Levels of Government

Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent

From 1778 to the adoption of the U.S. Constitution in 1789, the United States was governed by the Articles of Confederation. Article VII stated the expenses of the Confederation shall be defrayed out of a common treasury, which shall be supplied by the several states, in proportion to the value of all land within each state, granted to or surveyed for any person, as such land and the buildings and improvements thereon shall be estimated according to such mode as the United States in Congress assembled, shall from time to time direct and appoint. The taxes for paying that proportion shall be laid and levied by the authority and direction of the legislatures of the several states within the time agreed upon by the United States in Congress assembled.17

Thus, the states would levy taxes and each would pass on a share of the federal budget based on its land value. Individuals would pay taxes only to their state and local governments.18 ...

Making up about one-fifth of national income, land value taxation would provide about 60 percent of current U.S. federal, state, and local government revenue, which would be more than adequate for government spending if it did not include transfer payments. The taxable value of the land in the economy would increase over time for two reasons.

• First, a shift from taxing production to taxing land values would eliminate the lost output due to taxes — about $1 trillion per year.44 One-fifth of that would be rent, thus increasing rent by $300 billion.
• Secondly, the economy would grow faster, which also would increase rent over time.

As a concrete example, the transition to land value taxation can be accomplished in these steps:

1. Each county expands its register of all real estate and the title holders to include all lands owned by governments and previously non-registered entities.
2. Local real estate taxes are split into two taxes, one on land value and one on improvements.
3. The county real estate assessment function is transferred to land value assessment boards, comprised of representatives from the federal, state, county, and municipal governments as well as real estate professionals and scholars. These boards appoint assessors and establish an appeals process, similar to current real estate tax appeals.
4. All land is assessed at its current market value.
5. Over a period of years, depending on how much land values already have fallen in anticipation of the tax shift, the tax on improvements is reduced, while the tax on land values is increased. (An immediate tax shift to geo-rent, with other taxes reduced or abolished, could be compensated, for those with net losses, with special bonds whose face-value interest payments would decrease over time; this would have an effect similar to the gradual increase in the geo-rent tax rate.)
6. Sales taxes, tariffs, and excise taxes are reduced and eventually eliminated.
7. The personal exemption in federal income taxes is raised each year, until it eventually includes all income, at which time all state and federal personal income taxes are abolished. The taxation of corporate profits is also phased out.
8. The value of material land (minerals, oil, water, etc.), the electromagnetic spectrum, naturally growing forests, and other natural resources is taxed at gradually increasing rates up to a substantial amount, if not all, of the unimproved rental value.
9. An amendment to the Constitution is enacted prohibiting any taxation of wages, sales, profits, value-added, or produced wealth and establishing the taxation of the value of land and other natural resources, along with voluntary user fees and charges for pollution and congestion, as the only sources of public revenues. The amendment also establishes a land value tax commission with representatives from the federal, state, local, territorial, and Indian-nation governments to divide the taxes raised. Generally, taxes raised from off-shore oil and water, atmospheric pollution, airline routes, and other continental uses would be allocated to the federal government, and the rest would be allocated to the state (or provincial, in Canada), local, territorial, and Indian-nation governments. If the national government needs additional revenue, it is obtained from the state or territorial governments in proportion to their land value, as was specified in the Articles of Confederation that preceded the U.S. Constitution.
10. Top-down revenue sharing from federal to state and from state to local government stops. Many services, functions, and agencies are transferred from the central government to the state/provincial and local governments. ...
    

Land Value Taxation and Decentralized Governance

The United States is a federation of states (and Indian-nation reservations), with many government functions such as criminal law, education, and local services provided by the states. Since the federal income tax was enacted in 1913, taxation and authority have shifted increasingly to the federal government.

In 1902, federal taxes represented 37 percent of total revenue to governments at all levels.45 By 2002, federal taxes represented 67 percent of the government revenue pie.46 The share taken by state governments rose from 11.4 percent in 1902 to 21.5 percent in 1986. Local governments’ share fell from 51.3 percent in 1902 to 13.7 percent in 1986.

