CSI Policy Study …

                   CSI Policy Study
                                  Civil Society Institute · Santa Clara University
                     500 El Camino Real · Santa Clara, CA 95053 · csi@scu.edu · 408/554-6931




January 2006



                 The Ultimate Tax Reform:
               Public Revenue from Land Rent
                                      by Fred E. Foldvary**

The U.S. tax system is widely perceived as too complex, too intrusive, and too demanding of
workers' paychecks. Taxes today claim a greater share of the average family's budget than food,
clothing, housing, and transportation combined.1 In 2005, the average American had to work
107 days just to pay taxes, compared to 44 days in 1930.2

Tax reform proposals, not surprisingly, are
popular among voters and the politicians who        If land value is taxed, the land will not
represent them. President George W. Bush            flee, shrink, or hide. A tax on land
created an advisory panel on tax reform.            value has no deadweight loss.
Some economists and institutes have
proposed reforms to flatten and simplify the
income tax, or to replace it entirely with a national sales or consumption tax or value-added tax.

These would be an improvement, but if we seek to reform taxes, we should consider all the
possibilities and choose, as Milton Friedman puts it, the "least bad" tax.

Even a relatively flat income tax imposes what economists call a "deadweight loss" or "excess
burden" on society. Taxes on productive activity increase the price of labor or goods beyond
economic costs, and so reduce the quantity provided. This reduction in production, income, and



* Fred Foldvary received his Ph.D. in economics from George Mason University in Virginia. He teaches
economics at Santa Clara University, California. His publications include The Soul of Liberty; Public
Goods and Private Communities; "Municipal Public Finance" in the Handbook of Public Finance;
Dictionary of Free Market Economics; and (co-edited with Dan Klein) Half-Life of Policy Rationales. The
author thanks the following persons for their valuable comments on earlier versions of this study: Robert
Baade, Gordon Baldwin, Joseph Bast, John Beck, John Bethune, Dennis Brennen, George Clowes,
Steven Cord, Roy Cordato, Don Haider, Conrad Meier, John Merrifield, Edwin Mills, Dale Nance, Mike
Nelson, Mack Ott, William Peirce, Dan Polsby, Stephen Robinson, Jack Schwartzman, Gene Smiley, Sam
Staley, Douglas Stewart, Robert Weissberg, Tom Wyrick, and James Young. Any remaining errors are the
author's alone.
investment is a misallocation of resources. Resources are wasted because they do not go to
where they are most wanted. We can reduce this excess burden by reducing taxes, but changing
the type of tax can also reduce this deadweight loss. Economists recognize that if we tap for
public revenue a resource whose quantity is fixed, the excess burden disappears. The tax does
not reduce the supply and does not increase prices.

This might seem too good to be true, but in fact, such a resource exists everywhere and is
indispensable for human action. That resource is land. The supply is fixed, immobile, and
inherently visible. If land value is taxed, the land will not flee, shrink, or hide. A tax on land
value has no deadweight loss. If the purpose of tax reform is to reduce the extra costs imposed
on the economy, a tax on land value does this far better than any tax on income or goods.

                                                      If you currently pay property taxes on a home
 The economist Henry George analyzed                  or business, you may be shaking your head at
 taxing land value and untaxing labor                 this point. You are not eager to read about a
 and capital in his book, Progress and                proposal that would make your taxes even
 Poverty.                                             more onerous. But the proposal here is not to
                                                      increase taxes but to shift and reduce
                                                      taxation. Unless you own a valuable vacant
lot, the proposal presented below would most likely reduce your total tax bill, since if fully
implemented it abolishes taxes on your earnings and spending, and it also eliminates the portion
of real property taxes that falls on buildings and other improvements.

The tax reform presented here is not new. It has been working to some degree in many cities and
countries around the world. The idea probably obtained its greatest popularity in the U.S. in the
late 1800s, when the economist Henry George analyzed taxing land value and untaxing labor and
capital in his book, Progress and Poverty.

Many economists have since then expanded on George's writing, examining both the theory and
the evidence. There is even a "Henry George Theorem," which proves that in a community with
optimal population, the land rent equals the value of the community's public goods. Modern
economics thus affirms George's theory in a more comprehensive and more rigorous form,
although the empirical question of how much revenue could be obtained from rent would benefit
from more research.

An advance on George made by Spencer Heath, Spencer MacCallum, myself, and others has
been to apply the economic concept of rent-based public revenue to private communities,
showing that proprietary communities such as hotels, as well as associations such as
condominiums, in effect use site rentals for their revenue, with the implication that most
government programs could be shifted to private communities, where the rentals would be
collected by contract. Examining this application would take us away from the focus of tax
reform and the analysis of land rent for government revenue, but it is useful to point out that
economic actors in a competitive market use rentals to pay for public goods because that is most
efficient.

The use of land value or land rent for public revenue thus has proponents today, but their voices
have not been widely heard in the debate over tax reform, and there are also opponents. The



                                                -2-
purpose of this report is to give greater voice to land value taxation and to better inform those
interested in tax reform about this alternative. We can best judge among options when we
consider the whole range of possibilities.


Organization of this report

Part 1 of this report sketches the outline of the "least bad" tax policy: one that does not violate a
citizen's right to the fruits of his labor or his privacy; does not distort incentives to work and
save; and minimizes the costs of compliance and administration.

Part 2 describes how land value taxation
works. Part 3 discusses historical thought on       The "least bad" tax policy is one that
land value taxation.                                does not violate a citizen's right to the
                                                    fruits of his labor or his privacy; does
The impact of land value taxation, and a            not distort incentives to work and save;
comparison with other taxes, is discussed in        and minimizes the costs of compliance
Part 4. Part 5 discusses the actual practice of     and administration.
land value taxation. Part 6 shows how land
value taxation would help decentralize
government. Part 7 concludes.




