Land Value Tax - Was Henry George onto something after all?
What if all of our taxes came from a single source? And quite a lot of us would never have to pay that tax anyway? That was the vision and promise of Henry George. His 1879 book Progress and Poverty sparked more than just a little bit of a movement in the US. The source of this tax is the unimproved value of land.
To understand how Geroge came to this proposition, it is important to mention that George methodically differentiates between different economic quantities that are probably often mixed up a little bit. Production needs inputs. These can be any mix of labor, capital and land. The outcome of the production process is hopefully more valuable than the inputs. The distribution of the rewards of production have specific names:
labor produces wages.
capital produces interest.
land produces rent.
George deduces from “a principle as fundamental to political economy as the law of gravity is to physics. Namely, that people seek to gratify their desires with the least exertion” that these relations are governed by the following laws.
RENT depends on the margin of production — rising as it falls, and falling as it rises.
WAGES depend on the margin of production — falling as it falls, and rising as it rises.
INTEREST depends on the margin of production — falling as it falls, and rising as it rises. (Its ratio with wages being fixed by the net power of increase that attaches to capital.)
The margin of production is the best available opportunity, in a given place and time, for the next worker to employ her- or himself without having to pay rent. The level of wages available to labor at the margin of production determines the general level of wages in society.
To put it in a simple algebraic form:
Production = Rent + Wages + Interest. Production – Rent = Wages + Interest.
Rent results from payments for restricted access to natural opportunities or for privileges over geographic regions. In economics, “land” is everything that exists in nature independent of human activity. So George’s proposal also explicitly included factors such climate, quality of soil, waterways, mineral deposits, forces of nature (i.e. a waterfall suitable for hydropower), public ways, forests, oceans, air, and solar energy in the category of land.
George predicted that ground-rents would rise faster than wages and income to capital, a prediction that modern analysis has shown to be plausible, since the supply of land is fixed. The moral case against private landownership is that a landowner always acts as a monopolist and has the privilege to exclude others from locations. And this right gives them “a peculiar and valuable benefit”1. The basic idea is that rents on land, in contrast to interests earned on capital like the houses on land, are to a very large part determined by social, technological and administrative improvements of the surrounding. Landowners can withhold land from productive use (i.e. speculating on an increasing land value), therby causing land prices to rise, even far away from population centers and depressing the margin of production. This increases rents, creating a positive feedback loop fueling speculation. But because “land is required for the exertion of labor in the production of wealth”, “to control the land is to command all the fruits of labor, except only enough to enable labor to continue to exist.” Landlords are extracting huge parts of the surplus that labor and capital improvements generate by ramping up the rents extracting value, without assuming risks in the entrepreneurial sense or any exertion.
George’s remedy is to make land common property. He was accused of being a socialist for this proposal by people more inclined towards capitalist theory and a shill for capitalism by people more inclined to socialism, because Geroge favored capital and free markets as opposed to a command and control economy. George was definitely a humanist, though, seeing value and humans and believing that more humans create even better circumstances for humans. Each human is adding more to society, according to Geroge, than that individual subtracts in resources. He dedicated some sections of his book to give arguments against Malthus’ theory, which is based on the opposite view point, namely that people, who are are “geometrically” increasing their numbers, eat away a finite stock of goods, which is at best linearly increasing.
The most practical implementation of making land common property is for the state to collect a fee for land usage and distribute it to people in form of a so called citizen’s dividend, which would be called universal basic income today, a reduction of other taxes or an increase in public services.
For George, taxing land is “[…] the taking by the community, for the use of the community, of that value which is the creation of the community. It is the application of the common property to common uses.” After the introduction of such a tax “no citizen will have an advantage over any other citizen save as is given by his industry, skill, and intelligence; and each will obtain what he fairly earns. Then, but not till then, will labor get its full reward, and capital its natural return.”
Geroge fully recognized that a land value tax would cause the purchase price of land to plummet. He did not believe landowners should be compensated. For him, owning the land and having the right to chase inhabitants off that land gave the landowner at least as much power over a person as the institution of slavery gave slave masters. But while a slaver at least had some economic interest in his slaves, the landowner does not. For George, giving compensation to landowners would be analogous to giving compensation to slave owners and was therefore not only uncalled for, but outright abominable.
This form of taxation has a surprisingly large and diverse list of advocates:
Any economic topic that gets praise from such a diverse list of Nobel laureates as the Chicago School’s very own Milton Friedman:
So the question is, which are the least bad taxes? 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.