The change in the share of tax revenues taken by each level of government has occurred in large part because of the relative ease of increasing income taxes at the federal level, and the relative difficulty of increasing local and state taxes. Taxpayers find it much easier to respond to changes in state and local taxes, by moving to lower-tax communities. It is far more difficult to avoid taxes imposed by the federal government — especially since U.S. citizens are taxed even if they are abroad.

Revenue-sharing from the federal government to the states is, in effect, a tax cartel among the states, collusion to tax the population and then divide the funds among the states. Taxation at the federal level also encourages spending by the federal government instead of the states, so now we have federal departments and agencies for education, housing, health and welfare, energy, and other fields that once were local, state, or private-sector matters.

Local and state governments, once willing to go along with the federal government’s tax-and-revenue-sharing scheme, are beginning to realize centralized taxing brings with it centralized authority, dramatically reducing local control. Revenue-sharing comes with strings attached: Local and state governments must abide by federal government mandates in order to obtain the funds, taken from their residents in the first place. Revenue-sharing allows the federal government to sidestep the Tenth Amendment to the Constitution, which provides that powers not specifically delegated to the federal government are reserved to the people and the states.

Land value taxation would shift economic power back to state and local governments. Land is suited to local taxation because — unlike enterprise, capital, and labor — it cannot be moved. Land is also the logical source of local public finance because it does not burden enterprise, so that entrepreneurs don’t even want to run from it. Indeed, entrepreneurs welcome a shift to land value taxation, not only because their economic profits are not taxed if all taxation is on land values, but also because land value taxation reduces the price of land, so they do not need to borrow so much when they invest funds in an enterprise.

When public finance is based on land value taxation, government revenues flow up, instead of trickling down from the federal government to the states and then to local governments. Real estate taxes today are assessed and collected primarily by county governments; under a system of land value taxation, funds raised would flow up from the counties to the states, and only then to the federal government.

Land value taxation would create a decentralizing force, shifting or “devolving” power down to local government in accord with the principle of subsidiarity: that which can be most efficiently done by individuals or smaller jurisdictions should not be done by larger or higher-level jurisdictions. Government functions would then come under more observation and control by the voters, who can monitor and alter local governments much more easily than remote federal agencies.... read the whole document

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

Q3. In an interior or frontier town, where land has but little value, how would you raise enough money for schools, highways, and other public needs?
A. There is no town whose finances are reasonably managed in which the land values are insufficient for local needs. Schools, highways, and so forth, are not local but general, and should be maintained from the land values of the state at large.

... read the book

Charles T. Root — Not a Single Tax! (1925)

Every community, whatever its political name and extent -- village, city, state or province or nation -- has its own normal, unfailing income, growing with the growth of the community and always adequate to meet necessary governmental expenditure.

To explain: Every community has an indefeasible original right to the land on which it exists, and to all the natural, unmodified properties and advantages of that particular area of the earth's surface. To this land in its natural state, undrained, unfenced, unfertilized, unplanted and unoccupied, including its waters, its contents and its location, every individual in the community (which may consist of any political unit selected) has an equal right, while all the individuals together have a joint right to the value for use which society has conferred upon these natural advantages.

This value for use is known as "Land Value," or by the not particularly descriptive but generally adopted name of "Economic Rent."

Briefly defined the land value or economic rent of any piece of ground is the largest annual amount voluntarily offered for the exclusive use of that ground, or of an equivalent parcel, independent of improvements thereon. Every holder or user of land pays economic rent, but he now pays most of it to the wrong party. The aggregate economic rent of the territory occupied by any political unit is, as has been stated above, always sufficient, usually more than sufficient, for the legitimate expenses of the government of that unit. As also stated above, the economic rent belongs to the community, and not to individual landowners. ... read the whole article