                                                  -3-
                                              PART 1

               In Search of the Least-Bad Tax Policy

Taxes, while ostensibly payments made for the services of government, are quite unlike
payments made in the marketplace. The prominent libertarian economist Murray Rothbard was
among those who emphasized taxation as a "coerced exchange,"3 in that few would freely
choose to pay taxes if not for the penalties imposed on those who refuse to do so. But taxes are
also different from market prices in that the tax usually has no relation to any specific benefit.
Income and spending are taxed because of "ability to pay," meaning there is a flow of funds
from which money can be siphoned, to put it politely.

                                                        In contrast, user fees (truly voluntary fees,
 Land value taxation, too, is based on                  not excise taxes disguised as fees) are
 the benefit principle. Rent reflects                   somewhat like market prices, as the user pays
 neighborhood amenities.                                for a specific and wanted benefit, such as
                                                        entrance to a park. Land value taxation, too,
                                                        is based on the benefit principle and on
market prices. A landowner receives extra land value or land rental from the government
infrastructure, security, schooling, transit, fire protection, and so on. Land rent, priced by the
market, reflects the neighborhood amenities.

What qualities make for the best (or least-bad) tax system? Public finance economists identify
simplicity, efficiency, fairness, and revenue sufficiency as the proper objectives of tax policy.4 In
his Wealth of Nations,5 Adam Smith identified equality, certainty (clear manner and quantity),
convenience, and economy in collection. Transparency is also an important criterion; visible
taxes are better than hidden taxes.

In Progress and Poverty (1879), his most important book, Henry George contended the ideal tax
would most closely conform to the following conditions, similar to those of Smith:

   1. That the tax bears as lightly as possible upon production, minimizing the excess
   burden or deadweight loss.

   2. That the revenues be easily and cheaply collected, and fall as directly as may be upon
   the ultimate payers--so as to take from the people as little as possible in addition to what
   it yields the government.

   3. That it be certain and visible, so as to give the least opportunity for tyranny or
   corruption on the part of officials, and the least temptation to lawbreaking and evasion on
   the part of the taxpayers.

   4. That it be equitable, giving no citizen an arbitrary advantage or privilege, and in being
   consistent with moral principles.6



                                                -4-
The two things most people want from the
economy and from public revenue are                  The two things most people want from
efficiency and equity. As to efficiency, as the      the economy and from public revenue
world-famous free-market economist Milton            are efficiency and equity.
Friedman stated, "the least bad tax is the
property tax on the unimproved value of land,
the Henry George argument of many, many years ago."7 We will see how Friedman is right, why
land value taxation best fits the criteria of Smith and George and modern economics.




                                           -5-
                                              PART 2

                       "Lower Taxes to the Ground"

"Land," in the language of economics, includes all natural resources: the three-dimensional
space on the surface of the Earth (including space in and on water); material land such as
minerals, water, and oil; the electromagnetic spectrum; wildlife (including wild animals and
forests); and satellite orbits.

                                                     The most important potential source of public
 The "economic rent" ... refers to the               revenue from land is real estate sites.
 maximum that a tenant would bid for                 The income from land has been called
 the use of the site.                                "ground rent," "economic rent," or just
                                                     "rent." The term "rent" here will refer to the
                                                     income only from the land, excluding what is
paid for the use of the improvements. The "economic rent" with respect to land refers to the
maximum that a tenant would bid for the use of the site. I have called this "geo-rent" to
differentiate it from "rent" as a payment for any resource or from the actual amount a tenant may
pay, which could be less than what the market could bear.8

Land value taxation taps the geo-rent. Like today's real property tax, a land value tax would have
some tax rate that would tap some percentage of the land value or rent. I suggest 80 percent of
the geo-rent be used for public revenue. The landowner would pay it from the rental he collects
from the tenant, or if owner-occupied, from the implicit rental value he obtains from the site. The
80 percent rate would leave some of the land rent with the landowner to have a margin for
assessment error and also to maintain a positive price for the land to facilitate its sale.

There are several methods of assessing land value or rent. One way is to calculate the
replacement value of the existing improvements (unless they are historic), and then subtract the
depreciation of the buildings. Then subtract the building value from the total property value.
What is left is land value. For commercial property, one also can take the net income and
subtract the return on the improvements (using some interest rate), the remainder being land rent.
In some places there is vacant or bare land that has a market price, and sometimes there are
separate owners for the land and the improvements, for which data can be derived from leases
and sales. The assessors then smooth out the neighborhood land values, using computerized
maps. It is not necessary to individually assess the values of most of the buildings in a
neighborhood, since most lots in a locality will have a similar value per lot.

Assessors enter this data into computers, which generate neighborhood maps. The assessors
interpolate or smooth out the prices of lots between those for which they have recent sales or
rental data, since land values tend to be similar in a neighborhood unless there is some special
feature such as corner lots or odd-sized lots.

It does not matter whether the tax is based on the land value or the land rent. I suggest basing it
on the land value, similar to current real property taxes. The price of land is related to the rent by


                                                 -6-
a formula, where p is the price, r the annual rent (assuming constant rents), i the real interest rate
(after subtracting the inflation rate), and t the tax rate on the price (so if t = .1, the tax is 10
percent of p):

        p = r / (i+t).

The fraction f of the rent taken is

        f = t / (t+i)

Alternatively, given the fraction of the rent that is taxed, the tax rate on the land price p, given
interest rate i, is

        t = fi / (1-f),

i.e. the (fraction of rent) times (the real interest rate) divided by (one minus the fraction).

For example, suppose we want to tax 80 percent of the geo-rent, hence f=.8. Suppose the real
interest rate is 5 percent, hence i=.05. Then the tax rate on land value is:

        t = .80 * .05 / .20 = .04/.20 = 20 percent.

A tax of 20 percent of land value taps 80 percent of the economic rent. Note that the land price
falls as either the interest rate or the tax rate rises. The approximate ratio of the price of taxed
land to non-taxed land is:

        i / (i + t)

So if t is 20 percent and i is 5 percent, then the price of the taxed land would be about one-fifth
of the price of the untaxed land.

The rental value of oil, minerals, and water is more complex. Government often subsidizes
water, especially to agriculture, selling below cost, whereas efficient provision would base the
price on the market price, often above cost, the extra amount being rent. Offshore oil leases are
commonly bid on by companies, and the bids are basically the rent they pay for the leases. There
can also be extraction fees that take the rent as the raw material is taken out. Such fees can be
paid for taking natural resources such as timber and wildlife.

