The Land Value Tax/Land Tax Refund a Better Alternative for Government Revenues, than Income, Sales, Property, and Other Taxes
A Proposal of the Henry George Foundation of America
by Jack R. Jones, Independent Consultant
4715 Rittenhouse St.
Riverdale, MD 20737
301-277-2242
The Problem
Many economists, including a group of Nobel Laureates, will tell you that income, sales, property, excise, and import taxes damage the economy, because the under production is created by wrong incentives. So the usual argument is over doing moderate or major damage to the economy.We need government, big enough to protect our rights and small enough that it cannot take our rights away. The government needs revenue to operate, but the problem with the present system is it is cumbersome and unfair. The income tax punishes productivity. Sales taxes punish the poor more than the rich. The property tax punishes those who take good care of their property, and rewards those who let their property go to ruin. Excises and tariffs raise prices and discourage free trade.
Criteria of Effective Taxation
What is needed is a revenue which bears as lightly as possible upon production so as not to discourage the general output. That may be easily and cheaply collected, and falls as directly as possible on the ultimate payers, so as to avoid passing the cost and the markup on to consumers; that is certain, so as to give the least opportunity for tyranny and corruption on the part of government officials, and the least temptation to lawbreaking and evasion by the taxpayers; and that bears equally, so as to give no citizen an advantage or put anyone else at a disadvantage.
Various Proposals to Achieve a Fair Economy
Various proposals have been made over the years and each falls short of economic fairness in some way. Some propose greater economy in government; others suggest better education and improved habits of industry and thrift. Many have said that formation of labor unions is the solution; yet others suggest a cooperation of labor and capital. Many believe that governmental guidance and regulation will bring economic justice. Finally, some propose a more general distribution of land. All these either create economic disincentives and/or distortions, and involve the common unfairness that labor and capital have their productive economic gain taken, while their rent is raised by land owners, who did not even produce the land.
The Role of Land
There is an alternative, to the failed proposals above, that meets the previously stated criteria for raising revenues, that does eliminate the damage and the unfairness brought on by the present system, and still will support an optimal size government. We can borrow some ideas from the founding fathers and others: John Locke - only labor products are private property; obligation to leave good land for others in the commons, Thomas Jefferson - a basic grant of land to each citizen;or a land tax, Thomas Paine - a land tax, with revenue divided as a citizen dividend, John Stuart Mill - a land tax on future land values; big landlords are unproductive, Henry George - the land rent tax as the only tax. By combining their proposals, one can present a practical solution to our economic and revenue problem. All of them assert that land is not the same as other property, which is made by human labor mixed with the land (resources of nature). Land itself was not made by humans and therefore no one person has a better claim to it than any one else. One could use land and resources as they please, but they should also leave as good unused land in the commons for others. The property that each makes is theirs and theirs alone. No one else has any claim to it. In the past, we recognized our obligation to leave land and resources for others, in the commons. The problem, now, is that we have destroyed that commons by placing all land in ownership of individuals, so that there are fewer owners than when we were all owners of the land in common.Landowners now have an unfair land advantage over non-landowners, and are able to take any gains that labor and capital make through specialization or invention, with no productive effort on the landowners' part, by simply raising the rent. The landowners become richer with no productive effort on their part, because as population rises and as labor specializes, or as capital invents, they create a more productive economy, which raises the land value in the region, so that the rent rises with it, enriching the land owners. This was explained by Henry George's proposal as put forth in his 1879 book Progress and Poverty, which was written as a result of trying to figure out why, in the advance of economic sufficiency, the rich were getting richer and the poor getting poorer. A much debated question even today. He reasoned that all economic activity is ultimately connected back to, nature and its resources. The land (area, and natural resources, of which no human has created more), is used by individuals to create wealth; the wages of their labor. Some of this wealth is, in the form of capital goods, used to create more wealth; the interest returned on capital. Those who own the land charge rent to labor and capital to use the land. As regional development occurs, the land value increases, enriching the owners of land without any effort on their part. The land owners have an unfair advantage in land relative to the laborers and capitalists who do not own land. The land owners are able, through the rise in rent, to collect the increase in income that labor and capital achieve through specialization and invention.
The Proposal
Henry George felt that the solution to labor and capital losing their hard earned gains to rent collected by landlords, was to have the land rent collected by the government and returned to the whole population. He felt that no other change was necessary in our land use and ownership customs. It would be quite simple to tax (charge rent) based on the rental value of land (not buildings). He was opposed to income, property, sales, and excise taxes because of their interference with the free market and individual freedom. He was concerned that the laborer and the capitalist were being robbed of their just rewards and felt that having the government collect the rent (land value tax) and return it in government services and infrastructure or, as he later thought, to fund the minimum government and return the balance in equal shares to the adult citizens, was a good way to be fair The Land Question, 1881, page 84). Most of us are in some part laborer, capitalist, and landowner. The more we are landowners and can avoid rent increases or derive our income from land rent and its increases, the more advantage we have over the landless and less landed. And so, ultimately through the increase of land rent, which produces nothing, the rich get richer and the poor get poorer.There is a way to return the right to use and maintain the commons and to reward the productive members of society rather than the unproductive, and to get rid of the various taxes that harm the economy at the same time. That is to treat all the land as common as far as ownership, and maintain our present system of possession and use on an individual basis. That way we would not need to infinitely divide the land to be just. We would only need to divide the annual rental value of the land (not the building value). This could be done through free market or governmental systems similar to the present property tax systems, which are more efficient and effective than income and sales tax collection systems.
