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The purpose of this article is to outline why the idea of land value taxation argued by 19th century political economist, Henry George, is still relevant to many of today’s pressing issues, including poverty, economic growth, the environment, and responsible government.

In the late 19th century, the Industrial Revolution was well underway. Society, it would seem, was beginning to make a huge leap in progress in areas like technology and production. In places like California, many places went from camps to cities in a relatively short time. Such a time, one could assume, must have been quite exciting and hopeful.

But not everyone at that time would have made such an assumption. A printer from San Francisco named Henry George couldn’t help but notice that in the midst of all this progress, poverty was on the rise. “How could this be?” George wondered. So troubled by this observation, he set out to explore this vexing question in his aptly titled book, Progress and Poverty.

The problem, George concluded, was the inefficient hoarding of land and natural resources by a few at the top of the socioeconomic ladder coupled with a taxation system that hindered upward mobility of those at the bottom. George’s solution was to abolish all taxes but one: a single tax on land, (which would include natural resources but not include the products of human labor, like buildings and improvements to land).

Though Henry George was well known in his day, and though Progress and Poverty very popular, these days, it would seem, George has essentially been relegated to a footnote in economic history. This is unfortunate, I would argue, since I believe his idea would still be very relevant today in the larger context of many of today’s pressing issues, like the economy, poverty, the environment, and responsible government.

Henry George (1839 – 1897) at age 26

What is Economics?

For starters, we should have a working definition of “economics”. A fairly standard definition of economics would be “the study of the production, distribution, and consumption of limited goods and services used to satisfy unlimited human desires, whereby goods refer to those material things that satisfy human desires, and services refers to the direct satisfaction of human desires”.

Now upon examining this definition, one can easily deduce that in any economy, the distribution and consumption of goods and services will be constrained by the production of goods and services. In other words, one can neither distribute nor consume that which has not been produced. And since goods and services, (which are distributed and consumed), are limited, but human desires are unlimited, a fundamental problem becomes one of how an economy can maximize production.

Now if we examine “production”, there are three classical factors: land, labor, and capital. We can define land as “the entire material universe exclusive of people and their products”; labor as “all human exertion in the production of goods and services”; and capital as “goods used in the process of production, (e.g., tools), or in the course of exchange, (e.g., inventory)”.

Land, labor, and capital are all limited. However, a clear (and important) distinction can be made between “labor” and “capital” on the one hand and “land” on the other: the former refers to human activity and the products thereof, while the latter does not. More specifically, capital can only ultimately come into being by applying labor to land. Furthermore, if there’s no land, then there’s no production, and hence no economy. And of course, the same could be said for labor. But then, if there was no land, there’d be no humans, and hence no labor…not to mention no distribution, consumption, or human desires.

So just as production constrains distribution and consumption, land, (which is limited), constrains production. In other words, one cannot produce something from nothing. Thus, how land is dealt with is a fundamental economic problem which needs to be addressed. Such questions arise like, “How can the economically efficient use of land be maximized?”; “How is land distributed justly and by what mechanism?”; “How do we avoid the overconsumption of natural resources?”

Henry George’s idea of a single tax on land, which refers to the spatial-location value of land, (but not buildings and improvements), and natural resources, would effectively deal with these issues and more.

The Fruits of Productivity as Reward; Taxation as Punishment

Imagine a rat in a cage with a lever. Now imagine that the rat pulls the lever, and a food pellet comes out. The food pellet can be thought of as a reward for the rat’s behavior, (since the food satisfies its desires), and consequently the rat will learn to continue to pull the lever if a food pellet is consistently released each time the lever is pulled.

On the other hand, imagine if the rat pulled the lever and got an electric shock instead. In this scenario, the electric shock can be thought of as a punishment for the rat’s behavior, (since an electric shock would be highly undesirable), and consequently the rat will learn to continue to avoid the lever if an electric shock is administered each time the lever is pulled.

The fruits of productivity and taxation are very much like the food pellet and the electric shock, respectively, in the above scenario. When one labors, one is “rewarded” with wages. When one saves or invests in capital, one is “rewarded” with interest. When one consumes a good or service, one is directly “rewarded” by having their desires satisfied, while the seller of that good or service is “rewarded” for selling the good or service that satisfied human desire, and the producer of the good that is sold to the consumer or to the service provider is “rewarded” for producing a good used for satisfying human desire.

And the greater the “rewards”, the more likely these sorts of behavior continue; the lesser the “rewards”, the less likely these sorts of behavior continue. And if there is no “reward” for these behaviors or even a loss of some sort because of any of these behaviors, (i.e., a “punishment”), then such behaviors will be even less likely or even avoided. Such “punishments” could include a loss due to poor capital investments or a loss due to producing or selling a good or service that isn’t desired by a significant number of people.

And such “punishments” of economically productive behavior can effectively include taxation, (or what psychologists might refer to as an example of “punishment by removal”), even though taxation may only intentionally be for raising government revenue. When one’s wages are taxed, for example, one is punished with the removal of the fruits of one’s labor. That is less money to spend, save, or invest. When one’s capital is taxed, the owner may try to avoid the added cost by raising the price of his/her good or service, effectively passing the cost onto the consumer. Couple that with a sales tax and the consumer’s taxed wages, and the consumer ends up paying (artificially) more for something with (artificially) less money.