The frequencies of the electromagnetic spectrum also can be taxed as a type of natural resource.
The market for the frequencies will set the rent. If an active market does not exist, then the
current users can self-assess, subject to having to sell if another user wishes to buy it at that
assessment plus some set premium.

Some may wonder why anyone would own land if most of the rent is taxed away. One would
own land for the same reason people rent land: in order to use it. Ownership also gives the title
holder rights of possession, the ability to control the use of the site indefinitely.




                                                 -7-
Today there is also a speculative motive for owning land, to profit from the increase in its price.
With most of the geo-rent tapped for public revenue, the speculative motive would be dampened.
That would benefit the economy, since with a lower price of land, funds that now go to buy land
would instead go to build more capital goods, hire more labor, or provide better training.

                                                     The tax on the geo-rent would be borne by
 With a lower price of land, funds that              the owner, not the tenant. If a landlord, who
 now go to buy land would instead go                 was already charging what the market could
 to build more capital goods, hire more              bear, tried to pass on the tax, he would face
 labor, or provide better training.                  vacancies. Some say that since the tax would
                                                     be invisible to renters, the link between using
                                                     public services and paying for them would be
broken. But productive public services increase the geo-rent, so that link is there. If government
revenue is wasted, then indeed this does not generate rent, and a land value tax without
corresponding benefits would reduce land value. Pressure for a productive use of public revenue
would come from the landowners more than from the tenants. But that is no different than the
situation today; poor folks pay little or no income tax and no property tax, and typically they get
government assistance. This is an argument not against the use of rent, but in favor of privatizing
government programs. In the private sector, the link between ownership and control is stronger.




                                                -8-
                                             PART 3

         Economic Thought on Land Value Taxation
The concept of taxing land values for public finance is ancient. The Bible declares "the profit of
the Earth is for all" (Ecclesiastes 5:9). Land rent financed government in England during the
Middle Ages.9 During the 1700s, some French economists proposed an "impöt unique" or single
tax on land value. Calling their theory "physiocracy" (the rule of natural law), they outlined a
model of economic development that used land value taxes to finance public works, which
increased the value of the land (and thus increased taxes paid to the treasury), resulting in an
upward spiral of development and prosperity. The principal physiocratic economist, François
Quesnay, wrote

   Taxes ... should be laid directly on the net product of landed property, and not on men's
   wages, or on produce, where they would increase the cost of collection, operate to the
   detriment of trade, and destroy every year a portion of the nation's wealth. [Emphasis in
   the original.]10


John Locke, the natural-law philosopher
whose thought is reflected in the Declaration        During the 1700s, French economists
of Independence and Bill of Rights, wrote,           outlined a model of economic
"the things of nature are given in common"    11
                                                     development that used land value taxes
and "no man could ever have a just power             to finance public works.
over the life of another by right of property in
land ..."12 Locke recognized the benefits of
private ownership of land and the right of individuals to possess land--a right he contended
came about when an individual mixed his labor with the land. But Locke, in his famous
"proviso," stipulated that such private ownership would be held on the condition "where there is
enough and as good left in common for others."13 Though Locke did not explicitly state how that
condition could be met, the payment to a community of the rent, which measures the extra
productivity of superior relative to inferior land, would seem to satisfy the condition, since this
would keep in common the benefits of holding the better lands.

Land value taxation was viewed favorably by the classical economists, starting with Adam
Smith, who wrote, "Ground-rents, and the ordinary rent of land, are, therefore, perhaps, the
species of revenue which can best bear to have a particular tax imposed upon them. Ground-rents
seem, in this respect, a more proper subject of particular taxation than even the ordinary rent of
land."14

In the late 1700s, Thomas Spence proposed communities made up of leaseholds, thus financing
community expenses from the rent, an idea advanced later by Ebenezer Howard, who influenced
the design of residential associations in the twentieth century.




                                               -9-
Land value taxation and the founding fathers

Thomas Jefferson believed "the Earth is given as a common stock for men to labour and live
on."15 In 1797, he suggested "a land tax supply the means by which the individual States were to
contribute their quotas of revenue to the Federal Government."16

From 1778 to the adoption of the U.S. Constitution in 1789, the United States was governed by
the Articles of Confederation. Article VII stated the expenses of the Confederation

   shall be defrayed out of a common treasury, which shall be supplied by the several states,
   in proportion to the value of all land within each state, granted to or surveyed for any
   person, as such land and the buildings and improvements thereon shall be estimated
   according to such mode as the United States in Congress assembled, shall from time to
   time direct and appoint. The taxes for paying that proportion shall be laid and levied by
   the authority and direction of the legislatures of the several states within the time agreed
   upon by the United States in Congress assembled.17


Thus, the states would levy taxes and each would pass on a share of the federal budget based on
its land value. Individuals would pay taxes only to their state and local governments.18

                                                     Thomas Paine, the eighteenth century
 Thomas Paine wrote, "it is the value of             political philosopher and activist known for
 the improvements only, and not the                  his important role in the American
 Earth itself, that is individual                    Revolution, advocated in Agrarian Justice
 property."                                          that land rent is the proper source of public
                                                     revenue.19 Paine wrote, "it is the value of the
                                                     improvements only, and not the Earth itself,
that is individual property. Every proprietor, therefore, of cultivated land owes to the community
a ground-rent, for I know no better term to express the idea by, for the land which he holds ..."20


An idea widely held, yet little known!

Land value taxation is often ignored in policy discussions. For example, the publication Towards
Fundamental Tax Reform, analyzing various proposals to reform the U.S. tax system, discusses
taxes on income, sales, and value added. The editors recognize "Government should seek to raise
sufficient funds to finance the desired level of spending in a manner that does the least amount of
damage possible, while distributing the tax burden equitably."21 Yet the book has no mention of
taxes on land value or rent, even though, as argued in this study, land value taxation best fits
those criteria and resolves the alleged trade-off between efficiency and equity.

