Charles B. Fillebrown: A Catechism of Natural Taxation, from Principles of Natural Taxation (1917)

Q50. How could the landowner escape the alleged burden of an increase in his land tax?
A. Simply by assuming the legitimate role of a model landlord, by putting his land to suitable use, in providing for tenants at lowest possible price the best accommodations and facilities appropriate to the situation that money can buy.

... read the whole article

Henry George: The Common Sense of Taxation (1881 article)

Evidently this regard for the general good is the true principle of taxation. The more it is examined the more clearly it will be seen that there is no valid reason why we should, in any case, attempt to tax all property. That equality should be the rule and aim of taxation is true, and this for the reason given in the Declaration of Independence, that all men are created equal. But equality does not require that all men should be taxed alike, or that all things should be taxed alike. It merely requires that whatever taxes are imposed shall be equally imposed upon the persons or things in like conditions or situations; it merely requires that no citizen shall be given an advantage, or put at a disadvantage, as compared with other citizens.

The true purposes of government are well stated in the preamble to the Constitution of the United States, as they are in the Declaration of Independence. To insure the general peace, to promote the general welfare, to secure to each individual the inalienable rights to life, liberty, and the pursuit of happiness — these are the proper ends of government, and are therefore the ends which in every scheme of taxation should be kept in mind. ...

But while no limit can be properly fixed for the amount of taxation, the method of taxation is of supreme importance. A horse may be anchored by fastening to his bridle a weight which he will not feel when carried in a buggy behind him. The best ship may be made utterly unseaworthy by the bad stowage of a cargo which properly placed would make her the stiffer and more weatherly. So enterprise may be palsied, industry crushed, accumulation prevented, and a prosperous country turned into a desert, by taxation which rightly levied would hardly be felt. ...

Nothing is clearer than that when a farmer who wants more capital puts a mortgage on his farm, no new value is thereby created. Yet, in most of our States, both the farm and the mortgage are taxed; though so obvious is the double taxation that in some of them the clumsy expedient of making an exemption to the debtor is resorted to.

But it is manifest that property of this kind is not a fit subject for taxation, and ought not to be considered in making up the assessment rolls. It has, in itself, no value. It is merely the representative, or token, of value — the certificate of ownership, or the obligation to pay value. It either represents other property, or property yet to be brought into existence. And, as nothing real can be drawn from that which is not real, taxation upon property of this kind must ultimately fall, either upon the property represented, in which case there is double taxation, or upon those whose obligations it expresses, in which case men are taxed, not upon what they own, but upon what they owe; and all cumbrous devices to prevent the unjust effects of such taxation, like other complications of the revenue system, simply give to the stronger and more unscrupulous opportunities of throwing the burden upon the weaker and more conscientious. Property of this kind ought not to be taxed at all. Property in itself valuable is clearly that with which any wise scheme of taxation should alone deal.

To consider the nature of property of this kind is again to see a clear distinction. That distinction is not, as the lawyers have it, between movables and immovables, between personal property and real estate. The true distinction is between property which is, and property which is not, the result of human labor; or, to use the terms of political economy, between land and wealth. For, in any precise use of the term, land is not wealth, any more than labor is wealth. Land and labor are the factors of production. Wealth is such result of their union as retains the capacity of ministering to human desire. A lot and the house which stands upon it are alike property, alike have a tangible value, and are alike classed as real estate. But there are between them the most essential differences. The one is the free gift of Nature, the other the result of human exertion; the one exists from generation to generation, while men come and go; the other is constantly tending to decay, and can only be preserved by continual exertion. To the one, the right of exclusive possession, which makes it individual property, can, like the right of property in slaves, be traced to nothing but municipal law; to the other, the right of exclusive property springs clearly from those natural relations which are among the primary perceptions of the human mind. Nor are these mere abstract distinctions. They are distinctions of the first importance in determining what should and what should not be taxed.

For, keeping in mind the fact that all wealth is the result of human exertion, it is clearly seen that, having in view the promotion of the general prosperity, it is the height of absurdity to tax wealth for purposes of revenue while there remains, unexhausted by taxation, any value attaching to land. We may tax land values as much as we please, without in the slightest degree lessening the amount of land, or the capabilities of land, or the inducement to use land. But we cannot tax wealth without lessening the inducement to the production of wealth, and decreasing the amount of wealth. We might take the whole value of land in taxation, so as to make the ownership of land worth nothing, and the land would still remain, and be as useful as before. The effect would be to throw land open to users free of price, and thus to increase its capabilities, which are brought out by increased population. But impose anything like such taxation upon wealth, and the inducement to the production of wealth would be gone. Movable wealth would be hidden or carried off, immovable wealth would be suffered to go to decay, and where was prosperity would soon be the silence of desolation.

