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                          CSI Summary
                                 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

             This analysis explains why land value taxation is, as Milton Friedman once
             put it, the "least bad" tax. An ideal tax system 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. The supply of land is fixed,
             immobile, and inherently visible. If land value is taxed, the land will not flee,
             shrink, or hide. Once citizens, taxpayers, consumers, and voters understand
             the option of obtaining public revenue from land value or rent, then the logic
             of getting both greater efficiency and greater justice may prevail.




1. The U.S. tax system needs reform.

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. In 2005, the average American had to work
107 days just to pay taxes, compared to 44 days in 1930.

The "least bad" tax policy is 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. Taxes on income, sales, capital gains, and real property fail this test.
Compliance with the income tax consumes 5 billion hours each year in the U.S., the equivalent
of two million people working full time just to process the income tax. Sales taxes discourage
production of some goods and distort consumer choices. The collection of sales and income
taxes require that government collect information and invade people's privacy.

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 the goal is to fundamentally reform the tax system, then moving to an
entirely different kind of tax--land value taxes--needs to be on the table.
2                                                                              Land Value Taxation


2. What is land value taxation?

Land value taxation is a tax on land, not the buildings, homes, or other structures that might
occupy the land. The proposal here is to replace some or even all of the revenue produced by
other taxes with a tax on land value.

What makes land value taxation so different from other forms of taxation is that the supply of
land is fixed, immobile, and inherently visible. If land value is taxed, the land will not flee,
shrink, or hide. This means a tax on land values should be less distorting, easier to collect, and
require less government invasion of people's privacy.

                                                   Public revenue from land values is the most
    What makes land value taxation so              complete application of "supply-side"
    different from other forms of taxation         economic policy. Supply-side policy attempts
    is that the supply of land is fixed,           to increase production and the supply of
                                                   goods by decreasing costs, such as by
    immobile, and inherently visible.              lowering taxes and eliminating excessive
                                                   regulations and barriers to trade. A complete
tax shift away from taxing production to taxing land values would be the ultimate supply-side
policy, since it removes the excess economic burden of taxation.

Unless you own a valuable vacant lot, land value taxation would most likely reduce your total
tax bill, since it could abolish taxes on your earnings and spending as well as the portion of real
property taxes that falls on buildings and other improvements.


3. Land value taxation compares favorably to other taxes.
Impact on production. When something is taxed, we get less of it. 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. Since the
supply of land is fixed, taxing it does not reduce its supply. Consequently, land value taxation is
pro-economic growth.

Impact on behavior. Income taxes impose administrative costs on government and compliance
costs on taxpayers. Income taxes punish savings, while sales taxes punish borrowing and
consuming. Tapping land value, by contrast, does not distort an individual's choice to save or
borrow, consume or invest. Human action would be liberated from the disincentives currently
imposed by other taxes.

Least opportunity for tyranny and evasion. Income taxes require tax audits, bank account
seizures, and fear-inspiring letters from the IRS requesting information or additional payments or
imposing interest and penalties. Such threats to liberty would greatly diminish, if not entirely
disappear, under a land value tax. Land value taxation involves less invasion of privacy than
taxing the whole property, since land value assessors do not need to enter the property to assess
the new pipes, the expanded wiring, the renovated kitchen, or the new cottage in the back.
Land Value Taxation                                                                                   3


4. Land value taxation is not a new idea.
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. Land value taxation was viewed favorably by 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."

Thomas Jefferson believed "the Earth is given as a common stock for men to labour and live
on." 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."

Contemporary economists who have recognized and supported land value taxation include Leon
Walras, Knut Wicksell, Kris Feder, Mason Gaffney, C. Lowell Harris, Fred Harrison, Nicolaus
Tideman, and the late William Vickrey (winner of the 1996 Nobel Prize in economics). Milton
Friedman, a world-famous free-market economist, once stated, "the least bad tax is the property
tax on the unimproved value of land, the Henry George argument of many, many years ago."


5. Land value taxation works in practice.

Many private communities implement what
amounts to land value taxation as a fee or        Taiwan, Hong Kong, and Singapore
assessment. A condominium owner owns his          became major commercial centers in
unit and a share of the "common elements"         large part because much of their public
such as building exteriors, landscaping, and      finance is based on taxing land values,
recreation facilities. Similarly, guests in a     rather than taxing trade and commerce.
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.

Significant land value taxation has been adopted in several countries. Taiwan, 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. 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. In 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.
4                                                                                              Land Value Taxation


6. Land value taxation would reduce the size and cost of government.
A tax on land value in the U.S. would provide about 60 percent of the entire current tax revenues
of the federal, state, and local governments, allowing all other existing taxes to be abolished. The
revenue would be more than adequate to finance existing government spending on everything
other than transfer payments. But even if land value taxation did not yield as much revenue as all
other taxes now collectively raise, this is no argument against shifting as much public revenue as
possible to rent-based sources.

Land value taxation also would result in a substantial reduction in the cost of government. The
administrative cost of land value taxes would be less than that of existing property taxes (which
require a greater 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.


7. Land value taxation would decentralize government.
                                                                Land value taxation would shift economic
    When public finance is based on land                        power back to state and local governments.
    value taxation, government revenues                         When public finance is based on land value
    flow up, instead of trickling down                          taxation, government revenues flow up,
    from the federal government to the                          instead of trickling down from the federal
    states and then to local governments.                       government to the states and then to local
                                                                governments.

Real estate taxes today are 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. This 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.



    Based on the January 2006 CSI Policy Study, "The Ultimate Tax Reform: Public Revenue from Land Rent," by
    Fred E. Foldvary. Copies are available from the Civil Society Institute for $10 each.

    Copyright 2006 Civil Society Institute. Nothing in this Summary should be construed as reflecting the views of
    the Civil Society Institute or Santa Clara University, nor as an attempt to aid or hinder the passage of any
    legislation. Permission is hereby given to reprint or quote from this Summary; please send tearsheets to the Civil
    Society Institute, Santa Clara University, 500 El Camino Real, Santa Clara, CA 95053. Questions? Call us at
    408/554-6931 or send email to csi@scu.edu.