Nevertheless, many economists have recognized and supported land value taxation for public
finance. Léon Walras, known for his development of general-equilibrium theory, wrote land rent
provides the best means for funding a state.22 Knut Wicksell, a Swedish economist who
integrated classical, neoclassical, and Austrian economic thought, wrote, "the general economic
development of the community" increased the value of its land, and he proposed taxing such


                                               - 10 -
increases.23 Contemporary economists who have written favorably about land value taxation
include Kris Feder, Mason Gaffney, C. Lowell Harris, Fred Harrison, Nicolaus Tideman, the late
William Vickrey (winner of the 1996 Nobel Prize in economics), and myself.

Other economists have opposed the public collection of rent. William Fischel (1998) accuses
land value taxation of high administrative costs in "the knife-edge goal" of "getting almost all
land rent." He does not say why there has to be such an impossible "knife-edge goal." Others
claim the administrative costs of property taxes are greater than for income taxes. But even if
this is so, real property taxes already exist, so eliminating income and sales taxes can only
reduce total tax-collecting costs, not increase them.

Some economists agree taxing rent is efficient, but they claim the amount of revenue would be
trivial. Salvatore and Diulio (1996), for example, have an exercise in their textbook: "What are
the criticisms of the single-tax movement?" This was the movement for a single tax on land
value, by the followers of Henry George. One criticism offered in that book is the assertion,
provided with no evidence or citation, that "rents in the United States today amount to just about
1% of GNP," ignoring the fact that the U.S. housing stock alone amounts to $15 trillion24 and
research that indicates geo-rent is about 20 percent of GDP.

There will always be critics who concoct a huge cost in getting assessments correct down to the
last penny, or claim, without any evidence, that real estate is a trivial portion of the economy.
Such critics date back to the days of Henry George, when the landed interests felt threatened by
his ideas. Those opponents have been thoroughly rebutted in the book, Critics of Henry George
(the latest edition edited in 2004 by Robert Andelson). The reasons for such attempts to falsify
and trivialize rent-based public finance, and even to eliminate the land factor from economics,
are chronicled and analyzed in The Corruption of Economics, especially in the chapter by Mason
Gaffney, "Neo-classical Economics as a Stratagem against Henry George." This negative
viewpoint is perpetuated by academics who learn of land value taxation from misleading
secondary sources, not bothering to dig any further.

Those who argue it is impossible to assess the
value of land apart from improvements need           Several prominent libertarians have
to answer why this is in practice                    recognized land value or rent as the
accomplished well in Arden, Delaware, a              source of public finance most
community established by Georgists in 1900           compatible with liberty.
explicitly to demonstrate its practicality. They
also need to explain how cities such as
Sidney, Australia have a real property tax only on the land value, and how Japan, Taiwan,
Denmark, and many other countries had successful land taxes (see Andelson, Robert V., ed.,
Land-Value Taxation Around the World). Also, thousands of condominiums assess their owners
independently of their personal property. If this is said to be impossible in theory, yet it is done
in common practice, one wonders about a scholar who ignores the widespread practice in favor
of the alleged doctrine.

Several prominent libertarians have recognized land value or rent as the source of public finance
most compatible with liberty. Albert Jay Nock, for example, distinguished between the improper
political means of obtaining wealth, such as from arbitrary taxation, and the proper economic
means, from enterprise. He regarded public revenue from land rent as within the economic


                                               - 11 -
means, since the "monopoly of economic rent, on the other hand, gives exclusive rights to values
accruing from the desire of other persons to possess that property; values which take their rise
irrespective of any exercise of the economic means on the part of the holder."25 (He used the
term "monopoly" in its classical meaning, in which a new entrant cannot increase the supply,
hence together, the landowners have a monopoly.)

                                                     Frank Chodorov, a fervent individualist and
 Chodorov regarded a tax on land value               founding editor of The Freeman, published
 as not a true tax but a "payment for the            by the Foundation for Economic Education
 use of a location, determined by the                and still a leading libertarian journal of ideas,
 higgling and haggling of the market."               became in 1937 director of the Henry George
                                                     School of Social Science in New York City,
                                                     serving until 1942. Like most followers of
Henry George, Chodorov regarded a charge on land value as not a true tax, which arbitrarily
extracts wealth, but a "payment for the use of a location, determined by the higgling and
haggling of the market, and it makes no difference to the land user whether he pays rent to the
city fathers or to a private owner."26 Explaining the value of a location derives to a great extent
from community services, rather than the efforts of the landowner as such, Chodorov noted "it
would seem logical that this value--which we call land rent--should go to defray the expenses
of these common services."27

Friedrich Hayek was ambivalent about using rent for public finance. Hayek was first inspired to
study economics after being exposed to Georgist ideas. He thought using rent for public finances
is a good idea if the land value could be separated from the value of the improvements, which in
practice can be and is done by professional assessors and appraisers, as discussed above.28 Hayek
regarded any tax as inherently socialist, but he regarded a tax on rent as the least-bad "socialist"
tax.

The libertarian thinker Murray Rothbard thought it was impossible to tax rent, since doing so
would drive land prices to zero, also eradicating rent. But that proposition would apply equally
to private rent collection by landlords of mobile homes, who would by that logic be unable to
collect rent. Rent in fact does not get reduced when taxed. (See the book Critics of Henry
George (ed. Robert Andelson) for an analysis of how Murray Rothbard, Spencer Heath,
Friedrich Hayek, Ludwig von Mises, and other libertarians viewed and criticized public revenue
from land rent.) My suggestion to tap 80 percent of the rent would avoid the Rothbard criticism.
Even Henry George proposed the owner keep some of the rent. The accusation that land value
must drop to zero is not an argument against taxing some or even most of the geo-rent.




                                                - 12 -
                                             PART 4

     A Comparative Analysis of Land Value Taxation

We now analyze the criteria for taxation, discussed above, to see how tapping geo-rent for public
revenue compares with taxing income, value added, consumption, and sales.