And the reason of this difference is clear. The possession of wealth is the inducement to the exertion necessary to the production and maintenance of wealth. Men do not work for the pleasure of working, but to get the things their work will give them. And to tax the things that are produced by exertion is to lessen the inducement to exertion. But over and above the benefit to the possessor, which is the stimulating motive to the production of wealth, there is a benefit to the community, for no matter how selfish he may be, it is utterly impossible for any one to entirely keep to himself the benefit of any desirable thing he may possess. These diffused benefits when localized give value to land, and this may be taxed without in any wise diminishing the incentive to production.

To illustrate: A man builds a fine house or large factory in a poorly improved neighborhood. To tax this building and its adjuncts is to make him pay for his enterprise and expenditure — to take from him part of his natural reward. But the improvement thus made has given new beauty or life to the neighborhood, making it a more desirable place than before for the erection of other houses or factories, and additional value is given to land all about. Now to tax improvements is not only to deprive of his proper reward the man who has made the improvement, but it is to deter others from making similar improvements. But, instead of taxing improvements, to tax these land values is to leave the natural inducement to further improvement in full force, and at the same time to keep down an obstacle to further improvement, which, under the present system, improvement itself tends to raise. For the advance of land values which follows improvement, and even the expectation of improvement, makes further improvement more costly.

See how unjust and short-sighted is this system. Here is a man who, gathering what little capital he can, and taking his family, starts West to find a place where he can make himself a home. He must travel long distances; for, though he will pass plenty of land nobody is using, it is held at prices too high for him. Finally he will go no further, and selects a place where, since the creation of the world, the soil, so far as we know, has never felt a plowshare. But here, too, in nine cases out of ten, he will find the speculator has been ahead of him, for the speculator moves quicker, and has superior means of information to the emigrant. Before he can put this land to the use for which nature intended it, and to which it is for the general good that it should be put, he must make terms with some man who in all probability never saw the land, and never dreamed of using it, and who, it may be, resides in some city, thousands of miles away. In order to get permission to use this land, he must give up a large part of the little capital which is seed-wheat to him, and perhaps in addition mortgage his future labor for years. Still he goes to work: he works himself, and his wife works, and his children work — work like horses, and live in the hardest and dreariest manner. Such a man deserves encouragement, not discouragement; but on him taxation falls with peculiar severity. Almost everything that he has to buy — groceries, clothing, tools — is largely raised in price by a system of tariff taxation which cannot add to the price of the grain or hogs or cattle that he has to sell. And when the assessor comes around he is taxed on the improvements he has made, although these improvements have added not only to the value of surrounding land, but even to the value of land in distant commercial centers. Not merely this, but, as a general rule, his land, irrespective of the improvements, will be assessed at a higher rate than unimproved land around it, on the ground that "productive property" ought to pay more than "unproductive property" — a principle just the reverse of the correct one, for the man who makes land productive adds to the general prosperity, while the man who keeps land unproductive stands in the way of the general prosperity, is but a dog-in-the-manger, who prevents others from using what he will not use himself.

Or, take the case of the railroads. That railroads are a public benefit no one will dispute. We want more railroads, and want them to reduce their fares and freight. Why then should we tax them? for taxes upon railroads deter from railroad building, and compel higher charges. Instead of taxing the railroads, is it not clear that we should rather tax the increased value which they give to land? To tax railroads is to check railroad building, to reduce profits, and compel higher rates; to tax the value they give to land is to increase railroad business and permit lower rates. The elevated railroads, for instance, have opened to the overcrowded population of New York the wide, vacant spaces of the upper part of the island. But this great public benefit is neutralized by the rise in land values. Because these vacant lots can be reached more cheaply and quickly, their owners demand more for them, and so the public gain in one way is offset in another, while the roads lose the business they would get were not building checked by the high prices demanded for lots. The increase of land values, which the elevated roads have caused, is not merely no advantage to them — it is an injury; and it is clearly a public injury. The elevated railroads ought not to be taxed. The more profit they make, with the better conscience can they be asked to still further reduce fares. It is the increased land values which they have created that ought to be taxed, for taxing them will give the public the full benefit of cheap fares.