… mostly Neo-Keynsian Joseph Stiglitz2…:
Not only was Henry George correct that a tax on land is nondistortionary, but in an equilitarian society … tax on land raises just enough revenue to finance the (optimally chosen) level of government expenditure
… or a Post Keynsian William Vickrey3:
Removing almost all business taxes, including property taxes on improvements, excepting only taxes reflecting the marginal social cost of public services rendered to specific activities, and replacing them with taxes on site values, would substantially improve the economic efficiency of the jurisdiction.
… is probably worthy of a closer look.
But it’s not only modern economists that were at least somewhat endeared by the idea of a tax on the unimproved value land. It was no other than the philosopher and economist Adam Smith, who worked out two interesting properties of this tax in his book The Wealth of Nations, published in 1776.4
It cannot be esily shifted from a landowner to a tenant.
“Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground. […] As the wealth of those competitors would in no respect be increased by a tax upon ground-rents, they would not probably be disposed to pay more for the use of the ground. Whether the tax was to be advanced by the inhabitant, or by the owner of the ground, would be of little importance. The more the inhabitant was obliged to pay for the tax, the less he would incline to pay for the ground; so that the final payment of the tax would fall altogether upon the owner of the ground-rent. Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own.
It is efficient – unlike other taxes, it does not reduce economic productivity of labor or capital.
Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents and the ordinary rent of land are, therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them. […] Nothing can be more reasonable than that a fund which owes its existence to the good government of the state should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.”
In fact, Stiglitz argues that a land value tax can improve the use of land and redirect investment toward productive, non-rent-seeking activities, it could even have a negative deadweight loss that boosts productivity.
But what about his claim that this tax alone would be enough to fund a state? In his era, where the state did not concern itself with social security or health care, it might have been true. But even today, the argument can be made (and in fact Stiglitz has made it), that “under certain conditions, investments in public goods will increase aggregate land rents by at least as much as the investments cost. This proposition was dubbed the “Henry George theorem”, as it characterizes a situation where Henry George’s ‘single tax’ on land values, is not only efficient, it is also the only tax necessary to finance public expenditures.” So even if not all of the tax revenue came from this source, it appears entirely plausible that a huge part could come from it.
While rent on “spatial” (economic) land is still the primary emphasis of advocates of George today, there are other sources of rent that are theoretically analogous to ground-rent. The following are some sources of economic rent discussed by modern Georgists:
Extractable resources (minerals and hydrocarbons)
Severables (forests and stocks of fish)
Extraterrestrial domains and ways, like the geosynchronous orbits or airway corridors
Legal privileges that apply to specific location like the monopoly of electromagnetic frequencies or taxi medallions
Restrictions/taxes of pollution or severance , like tradable CO2 emission permits and or hunting quotas
Right-of-way (transportation) used by railroads, utilities, and internet service providers
Seigniorage arising from the creation of legal tender
Privileges excluding others from natural opportunities (patents of pharma products or technology, licenses for gambling services)
There are some areas of the economy, where free competition is impossible or impractical, such as electricity lines, water, gas, and transportation. For George such business assume a social function, which should be controlled and managed by and for the concerned people." Georgists disagree of whether these monopolies or only the rents arising from them should be owned by the public. Today, network effects of certain internet search or social media companies could be regareded as a natural monopoly, which only arises from the number of users and not necessarily from the quality of the product or even the users’ satisfaction. The same could be said about online games. The value is not inherent in the game, as professed by many an avowed fan’s ramblings about bugs, but in the community playing the game. Sport franchises, which monpolize locality and the arising sense of belonging to that locale, seem also like belonging to the same category of “locale rent”.
Despite its age, George’s book is an interesting read and makes you wonder, what the arguments against such a form of taxation actually are? Difficulties in determining the optimal amount of the tax? Political resistance? I think in an era of inflated and still inflating home prices this old idea might deserve a fresh look.
Henry George (1879) Progress and Poverty, Book VIII, Chapter 3 ↩︎
Stiglitz, Joseph (1977). “The theory of local public goods”. In Feldstein, Martin; Inman, Robert (eds.). The Economics of Public Services. London: Macmillan Publishers. pp. 274–333. Quote from page 282. ↩︎
Vickrey, William (1996). “The Corporate Income Tax in the U.S. Tax System, 73 TAX NOTES 597, 603 (1996). ↩︎
Smith, Adam (1776). “Chapter 2, Article 1: Taxes upon the Rent of Houses”. The Wealth of Nations, Book V ↩︎