Impact on production

It is widely understood that when something is taxed, we get less of it. As discussed above, this
reduction in labor, production, and investment is called the "excess burden" or "deadweight
loss" of taxation. Income taxation discourages work, sales and value-added taxes discourage
consumption, capital gains taxes discourage investment, and real property taxes discourage
building and improving property. Those taxes make the asset or activity more costly, which then
reduces the quantity bought of the thing being taxed.

What makes land different is that its supply is
fixed, and it is independent of human action.         When land value or rent is tapped for
When land value or rent is tapped for public          public revenue, the land does not
revenue, the land does not shrink, flee, or           shrink, flee, or hide.
hide.

Recall the definition above, that land means natural resources. Real estate sites consist of the
three dimensional space within some boundary of title or jurisdiction. We cannot import land to
expand the amount of space. There can be no land factories to produce more space. Chopping
down trees, leveling inclined slopes, and draining and filling in water only change the material
contents of the space, not the extent or location of the space. Building taller just makes more
space usable; the three-dimensional space does not expand.

Some critics of this proposition claim the supply of land is not fixed, because all resources are
subjective. Extreme subjectivists seem to think that if there is a boundary line between your land
and my land, that is not an objective fact, since I may subjectively think the boundary line is
different from what you think. The line is in the mind, not on the ground. In my judgment, such
views would take us out of the realm of common-sense economics into rarified philosophical
areas of metaphysics, ontology, and epistemology. Ordinary folks believe that if I draw a line in
the sand, it is an objective enough fact for practical purposes, because there is an intersubjective
agreement on phenomena such as boundary lines.

Some economists of the Austrian school reject the distinction between land and capital goods.
They think improvements such as buildings are also land, so the supply is not fixed. But that is a
semantic quibble and a refusal to face the issue. The common-sense fact is that the space in a
plot of land cannot be increased or decreased. Whatever one wants to call it, we can distinguish
stuff we construct on a site from the site itself.



                                                  - 13 -
Another objection is that landowners can change the boundary line and so expand the amount of
land. But the "supply of land" does not refer to the size of an individual's title, but to the total
amount in some market area. If Roy buys Jane's land that is adjacent to his, his increase in land
is exactly offset by the decrease in the land she owns. The tax on the combined lot will be the
same as the sum of the land taxes on the previously separate lots.

                                                      Another source of confusion is the claim that
 The "supply of land" does not refer to               since the rent of land depends on demand,
 the size of an individual's title, but to            which is done by human beings, this makes
 the total amount in some market area.                the supply of land variable. This view
                                                      confuses supply with demand. Demand is the
                                                      willingness of buyers to pay. This is
independent of the quantity that is available. If there are three specimens of a rare stamp, the bids
of those wanting to buy it do not change the number of stamps in existence.

Another error made even by academic economists is to confuse the supply of land for a
particular use, such as housing, with the overall supply of land. Of course the supply for a
particular use can vary, since, for example, we can convert farmland to housing land. But the
total area available for all uses does not change, and that is the relevant supply.

The relevance for taxation is that if a plot of land used for a factory is taxed, the owner will not
suddenly want to convert it into a farm unless its use as a factory was suboptimal. If the plot was
already being used to maximize the rent, taxing it will not change the use. Taxing the site will
also not make the boundary lines move to the west. Taxing the site will also not affect the
demand by tenants to use the site.

Another objection to taxing land value, which some find compelling, is that when the owner
bought the land, he already paid the present value of all future rents, so taxing the land would be
a double payment. But many who bought their lands in the past have enjoyed gains, often large,
in the real estate value. Moreover, this is only a transition problem; once the tax is in place, a
new buyer's tax is offset by a lower price for land and lower mortgage interest payments. Such
an argument would prevent the liberation of slaves, since slave owners also pay the value of
future labor when they buy a slave.


Impact on behavior

Income taxes impose on the economy a large administrative cost by government and a cost to
payers of filling out forms, paying lawyers and accountants, and trying to comprehend the
complex requirements. The compliance cost of lost time in the U.S. is 5 billion hours per year,
the equivalent of two million people working full time just to process the income tax. In dollar
terms, the compliance cost is estimated to be more than $200 billion per year.29

Reformers who want to impose a national retail sales tax are well aware of the substantial impact
taxes have on human behavior. That, indeed, is often why such reforms are proposed: The
reformer wishes to discourage borrowing, reduce consumption, or encourage savings, for
example. But moving to a national retail sales tax results in little improvement.



                                               - 14 -
Most people use their wage income to pay for goods and services and sales taxes. Switching
from an income to a sales tax is like taxing you when you leave a room instead of when you
enter the room.

Income taxes punish savings, but sales taxes punish borrowing. If you borrow $10,000 to buy a
car and there is a 20 percent sales tax, you need to borrow an extra $2,000 to pay the tax. Some
folks might decide to not buy the car, spending the $10,000 on something else, without
borrowing $2,000.

There is no good economic reason to tax-punish consumption or borrowing. The purpose of
production is consumption! If we punish consumption, we punish production. Consumption is
not an evil to be thwarted, but the very benefit we get from the economy. We may as well also
tax fun and joy! Those seeking to tax consumption act as though they have a Puritan streak that
considers enjoying goods to be evil and working and saving to be good for their own sake.

Tapping rent or land value, by contrast,
avoids the manipulation of an individual's         There would no longer be any tax
choice to save or borrow, consume or invest.       audits. There would be no record-
A well-constructed land value levy has no          keeping for taxes.
distortive effect at all on human action or
decisions, since it taps a pure surplus, what is
left over after paying for the economic costs of production. The effect of shifting public revenue
from labor and capital to land would be to liberate human action from the disincentives currently
imposed by other taxes.

As Henry George noted,

   The advantages which would be gained by substituting for the numerous taxes by which
   the public revenues are now raised, a single tax levied upon the value of land, will appear
   more and more important the more they are considered ... With all the burdens removed
   which now oppress industry and hamper exchange, the production of wealth would go on
   with a rapidity undreamed of ... [It would be] like removing an immense weight from a
   powerful spring.30


Costs of collection and administration

Consider the effect of abolishing income taxes and sales taxes, replacing them with a land value
tax. There would no longer be any tax audits. There would be no record-keeping for taxes. You,
the landowner, would instead get a monthly bill, like you get for utilities. You would simply pay
the bill or have it automatically deducted from some financial account. At the same time,
government would avoid the high cost of processing complex accounts and keeping individual
tax records. It would only need to keep real estate records and assess the land values, both of
which it already does for property tax purposes.