So with railroads everywhere. And so not alone with railroads, but with all industrial enterprises. So long as we consider that community most prosperous which increases most rapidly in wealth, so long is it the height of absurdity for us to tax wealth in any of its beneficial forms. We should tax what we want to repress, not what we want to encourage. We should tax that which results from the general prosperity, not that which conduces to it. It is the increase of population, the extension of cultivation, the manufacture of goods, the building of houses and ships and railroads, the accumulation of capital, and the growth of commerce that add to the value of land — not the increase in the value of land that induces the increase of population and increase of wealth. It is not that the land of Manhattan Island is now worth hundreds of millions where, in the time of the early Dutch settlers, it was only worth dollars, that there are on it now so many more people, and so much more wealth. It is because of the increase of population and the increase of wealth that the value of the land has so much increased. Increase of land values tends of itself to repel population and prevent improvement. And thus the taxation of land values, unlike taxation of other property, does not tend to prevent the increase of wealth, but rather to stimulate it. It is the taking of the golden egg, not the choking of the goose that lays it.

Every consideration of policy and ethics squares with this conclusion. The tax upon land values is the most economically perfect of all taxes. It does not raise prices; it maybe collected at least cost, and with the utmost ease and certainty; it leaves in full strength all the springs of production; and, above all, it consorts with the truest equality and the highest justice. For, to take for the common purposes of the community that value which results from the growth of the community, and to free industry and enterprise and thrift from burden and restraint, is to leave to each that which he fairly earns, and to assert the first and most comprehensive of equal rights — the equal right of all to the land on which, and from which, all must live.

Thus it is that the scheme of taxation which conduces to the greatest production is also that which conduces to the fairest distribution, and that in the proper adjustment of taxation lies not merely the possibility of enormously increasing the general wealth, but the solution of these pressing social and political problems which spring from unnatural inequality in the distribution of wealth.

"There is," says M. de Laveleye, in concluding that work in which he shows that the first perceptions of mankind have everywhere recognized a most vital distinction between property in land and property which results from labor, — "there is in human affairs one system which is the best; it is not that system which always exists, otherwise why should we desire to change it; but it is that system which should exist for the greatest good of humanity. God knows it, and wills it; man's duty it is to discover and establish it." ... read the whole article

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)

...Well may the community leave to the individual producer all that prompts him to exertion; well may it let the laborer have the full reward of his labor, and the capitalist the full return of his capital. For the more that labor and capital produce, the greater grows the common wealth in which all may share. And in the value or rent of land is this general gain expressed in a definite and concrete form. Here is a fund which the state may take while leaving to labor and capital their full reward. With increased activity of production this would commensurately increase.

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.

• 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.
• 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.
• 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.

• The farmer would not have to pay out half his means, or mortgage his labor for years, in order to obtain land to cultivate;
• 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*;
• the company that proposed to erect a manufactory would not have to expend a great part of its capital for a site.
• 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.

With natural opportunities thus free to labor;

• with capital and improvements exempt from tax, and exchange released from restrictions, the spectacle of willing men unable to turn their labor into the things they are suffering for would become impossible;
• the recurring paroxysms which paralyze industry would cease;
• every wheel of production would be set in motion;
• demand would keep pace with supply, and supply with demand;
• trade would increase in every direction, and wealth augment on every hand. ... read the whole chapter

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

f. The Single Tax Retains Rent for Common Use.

To retain Rent for common use it is not necessary to abolish land-titles, nor to let land out to the highest bidder, nor to invent some new mechanism of taxation, nor in any other way to directly change existing modes of holding land for use, or existing machinery for collecting public revenues. "Great changes can be best brought about under old forms."109 Let land be held nominally as it is now. Let taxes be collected by the same kind of machinery as now. But abolish all taxes except those that fall upon actual and potential Rent, that is to say, upon land values.

