the beneficiaries of community services whether they are improved or
not. As has been forcefully argued by this writer and others elsewhere,32
a tax on land value conforms to all the textbook principles of sound tax
theory. Some further considerations are worth reviewing, however, when looking
at ground rent as a flow rather than as a “present value” stock.
The technical ability to trace changes in the market prices of sites – or
as can also be understood, the variable flow of ground rent to those sites – by
the application of GIS (geographic information systems) real-time recording
of sales transactions invites wholesale changes in the maintenance of cadastral
data. The transmittal of sales records as typically received in the offices
of local governments for purposes of title registration over to Assessors’ offices
allows for the possibility of a running real-time mapping of market values.
Given also that GIS algorithms can now calculate the land value proportions
reasonably accurately, this means that “landvaluescapes” are
easily created in ways analogous to maps that portray other common geographic
features. These landvaluescapes reflect the flow of ground rent through local
or regional economies, and can also be used to identify the areas of greatest
market vitality and enterprise. The flow of economic rent can easily be taxed
in ways that overcomes the mistaken notion that it is a stock. Just as income
is recognized as a flow of money, rent too can (and should) be understood
as such.
The question still begs to be answered, “why tax land?” And
what happens when we don’t tax land? Henry George answered this more
than a century ago more forcefully and clearly, perhaps, than anyone has
since. He recognized full well that the economic surplus not expended by
human hands or minds in the production of capital wealth gravitates to land.
Particular land sites come to reflect the value of their strategic location
for market exchanges by assuming a price for their monopoly use. Regardless
whether those who acquire title to such sites use them to the full extent
of their potential, the flow of rent to such locations is commensurate with
their full capacity. This is why John Stuart Mill more than a century ago
observed that, “Landlords grow richer in their sleep without working,
risking or economizing. The increase in the value of land, arising as it
does from the efforts of an entire community, should belong to the community
and not to the individual who might hold title.”33 Absent its recovery
by taxation this rent becomes a “free lunch” to opportunistically
situated titleholders. When offered for sale, the projected rental value
is capitalized in the present value for purposes of attaching a market price
and sold as a commodity. Yet simple justice calls for the recovery in taxes
what is the community’s creation. Moreover, the failure to recover
the land rent connected to sites makes it necessary to tax productive activities
in our economy, and this leads to economic and technical inefficiency known
as “deadweight loss.”34 It means that the economy performs suboptimally.
Land, and by this Henry George meant any natural factor of production not
created by human hands or minds, is ours only to use, not to buy or sell
as a commodity. In the equally immortal words of Jefferson a century earlier, “The
earth belongs in usufruct to the living; . . . [It is] given as a common
stock for men to labor and live on.”35 This passage likely needs a
bit of parsing for the modern reader. The word usufruct, understood since
Roman times, has almost passed from use today. It means “the right
to use the property of another so long as its value is not diminished.”36
Note also that Jefferson regarded the earth as a “common stock;” not
allotted to individuals with possessory titles. Only the phrase “to
the living” might be subject to challenge by forward-looking environmentalists
who, taking an idea from Native American cultures, argue that “we do
not inherit the earth from our ancestors; we borrow it from our children.” The
presumption that real property titles are acquired legitimately is a claim
that does not withstand scrutiny; rather all such titles owe their origin
ultimately to force or fraud.37
If we own the land sites that we occupy only in usufruct, and the rent that
derives from those sites is due to community enterprise, it is not a large
logical leap to argue that the community’s recovery of that rent should
be the proper source of taxation. This is the Georgist argument: that the
recapture of land rent is the proper – indeed the natural – source
of taxation.38
... read the whole commentary