Those who are retired or temporarily have little cash income would be able to defer taxes by
accumulating liens on the real estate until they die or sell the property, as is commonly done
today with real estate taxes.

                                              - 15 -
If you thought the assessment of the land value was too high, you could appeal, as one can
today's real estate taxes. The land value assessments would be public records available on the
Internet, unlike income tax records, which are quite properly hidden from public view. You
could easily compare your assessment with those of your neighbors. If the appeals board rejected
your claim, the assessment could be appealed to a jury, if you were willing to pay the cost of the
jury's decision.

                                                     Nobody would be sent to prison for tax
 Land value taxation also involves less              evasion, because there would be no tax
 invasion of privacy than taxing the                 evasion. A non-payer would lose title to his
 whole property, since land value                    land or lose the protective services of
 assessors do not need to enter the                  government, depending on the local
 property to assess it. They don't assess            enforcement practice. Property taxes are
 the new pipes, the expanded wiring,                 already being assessed and collected by
                                                     counties in the U.S. A complete shift to the
 the renovated kitchen, or the new                   taxation of land values would not increase
 cottage in the back.                                these costs, but would eliminate the expenses
                                                     involved in collecting sales and income taxes.


Least opportunity for tyranny and evasion

Without audits, bank account seizures, and fear-inspiring letters from the IRS requesting
information or additional payments or imposing interest and penalties, the opportunity for
tyranny would greatly diminish, if not entirely disappear. Evasion being impossible, there would
be no need or excuse for any inquisitive state investigators of fraud. Land value taxation also
involves less invasion of privacy than taxing the whole property, since land value assessors do
not need to enter the property to assess it. They don't assess the new pipes, the expanded wiring,
the renovated kitchen, or the new cottage in the back.


Justice, fairness, equity

We still need to judge whether it is fair for only landowners to pay the taxes, rather than to
spread the burden on all who get income or spend money or have wealth.

Natural-law philosophers such as John Locke have reasoned that all human beings have a natural
ownership right to their labor and the products of that labor. The fundamental equality of
humanity means it is fundamentally wrong for some to take away the labor done by others.31
That notion is almost universally recognized today with respect to slavery, and some folks are
beginning to recognize that the current tax system--which taxes our earnings and taxes how we
invest or spend those earnings--also violates man's natural right to the fruits of his labor.

If taking the fruit of one's labor is fundamentally unjust, how can a community raise the monies
needed to build essential infrastructure and provide public services? Land value taxation takes
into account not only the value of the land due to nature, such as soil and climate, but also the
great increase in land values that result from population, commerce, security and other civic


                                               - 16 -
services, and public works--elements beyond the activity of the property owner. The windfall
increase in the rental or land value of the land, contended Henry George and others, is a surplus
that can be tapped by the community.32

Those suggesting positive consequences of
shifting taxation to rent have been accused of      The windfall increase in the rental or
                                     33
exaggerating its beneficial effects. Freedom        land value of the land, contended
from punitive taxation is not a panacea, but        Henry George and others, is a surplus
the infliction of arbitrary costs on enterprise     that can be tapped by the community.
and the skewing of market signals such as
prices and profits is indeed a universal and
major cause of economic woes. It is not an exaggeration to propose that removing these would
have many beneficial results, just as one's health improves considerably if one stops taking
poison.




                                              - 17 -
                                              PART 5

         Land Value Taxation in Theory and Practice

Land value taxation in history

Significant land value taxation was adopted in several countries. In Japan, after a revolution in
the 1860s, the government transferred agricultural lands to farmers, who then paid a tax on its
value. The Japanese government used this tax to finance public works and education, which
further increased land values and thus the proceeds from the land value tax. This created a
powerful upward spiral that turned Japan into a major industrial power. (Japan later switched to
taxing income due to political pressure from landowners.)34

                                                    The German colony of Kiaochow, China,
 Hong Kong and Singapore became                     established in 1898, had a single tax on land
 major commercial centers in large part             value set at 6 percent.35 Its principal city,
 because much of their public finance is            Tsing-tao, developed into a fine modern city.
 based on taxing land values, rather                The Germans lost the colony in 1914 at the
 than taxing trade and commerce.                    outbreak of World War I, but their experience
                                                    influenced the Chinese revolutionary Sun
                                                    Yat-sen, who became head of the government
of China. He and his successors in the Nationalist Party were not able to implement land value
taxation in that country, but when they moved to Taiwan in 1950 after the communists took the
mainland, Chiang-kai shek implemented a land-to-the-tiller reform accompanied by a tax on land
value. Taiwan has since developed into a major industrial power. Hong Kong and Singapore
became major commercial centers in large part because much of their public finance is based on
taxing land values, or in the case of Hong Kong, from selling land leases, with low taxes on trade
and commerce.

Of course there are many reasons for the success of economies such as Hong Kong's, but the
evidence is that more economic freedom is widely associated with greater growth and per-capita
income, in accord with the economic theory that the deadweight loss caused by restricting and
taxing production leads to lower production.

Many cities worldwide, including Johannesburg, South Africa and Sydney, Australia, have
levied real estate taxes on land values only. Some cities in Pennsylvania have had a two-rate
system, where land values are taxed at a rate higher than the tax on improvements.36

Followers of Henry George established several model communities. In one of them, Arden,
Delaware, all residential land is owned by a trust. It leases the land to the residents, who pay rent
only on their leaseholds. The trust itself pays property taxes to the county. Arden has prospered
as a community with fine houses and lively community activities.37

Many private communities implement the single tax on land in effect, collected as a fee or
assessment. A condominium owner, for example, owns his unit and a share of the "common

                                               - 18 -
elements" such as building exteriors, landscaping, and recreation facilities. The unit owner pays
an assessment often calculated as a "percentage interest," based on the market value of the unit
relative to other units. In effect, the unit owner is paying rent for use of the common elements.38

Guests in a hotel pay a rental for one room and receive hotel amenities such as transportation
(elevators), the lobby, hallways, and swimming pool. Owners of mobile homes pay rent for sites
along with services, and boat owners similarly pay for a space along with amenities. All are
examples of paying rent for the use of private community services and location amenities.39 In
the private sector, rent is viewed as an efficient form of financing community services, while
governments tend instead to levy taxes on sales or income or wealth, with little or no direct
relationship to services.