If that were done it is doubtful if land-owners could any longer confiscate enough Rent to be worth the trouble. Even though some surplus were still kept by them, it would be so much more easy to secure Wealth by working for it than by confiscating Rent to private use, to say nothing of its being so much more respectable, that speculation in land values would practically be abandoned. At any rate, the question of a surplus — Rent in excess of the requirements of the community — may be readily determined when the principle that Rent justly belongs to the community and Wages to the individual shall have been recognized by society in the adoption of the Single Tax. 110

110. Thomas G. Shearman, Esq., of New York, author of the famous magazine article on "Who Owns the United States," estimates that sixty-five per cent of the present annual value of the land in the United States would pay all the present expenses of American government — federal, state, county, and municipal. ... read the book

Nic Tideman: Basic Tenets of the Incentive Taxation Philosophy

• Equal Rights Ending Privilege Equal Rights to Land The Proper Disposition of Returns to Different Factors of Production Replacing Existing Taxes Reducing the Price of Land

  The Importance of Constitutional Change Historical Precedents Creating a More Productive Economy Making Housing Affordable Applications Abroad as Well as at Home

  The question I am assigned is whether the taxable capacity of land without buildings is up to the job of financing cities, counties, and schools. Will the revenue be enough? The answer is "yes."

 The universal state and local revenue problem today is whether we must cap tax rates to avoid driving business away. It is exemplified by Governor Pete Wilson of the suffering State of California. He keeps repeating we must make a hard choice: cut taxes and public services, or drive out business and jobs. (When a public figure gives you two choices you know they're both bad, and he wants one of them.)

 The unique, remarkable quality of a property tax based on land ex buildings is that you may raise the rate with no fear of driving away business, construction, people, jobs, or capital! You certainly will not drive away the land. However high the tax rate, not one square foot of it will put on a track shoe and hop out of town. The only bad thing to say about this tax's incentive effects is that it stimulates revitalization, and makes jobs. If some people think that is bad, maybe this attitude is the problem. ...  Read the whole article

Ted Gwartney: A Free Market Strategy to Reduce Sprawl

One means that has long been available but not brought into general use is to exempt buildings from the real estate tax and begin to impose an annual tax on land sites that makes holding land off the market for speculation a costly proposition. An annual fee on land should be set near what the land site alone would yield if rented by the owner to the highest bidder. Think of how this would change the behavior of land owners. If I owned a parcel of land with a rental value of $6,000 a year and that was near what the city charged me as my annual fee, my return on investment as a land speculator would be greatly reduced. In order to generate positive cash flow I would either develop the land myself or put it on the market so that someone else would develop it. At the same time, if my tax rate on the building I constructed on the land was zero, my incentive is to construct a building that maximizes my cash flow (i.e., to develop the parcel to its highest and best use in the market). At minimum, land prices would stabilize and the increase in land brought onto the market would be somewhat offset by increased demand. Land prices to builders would tend to begin to fall over time. ... read the whole article

Nic Tideman:   The Case for Taxing Land

• First, the tax must not be more than the rental value of land, or no one will be willing to hold title to land and pay the tax.  Since the most productive uses of land often require capital that is durable and immobile, it is also necessary for people to be confident when they contemplate investment that the tax will not exceed the rental value of the land over the life of the investment.
• Second, the tax must be administered in such a way that the tax will not increase if the land is used more productively.  That would discourage productive use of the land.
• Finally, the analysis as presented applies only to the indestructible components of land.  If there are ways that people might want to use land that would reduce its value compared to what nature provided (as with mining or fishing), then a tax on land in proportion to its value will give people an inefficient incentive to reduce its value.

Nic Tideman: Land Taxation and Efficient Land Speculation

The optimal timing of development is an important allocative function that can be either enhanced or degraded by the impact of land taxes on land speculation. This paper discusses four types of taxes on land:

• taxes on the rental value of land,
• taxes on the sale value of land,
• taxes on realized income from land, and
• taxes on realized gains from the sale of land.

All four taxes reduce incentives for speculation in land, which is generally beneficial. The third and fourth produce distortions with respect to incentives to develop land, while the first and second do not. All four taxes have some beneficial effect of mitigating imperfections in capital markets. All permit reduction or elimination of taxes with significant dead-weight losses, such as those on improvements. ... read the whole article

Jeff Smith and Kris Nelson: Giving Life to the Property Tax Shift (PTS)

Planners have a litany of great ideas for rebuilding cities(4) -- set-backs, landscaping, pedestrian bridges, bridges, etc -- but have no idea of how to pay for them. One way is to let them pay for themselves. Improving a city raises its land's value. A tax or fee can collect this ground rent that can then be used to pay off the earlier investment in ecologizing the city(5). Indeed, the expected change in land value can be a perfect measure of some proposed improvement's worthiness. If it can pay its way, throw it up. If it can't, then back to the drawing board.

