Land Taxes: The Return of Henry George
By Pierre Lemieux
An article in the August 9 issue of The Economist, “The Time May Be Right for Land-Value Taxes,” suggests to reconsider the land-value tax advocated by American economist Henry George in his 1879 book Progress and Poverty.
George proposed to tax away the rent on the unimproved value of land, and to replace all other taxes by that single one. The improved value, represented for example by a house or an industrial building, would not be taxed. Presumably, the implicit rent a homeowner earns on the land on which his house stands would be taxed. The receipts from the tax would finance public goods. These goods boost land rents–think about a police station or even a park or a road–and benefit the landowners more than the landless, who have paid wage taxes and other taxes to finance the public goods. In other words, the rent tax would be redistributed to the landless in free public goods.
By the way, the Economist article contains many good illustrations of economic theory. For example, a land tax is capitalized in land values, which decrease by the present value of future tax payments. A Danish government study apparently provided an empirical confirmation (a useful citation would have been appreciated).
A convincing argument exists for taxes on unimproved land, from the double perspective of economics and ethics.
The economic argument is that land being in fixed supply, a tax on unimproved land does not change the allocation of resources. It will be totally capitalized—negatively—in the land prices. In traditional public finance theory, a tax on unimproved land is an efficient tax. In 1978, Milton Friedman said that “the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago” (quoted by Fred Foldvary of San Jose State University, a proponent of the Georgist tax).
The basis of the ethical or distributive argument for Georgist taxes is well summarized by The Economist:
The most famous attempt to justify land ownership was made by John Locke in the 17th century. He argued that because people own their own labour, toiling on the land confers ownership rights over the resulting product (a farm, say). Yet even Locke said this only works as long as there was “enough, and as good, left in common for others”. This proviso may be met in a wilderness but not in booming cities. In any case, such a combination seems a shaky justification for acquisition. Robert Nozick, a 20th-century libertarian philosopher, doubted whether pouring his can of tomato juice into the sea, combining the two, meant that he could then claim ownership over the ocean. Without a good basis for land ownership, how can it be fair for landlords to get rich from rent?
As attractive as a Georgist tax or other similar land-value taxes appear, there are many issues to explore. Let me mention a few. (The more I talked to Fred, the fewer issues I was left with! Perhaps I am, like it has been said of Donald Trump, overly influenced by the last person I talked to?)
First, even taxing the whole rent would not produce enough government revenues to replace all existing taxes. Total (federal, state, and local) government expenditures in the US amount to about $6 trillion a year. Economist William Larson estimated the value of all land in the US at $23 trillion in 2009; let’s increase the estimate to, say, $50 trillion in order to account for increasing land prices since then. Assuming an annual rent of 5%, taxing all of it away would yield “only” $2.5 trillion a year.
This problem, however, would be more an advantage than a disadvantage if it could force a reduction of government expenditures by some 40% ($2.5 trillion is 42% of $6 trillion). Such a change could be gradually realized over several years, perhaps a generation. Of course, this scenario assumes that governments can make and keep such a commitment. It is even more difficult to imagine in a federal system.
A second issue is that a new land tax expropriates, at least partly, the current owners of land, who paid for the capitalized value of future non-taxed (or lightly taxed) rents when they purchased their land. This problem could be solved by reducing the landowners’ income taxes or other taxes by an amount equivalent to their capital loss. As all governments in America levy about $5 trillion in taxes per year, a long transition would again be necessary.
A third issue–or perhaps a complex of issues–is whether land-value taxes should tax away the whole rent (or more) as George wanted, or only part of it as Friedman probably envisaged. A related issue is whether confiscation of the whole rent by government means the same as the nationalization of land. And once the government has this whole field of taxation open to it, will it not stealthily nationalize all land by charging land taxes higher than the rent and high enough to make the private possession of land uneconomical?
It seems to me that there are three possible lines of argument against taxing all land rents, two of a moral nature and one more economic:
Reformulate the Lockean argument in a way to make it defensible.
Argue, like Anthony de Jasay, for a presumption of liberty and a prima facie case that property simply is, and may only be contested if a precise tort can be proven. (See my Econlib article “An Unavoidable Theory of the State,” and the links therein.)
Make a public-choice argument to the effect that a government with a monopoly of land would a very dangerous Leviathan. As argued by Geoffrey Brennan and James Buchanan in their 1980 book Power to Tax, the unrestrained Leviathan will charge in taxes what the market will bear.
We seem to always come back to the question of the justification of the state and, if such a justification is found, to the problem of chaining Leviathan.