How much revenue?

Total land values or land rents are not reported in national statistics. The U.S. national income
accounts have a number only for the "rental income of persons," which excludes rent obtained
by corporations and the rental value of government land. This "rental income" is after all
expenses, including property taxes, and so includes only a tiny fraction of the geo-rent.40

The national rent in the United Kingdom has
been estimated at 22 percent of national            Land value taxation would result in a
income, which exceeds the amount raised in          substantial reduction in the cost of
                                41
that country by the income tax. Steven              government.
      42
Cord estimated the annual economic rent of
land in the U.S. in 1986 at $680 billion,
20 percent of national income, while Mike Miles (1990) arrived at a similar figure using data
from the Bureau of Economic Analysis.43 The totals include government lands but do not include
the increase in geo-rent that would occur with the elimination of market-hampering taxes.
Making up about one-fifth of national income, land value taxation would provide about 60
percent of current U.S. federal, state, and local government revenue, which would be more than
adequate for government spending if it did not include transfer payments.

The taxable value of the land in the economy would increase over time for two reasons. First, a
shift from taxing production to taxing land values would eliminate the lost output due to
taxes--about $1 trillion per year.44 One-fifth of that would be rent, thus increasing rent by
$300 billion. Secondly, the economy would grow faster, which also would increase rent over
time.

Tideman et al. (2002, 17) "estimate that the net gain (measured in real dollars of 2000), from
shifting as much taxation to land as could be financed by collecting 90% of the land rent, would
be $1308 billion or 14% of NDP in 2002 and $4,799 billion or 26.6% of NDP in 2042."

Even if only a fraction of government revenue shifted from the types of taxes we know today to
a geo-rent tax, the efficiency gains could be substantial. Some critics simply do not believe these
results, without bothering to read them. I have not seen a rebuttal of Tideman's calculation.




                                               - 19 -
Even if land value taxation does not yield the revenue that is desired, this is no argument against
shifting as much public revenue as possible to rent-based sources. Public revenue from land
values is the most complete application of "supply-side" economic policy. Supply-side policy
attempts to increase production and the supply of goods by decreasing costs, such as by lowering
taxes and eliminating excessive regulations and barriers to trade. A complete tax shift, away
from taxing production to taxing land values, is the ultimate supply-side policy, since it removes
the excess economic burden of taxation. The public collection of land rent is thus the ultimate in
tax reform.

                                                    Land value taxation would also result in a
 A complete tax shift, away from taxing             substantial reduction in the cost of
 production to taxing land values, is the           government. The administrative cost of land
 ultimate supply-side policy, since it              value taxes would be less than that of existing
 removes the excess economic burden                 property taxes (which require a greater
 of taxation.                                       inspection of buildings and improvements),
                                                    and the cost of enforcing income and sales
                                                    taxes would be eliminated. By improving
economic growth and allowing workers to keep all the money they earn, land value taxation
would result in higher incomes, reducing the demand for government welfare programs.
Decentralization, privatization, and the elimination of wasteful government programs would
further reduce the amount needed to fund government.


How to make the transition

The switch to land value taxation will affect most significantly those who own land at the time of
the transition. These are the persons who have been subsidized, receiving site rental and land
value from civic works paid for mostly by taxes on wages when earned or spent. But even many
landowners would not see their total tax burden rise. Their wages, profits, interest, and
consumption would all become untaxed, and taxes on their buildings and other improvements
would be eliminated.

As shown by the equations earlier in this report, the land value tax is not even any burden on
future owners of the land, since the tax on the land reduces its purchase price. What the owner
pays in a tax on his geo-rent, he saves in not having to pay that amount as mortgage interest.

There are two ways of addressing any net burden that might fall on current landowners during a
shift to land value taxes. First, landowners could be compensated. Second, the shift could be
implemented gradually, allowing land values to fall to accommodate the expected and gradually
implemented tax shift.

As a concrete example, the transition to land value taxation can be accomplished in these steps:

   1. Each county expands its register of all real estate and the title holders to include all
   lands owned by governments and previously non-registered entities.

   2. Local real estate taxes are split into two taxes, one on land value and one on
   improvements.


                                               - 20 -
   3. The county real estate assessment function is transferred to land value assessment
   boards, comprised of representatives from the federal, state, county, and municipal
   governments as well as real estate professionals and scholars. These boards appoint
   assessors and establish an appeals process, similar to current real estate tax appeals.

   4. All land is assessed at its current market value.

   5. Over a period of years, depending
   on how much land values already                Over a period of years ... the tax on
   have fallen in anticipation of the tax         improvements is reduced, while the tax
   shift, the tax on improvements is              on land values is increased.
   reduced, while the tax on land values
   is increased. (An immediate tax shift
   to geo-rent, with other taxes reduced or abolished, could be compensated, for those with net
   losses, with special bonds whose face-value interest payments would decrease over time; this
   would have an effect similar to the gradual increase in the geo-rent tax rate.)

   6. Sales taxes, tariffs, and excise taxes are reduced and eventually eliminated.

   7. The personal exemption in federal income taxes is raised each year, until it eventually
   includes all income, at which time all state and federal personal income taxes are
   abolished. The taxation of corporate profits is also phased out.

   8. The value of material land (minerals, oil, water, etc.), the electromagnetic spectrum,
   naturally growing forests, and other natural resources is taxed at gradually increasing
   rates up to a substantial amount, if not all, of the unimproved rental value.