Where planners, armed with the sternest growth control measures, have failed, geonomics can succeed. By making speculation too expensive, it unplugs the "metro tub", letting the flow of development return to its natural course, filling in the vacant lots and abandoned buildings. Clever local governments, no longer able to tax willy-nilly and thus more dependent upon site rent, would squeeze streets, now overly wide for traffic, replacing parking lanes with space for sidewalk cafes beneath rows of shady trees, alongside lanes for bikes, and thereby drive up site values.

As cities grow more livable and lovable, their site values rise. The resultant increase in land dues would push owners to continually convert to highest and best use automatically. In this positive feedback loop, cities would constantly renew.

• If taxes on improvements are low or non-existing and taxes on land are high, the cities are bound to grow vertically and at a fast rate.
• If taxes on improvements are high and taxes on land are low, our cities will spread over larger and larger areas. They will become metropolitan areas and they will grow at a much slower rate.

• It gobbles up a tremendous amount of farm land;
• the farmers have to give up their land before it is really needed;
• the building developer has to go far out to find available land;
• the prospective home-owner has to travel farther;
• traffic on congested roads will increase and
• new roads and schools will have to be built.

Bill Batt: The Merits of Site Value Taxation

One must begin a discussion by recognizing that governments, constitutionally speaking, have two means by which to effectuate public policy, conventionally known as tax powers and police powers.1 The primary purpose of taxing power historically has been to raise the necessary revenue to support government functions as defined by the electorate through its chosen representatives. Many students of government argue that this should be its only purpose. President Reagan, for example, reflected this view of taxation when he stated in 1981 that "the taxing power of the government must be used to provide for legitimate government purposes. It must not be used to regulate the economy or bring about social change."2 This view has within it the implicit view that there is a way to tax that is totally neutral in its influence on economic behavior, something which has not always been understood or agreed to. Taxes have always been used to facilitate socioeconomic policies, and in recent years have become a conscious tool of policy makers even more. One recent study notes that in the state of Washington, for example, 222 of the 378 identifiable tax breaks for special purposes have been enacted since 1970; the state of Oregon, similarly, has witnessed 288.3 But whether using taxing powers to facilitate other purposes is a wise and efficient approach needs to be more carefully considered, and there has been too little discussion of this issue in contemporary scholarship or political life. Furthermore, only recently has it been possible to understand the possibility of tax neutrality. ...

... Not all revenue collection on the part of government is grounded in the constitutional authority of its tax powers. Taxes in the strictest sense of the term are revenues involuntarily paid to general funds for the general purposes of government. But there are many other revenues paid to government that would never be construed as taxes: lottery revenues, fines, interest payments, environmental (green) fees, payment for information, and user fees being the most common examples. Fines, green fees, and user fees are instruments of police power precisely because their primary purpose is to correct behavior, and only secondarily to raise revenue. User fees, along with environmental fees particularly, are employed to recover the costs of use, wear or damage to environmental or government-provided "services." (Only in recent years has it been fashionable to regard use or degradation of the natural environment as a "service," necessitating "correction," as was originally explicated by Pigou earlier this century.

Fiscal measures such as those noted above can be employed under police powers to correct, or at least compensate for, otherwise egregious social behavior, and public policy makers must concern themselves with the question whether such measures are more or less appropriate or effective. These provide an attractive alternative to what have come to be known as "command and control" approaches. Just as are so many fiscal measures, command-and-control approaches to regulating and controlling social and economic behavior is also grounded in the police powers of government. Administrative theory has grown in appreciation for fiscal approaches and away from command-and-control approaches in recent years.8 This is because they are often far less expensive and more efficient to implement, easier to understand, have a greater degree of compliance, and has the added virtue, lastly, of raising revenue for the support of governmental responsibilities. This interest in "tax shifting" has inspired the slogan, "Tax Bads, Not Goods."... Read the whole piece

Bill Batt: The Nexus of Transportation, Economic Rent, and Land Use

Bill Batt: Comment on Parts of the NYS Legislative Tax Study Commission's 1985 study “Who Pays New York Taxes?”