In short, it would seem, taxation punishes economic behavior and the products thereof and should be avoided. Land, on the other hand, is neither human economic activity nor a product of it, and it is this quality that makes Henry George’s idea of a single tax on land and its consequences distinctly different from the other forms of taxation.

Land-Value Taxation Versus Property Taxation

Consider someone who owns a house on a piece of land and who has to pay property taxes each year. The property taxes equal a certain percentage of the property’s market value. Therefore, if the owner improves that property, the property’s market value will go up, and hence the property tax will go up. In other words, the property owner will effectively be punished for improving their property!

Now imagine a land speculator who buys a piece of unimproved land on the outskirts of town and then holds on to the land without improving it. Now imagine that a road is built (using taxpayer money) that goes right by that piece of property. As a result, the location-value of that piece of unimproved land goes up, (since now it is located next to a road when before it wasn’t), and the land speculator sells the land and makes a profit.

So in comparing these two examples under a typical property tax system that includes buildings and improvements, the property owner who improves his/her property gets hit with a higher tax, while the land speculator who doesn’t improve his/her property makes a profit off of the tax-funded improvements near his/her property. (And, ironically, part of those tax funds come from the first property owner in our scenario!)

A more sensible tax policy would be to not tax buildings and improvements, (i.e., “capital”, if the property is to be sold), but to tax the spatial-location value of land instead, (i.e., “rent”, in classical economics).

Since land is in fixed-supply, the more land that is used, the less there is on the market. So by the Law of Supply and Demand, the spatial-value of the remaining land on the market will rise even if demand stays the same. In other words, the more land that is used, the more expensive the remaining land becomes.

And the location-value increase is not due to the labor, investments, or economic activity in general of the land owner, but instead due to the labor, investments, and economic activity in general of the surrounding community. So if you’re going to tax something, tax the increase in value that itself was solely created by both the private and public investments of the surrounding community.

The Benefits of a Single Tax on Land

Generally speaking, the benefits of a single tax on land can be described as (1) pro-economic efficiency, (2) progressive, (3) pro-conservation, (4) pro-limited and responsible government.

  1. Removing taxation on wages, capital, and consumption means more money to spend, invest, and save, which leads to more business, less cost of goods and services, and lower interest rates.
  2. Since the wealthiest tend to own the most valuable land and natural resources, (think downtown Manhattan or big oil), the bulk of the tax burden would fall on the wealthiest, (and you can’t put land in a tax shelter, either). The poorest tend to own no land, so they wouldn’t have a tax burden. And since there would be an economic incentive to not use any more land than one could afford and to be as efficient as possible with as little land as possible, more land would be left on the market, thus making it more affordable for more people. Add to that, no taxes on building materials, (either in their production or sale thereof), would lower the cost of buildings even more. And again, no taxes on income would mean more money for individuals to buy land or save for it, the latter of which would contribute to lower interest rates on loans overall. In other words, the more money banks have, the more cheaply they can loan it out.
  3. Since the incentive would be to use as little land and natural resources as efficiently as possible, this would mean less waste of land and natural resources. Since land speculation would not be profitable, it would be far less likely, for example, to have things like rundown buildings in downtown areas coupled with urban sprawl. Actually, this is exactly the effect anywhere land value taxation is tried, (or even split-rate taxation, whereby the rate on buildings and improvements is lower than the spatial-location value of land). Some municipalities in Pennsylvania would be an example. In the area of renewable resources, there would be an economic incentive to be pro-conservation. For example, under a purely land value tax system, a paper mill would have the incentive to use as little natural growth trees as possible plus have the incentive to replant as many trees as quickly as possible. The former would fall under land value taxation. The latter would not, since re-planted trees would be improvements to land or “capital”. A final example in this area would be that alternative energy technologies would be more competitive in a land value taxation system. Energy sources like oil and coal would fall under a land value tax, thus raising their cost. On the other hand, since most alternative technology costs fall on capital, (like solar energy), their costs would be reduced.
  4. Currently, the government comes up with a budget and then raises the revenue for that budget, (and even then falls short of the budget, leaving the burden for the next generation). Interestingly, no business or household can do that. Businesses and households must budget what money they already have.

Under a land value tax system, government would have the same state of affairs since it would be the local market which determines the tax revenue. The greater the spatial-location value of the land, the greater the revenue. This way, the government’s budget is constrained by the market, just like it is for everyone else.

The only way that government could actively participate in raising its revenue under a land value taxation system would be to carefully and responsibly invest its limited revenues…again, just like it is for everyone else. More specifically, a government would have the incentive to invest public money in such a way as to maximize an increase in location values in its jurisdiction. This would include carefully investing in things like infrastructure, utilities, and schools, all which increase location value in the community, therefore increasing future government revenues.

Conclusion

I have attempted to outline Henry George’s basic idea of a single tax on land with an examination of both some basic economic concepts and concrete examples. George’s idea is 130 years old now. Unfortunately, he has been mostly forgotten. Nevertheless, perhaps his idea of a single tax on land is worth taking another look at. Perhaps states and municipal governments should strongly consider switching from a property tax system to a land value tax system, (or at the very least, a split-rate property tax system), while simultaneously shifting away from taxes on human economic activity and the products thereof. With issues today like economic recession, poverty, environmental problems, and (at times) irresponsible government, a second look couldn’t hurt. Who knows? Henry George’s idea of a single tax on land may be very relevant to these pressing issues today…perhaps even more pressing than it was in his day.

To explore these ideas further, here are some helpful links: