In his heyday Henry George was very popular, with his ideas inspiring passionate debate among young intellectuals. After George published Progress and Poverty in 1879, a political movement grew in the United States around his work. He later narrowly missed being elected mayor of New York.
Most taxes, noted George, stifle productive behavior. A tax on income reduces people’s incentive to earn income, a tax on wheat would reduce wheat production, and so on. But a tax on the unimproved value of land is different. The value of land comes from two components, its natural value and the value that is created by improving it (by building on it, for example). The value of a vacant lot in its natural state comes not from any sacrifice or opportunity cost borne by the owners of the land, but rather from demand for a fixed amount of land. Therefore, argued George, because the value of the unimproved land is unearned, neither the land’s value nor a tax on the land’s value can affect productive behavior. If land were taxed more heavily, the quantity available would not decline, as with other goods; nor would demand decline because of land’s productive uses. By taxing the whole of the value of unimproved land, the government would drive the price of land to zero.
George was right that other taxes may have stronger disincentives, but economists now recognize that the single land tax is not innocent, either. Site values are created, not intrinsic. Why else would land in Tokyo be worth so much more than land in Mississippi? A tax on the value of a site is really a tax on productive potential, which is a result of improvements to land in the area. Henry George’s proposed tax on one piece of land is, in effect, based on the improvements made to the neighboring land.
And what if you are your “neighbor”? What if you buy a large expanse of land and raise the value of one portion of it by improving the surrounding land. Then you are taxed based on your improvements. This is not far-fetched. It is precisely what the Disney Corporation did in Florida. Disney bought up large amounts of land around the area where it planned to build Disney World, and then made this surrounding land more valuable by building Disney World. Had George’s single tax on land been in existence, Disney might never have made the investment. So, contrary to George’s reasoning, even a tax on unimproved land reduces incentives.
George’s argument also assumes that in setting taxes, the government can separate the raw value of land from the value of its improvements—a difficult, if not impossible, task, especially for a politically motivated government. Can the government tax the “unimproved rental value” of the land under an office complex in Los Angeles without creating any disincentive for the owner to increase its improved value?
Objections aside, Henry George may have been arguing for what is really the least offensive tax. As Milton Friedman said almost a century after George’s death: “In my opinion, the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago” (Mark Blaug. Economica, New Series, 47, no. 188  p. 472).
Henry George was also a passionate advocate of free trade and opponent of protectionism. He saw clearly that protectionism is a misleading term for barriers to trade and identified whom “protectionism” hurts. George wrote:
To every trade there must be two parties who mutually desire to trade, and whose actions are reciprocal. No one can buy unless he can find some one willing to sell; and no one can sell unless there is some other one willing to buy. If Americans did not want to buy foreign goods, foreign goods could not be sold here even if there were no tariff. The efficient cause of the trade which our tariff aims to prevent is the desire of Americans to buy foreign goods, not the desire of foreign producers to sell them. Thus protection really prevents what the “protected” themselves want to do. It is not from foreigners that protection preserves and defends us; it is from ourselves. (Henry George 1980, Protection or Free Trade, pp. 45–46)
About the Author
Charles L. Hooper holds an M.S. in engineering-economic systems from Stanford University and is a visiting fellow with the Hoover Institution.