Henry George’s Solution: Taxing the Flow of Land Rent

If land values are really the present values of anticipated future ground rents, one can certainly treat them as flows rather than stocks, just as community services are continuous flows. The amount of rent flowing through a site and through the economy is not negligible; what estimates have been made, where indeed the economic data allow it to be made, suggest that it is roughly a third of a nation’s GDP.29 The question is whether it makes more sense to. Should we elect to continue property tax regimes as we do, it would make better sense to tax buildings as stocks and lands as rent flows. But this raises the question whether real property should be exempt from all taxes, as some have argued.30 What rationale exists for taxing lands, whether as stocks or flows; and why do we tax buildings? I will argue below that taxing buildings and the failure to adequately tax land both have deleterious consequences for the whole economy.

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. ... read the whole commentary

Bill Batt: How Our Towns Got That Way   (1996 speech)

Failure to recapture publicly-created land rents through the tax mechanism provided the incentive to speculators to buy land, not to use it in production but to hold it for the rise. In this way, choice parcels remain undeveloped or underdeveloped relative to the full extent that their values warrant and development occurs instead in remote areas where opportunity for profit is more immediate. The result was low density development what we know as sprawl.

To some people this may be counter-intuitive. It may not be obvious that increasing taxes on a parcel of land will foster its improvement. Consider, however, the possibility that there are two parcels of land in roughly the same location and of equal size. You own a vacant parcel and another next to it has a twenty-story building. If only the land-value is taxed you will be paying the same tax revenue as your neighbor. What are you likely to do with your parcel? If you are rational, you will either build a twenty-story building or else sell the land to someone who will. In this way improvements tend to be clustered in high-land-value areas except where it is prohibited, perhaps for a park.  ... read the whole article

Wyn Achenbaum: Eminent Domain and Government Giveaways

It seems to me that there are better ways than eminent domain to provide the incentives that will lead the private sector to develop choice land. ...

While at one time this area might have been an appropriate place for a neighborhood of single family homes, it appeared to me that that time had passed a decade or so ago. It seemed to me that the path of progress would -- if the incentives were logical and the market responsive to signals -- have caused the private sector to have redeveloped that site. Such re-development might have been painful to the residents of the neighborhood, but would have put now-choice land to a higher and better use than single-family homes.

But our system wasn't designed to send signals all that well -- Connecticut law required properties to be reassessed once every decade (and I've heard that once in early '70s and once in the late 80's was construed to satisfy that requirement). Now assessments are required every 4 years (though my town decided it didn't like the 2003 revaluation and is keeping the 1999 for a few more years).

But if the properties had been reassessed on a regular basis, with market-based values assigned first to the land and the residual being assigned to the existing buildings, the homeowners themselves would have been in a position to make their own rational decisions on whether it was worth it to them to continue to occupy extremely valuable land (and pay the taxes on it), or more to their advantage to accept an offer from someone who was prepared to put it to a higher and better use, and take that equity and buy elsewhere. ...

Our land, particularly the best-located land, is a common asset on which we are all dependent. Allowing individuals or corporations to occupy it without compensating the rest of us for its value is the underlying problem, and solving that problem through good assessment and rational (that is, land value) taxes is the way to solve it. When we do that, a lot of problems will begin to fall away.  Read the whole article

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. ... read the whole article

Land value taxation generalizes into the principle that people should pay for all of their appropriations of natural opportunities, according to the opportunity costs of those appropriations, and the resulting revenue should be shared equally. ...

Taxing land has an additional effect that increases the stock of capital. A tax on land represents a redistribution from living adults to the young and unborn, who will now be born with rights to land. Unless there is a perfectly offsetting reduction in the desire to accumulate assets to transfer to the next generation, this redistribution will induce the living, who now have fewer assets, to accumulate at a more rapid rate than they would otherwise do. That is, saving and capital accumulation will increase.

Taxing land also increases the efficiency with which land is used. This occurs through three paths.

• First, a tax on land reduces the return to land speculation, and therefore reduces the quantity of land speculation.
• Second, as taxes on land are capitalized into the selling price of land, the result is the substitution of a recurring cost (the annual tax) for a one-time cost (the purchase price). This makes land relatively more attractive to bidders with high discount rates and relatively less attractive to bidders with low discount rates. To the extent that the former are more entrepreneurial and the latter more passive investors, land will tend to flow into the hands of persons who will choose to use it more intensively.
• The third path by which a tax on land increases the efficiency with which land is used is that, for those who are using land inefficiently, it substitutes an explicit cost (the tax) for an implicit one (the income foregone by inefficient use).

Psychologically, explicit costs tend to be more effective in motivating efficient behavior than implicit ones. .. read the whole article