   9. An amendment to the Constitution is enacted prohibiting any taxation of wages, sales,
   profits, value-added, or produced wealth and establishing the taxation of the value of land
   and other natural resources, along with voluntary user fees and charges for pollution and
   congestion, as the only sources of public revenues. The amendment also establishes a
   land value tax commission with representatives from the federal, state, local, territorial,
   and Indian-nation governments to divide the taxes raised. Generally, taxes raised from
   off-shore oil and water, atmospheric pollution, airline routes, and other continental uses
   would be allocated to the federal government, and the rest would be allocated to the state
   (or provincial, in Canada), local, territorial, and Indian-nation governments. If the
   national government needs additional revenue, it is obtained from the state or territorial
   governments in proportion to their land value, as was specified in the Articles of
   Confederation that preceded the U.S. Constitution.

   10. Top-down revenue sharing from federal to state and from state to local government
   stops. Many services, functions, and agencies are transferred from the central
   government to the state/provincial and local governments.

Critics of land value taxation claim that over time, there would be popular pressure to bring back
the income and sales taxes. It is true that those owning valuable commercial land will always
seek to lower the tax on land and shift taxes to labor and capital. It is also true that governments
can ignore constitutional rules, and governments get overthrown. By this argument, the slaves


                                               - 21 -
should never have been freed, because slavery can always be restored. Women should not have
been given the opportunity to vote, because that could be reversed. This is an argument against
any reform and indeed against any action to improve your condition. (Why bother to work? You
might lose your money, and it will have been for nothing.) This is ultimately a philosophical
argument for the futility of any human action.

                                                  But the fact is that there was a shift in public
 Once there is a shift in public attitudes        attitude about slavery, and most folks now
                                                  believe it was morally wrong. It would be
 about taxing wages, the view that it is          politically difficult today to reverse the equal
 morally wrong to tax labor could be              rights of women to vote. Similarly, once there
 just as irreversible.                            is a shift in public attitudes about taxing
                                                  wages, the view that it is morally wrong to
                                                  tax labor could be just as irreversible.




                                             - 22 -
                                             PART 6

                         Land Value Taxation and
                         Decentralized Governance

The United States is a federation of states (and Indian-nation reservations), with many
government functions such as criminal law, education, and local services provided by the states.
Since the federal income tax was enacted in 1913, taxation and authority have shifted
increasingly to the federal government.

In 1902, federal taxes represented 37 percent of total revenue to governments at all levels.45 By
2002, federal taxes represented 67 percent of the government revenue pie.46 The share taken by
state governments rose from 11.4 percent in 1902 to 21.5 percent in 1986. Local governments'
share fell from 51.3 percent in 1902 to 13.7 percent in 1986.

The change in the share of tax revenues taken
by each level of government has occurred in        Land value taxation would shift
large part because of the relative ease of         economic power back to state and local
increasing income taxes at the federal level,      governments.
and the relative difficulty of increasing local
and state taxes. Taxpayers find it much easier
to respond to changes in state and local taxes, by moving to lower-tax communities. It is far
more difficult to avoid taxes imposed by the federal government--especially since U.S. citizens
are taxed even if they are abroad.

Revenue-sharing from the federal government to the states is, in effect, a tax cartel among the
states, collusion to tax the population and then divide the funds among the states. Taxation at the
federal level also encourages spending by the federal government instead of the states, so now
we have federal departments and agencies for education, housing, health and welfare, energy,
and other fields that once were local, state, or private-sector matters.

Local and state governments, once willing to go along with the federal government's tax-and-
revenue-sharing scheme, are beginning to realize centralized taxing brings with it centralized
authority, dramatically reducing local control. Revenue-sharing comes with strings attached:
Local and state governments must abide by federal government mandates in order to obtain the
funds, taken from their residents in the first place. Revenue-sharing allows the federal
government to sidestep the Tenth Amendment to the Constitution, which provides that powers
not specifically delegated to the federal government are reserved to the people and the states.

Land value taxation would shift economic power back to state and local governments. Land is
suited to local taxation because--unlike enterprise, capital, and labor--it cannot be moved. Land
is also the logical source of local public finance because it does not burden enterprise, so that
entrepreneurs don't even want to run from it. Indeed, entrepreneurs welcome a shift to land value
taxation, not only because their economic profits are not taxed if all taxation is on land values,


                                               - 23 -
but also because land value taxation reduces the price of land, so they do not need to borrow so
much when they invest funds in an enterprise.

                                                      When public finance is based on land value
 When public finance is based on land                 taxation, government revenues flow up,
 value taxation, government revenues                  instead of trickling down from the federal
 flow up, instead of trickling down                   government to the states and then to local
 from the federal government to the                   governments. Real estate taxes today are
 states and then to local governments.                assessed and collected primarily by county
                                                      governments; under a system of land value
                                                      taxation, funds raised would flow up from the
counties to the states, and only then to the federal government.

Land value taxation would create a decentralizing force, shifting or "devolving" power down to
local government in accord with the principle of subsidiarity: that which can be most efficiently
done by individuals or smaller jurisdictions should not be done by larger or higher-level
jurisdictions. Government functions would then come under more observation and control by the
voters, who can monitor and alter local governments much more easily than remote federal
agencies.




                                              - 24 -
                                              PART 7

                 Summary and Concluding Remarks

An ideal public revenue policy respects a person's right to privacy, does not discourage work or
savings, and does not induce dishonesty. While income, sales, and value-added taxes fall
woefully short of this ideal, land value taxation meets each requirement.

Imagine the increased prosperity and
opportunities for advancement that would          An ideal public revenue policy
exist if people could keep all of the money       respects a person's right to privacy,
they earn; if billions of dollars wasted on       does not discourage work or savings,
efforts to avoid high income taxes were           and does not induce dishonesty.
suddenly turned to productive endeavors; and
if the growth of government were constrained
by a tax system that would raise only enough to pay for services actually provided.

Land value taxation is central to the political philosophy of the founding fathers of the United
States. Far from being a new idea, or the idea of a small group of thinkers, it is a concept
embraced by many of the most important figures from our