How The Land Value Tax/ Land Tax Refund Works
How it would work is like this. The land owner would pay a Land Value Tax for the land they possess. The revenue would be divided equally as a Land Tax Refund (similar to citizen oil dividend in Alaska, except that all land/natural resources are included in this land tax refund), for their equal right to share the commons. The land value tax would be based on the annual rental value of that land in the free market, as determined by sales comparison and/or income method. The citizens could vote on an annual basis to then decide what portion of the annual land rental value would go to their land tax refund, to return on investment to the land user, and to tax revenues for the local government, for the state government, and for the federal government. As a transitional approach, legislatures (local, state, and federal) could meet to determine the distribution.
Civic Action and the Law
Of course the question is: "How do we get there from here?" One would need to determine if the State in which one is located allows land to be taxed at a different rate than improvements.. And at what level of government. There are States that allow it at the State level, but not the county. In others it is the reverse. In some cities can do it and counties can not. If legislation exists then one needs to work with officials at the permitted level to encourage a switch from property and other taxes over to a land value tax. If legislation exists at no level then civic action is needed to bring about laws that permit or mandate the ability to tax land separately. One should also look for the possibility for cities and/or counties to amend their charters.Education of the appropriate elected officials and/or civic organization leaders is the first step in any case, from there the course may be working for legislation or making the change over if legislation is already in place.
Again in some states and commonwealths, there are existing laws that allow land to be assessed separately from buildings and other improvements. In others, legislation may be needed. At any rate, the people of this country are fairly sure the present system is broken, and are looking for some alternative that does work. There are some 700 cities around the world that are trying the land tax as a partial or total replacement of the property tax on buildings and other improvements, with good effects. Some cities have structured their tax policy to replace some other taxes, in a phase-in over time. Phasing in, is a good idea as it allows people to adjust from tax avoidance strategies to one of proactive economic strategies, a five to ten year period should be adequate to see improvement without disruption and of course it is best if this is a citizens' decision as to how long rather than a politicians' decision.
Benefits To Be Expected
* The land value tax is the most economically neutral form of revenue collection. It is most neutral when all levels of government (local, state, federal) services are limited to those in which all citizens benefit about equally, and the balance of the land value tax is returned to the citizens in equal shares as a land tax refund.
* It can improve economic productiveness by replacing the income tax, which punishes labor for production; the property tax, which punishes capital for production; and the sales tax, which punishes those who engage in economic exchange.
* The best economic use of land is encouraged because unused and underused land adjacent to best use land would pay the same land value tax. More effecient transportation networks, and utility infrastructure is also encouraged. However, for full effect, repeal of suburban subsidies is required. This is needed because land value reflects efficient economics in that it is less expensive to build within and up than it is to build outwards.
* The land tax refund will serve as an irreducible income that can be used to defray the inequity of the income tax between individuals and corporations, to defray the regressiveness of the sales tax, and/or as a social catastrophe insurance for those who are landless and perhaps jobless.
* The Land Value Tax/Land Tax Refund system will curb boom and bust cycles in the economy, driven by real estate speculation.
* Since more people will have a fair share of the economy through the land tax refund, it will be more difficult for a few people in government and on corporate boards to control the economy, as is now done.
* It is an easy to administer tax, since it is easier to assess land than improvements. Also, it only involves the land title holders, which are less in number than workers or consumers. The tax can be collected as property tax is presently collected, as these systems are more effective and efficient than income or sales tax collection systems.
* The federal tax could be collected as it was in the beginning of the republic, that is, a per capita tax paid by the state governments to the federal government. Excises and tariffs could be dropped also, to encourage free trade and full employment.
The Alternative Illustrated
How this will effect individuals varies on a case by case basis depending on how the present local, state, and federal tax structure affects them.With a land value tax replacing property, income, and sales taxes, corporations would tend to pay more, while individuals would tend to pay less, leveling the economic playing field between the two groups. In the pure libertarian version, where all of the land value taxes go directly back to the citizens as a land tax refund (which in this case would provide the greatest amount to be used to balance the inequities between the individual and corporate income tax and the regressiveness of the sales tax), the typical family would pay about the same in land value taxes as they would get back as a land tax refund. A typical family without land would pay no land value tax and receive most of the land tax refund. The land owner who is using the most valuable piece of land would pay the most tax (almost equal to the annual market rental value) and would receive a land tax refund equal to that of the average land user or the landless family. In all cases no one would pay any other taxes. In a centrist version, the cost of government would be deducted from the land tax refund that would leave the landless family of four with say half of the above citizen land dividend and whatever government services they could get.
If people wanted a more socialistic government, the cost of government would then use up the total land tax refund, and the landless would only receive whatever government services they could get. However, in all the above cases the revenue total for all levels of government, local, state, and federal would be about half of its present size as a result of current land values. The land tax value of natural resources such as minerals, fisheries, forests, air ways, electromagnetic bands, etc., would add to the revenue potential, but there are not any reliable estimates of the amount at this time.