The Ultimate Tax Reform: Public Revenue from Land Rent

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 represent them. President George W. Bush created an advisory panel on tax reform. 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 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 or business, you may be shaking your head at this point. You are not eager to read about a proposal that would make your taxes even 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 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. ... read the whole proposal

The Rent, the Whole Rent, and Nothing but the Rent

• the spatial surface of the earth,
• material resources such as water and minerals,
• the radio spectrum,
• the atmosphere used for travel or as a dump,
• all wildlife, and
• the genetic information in living beings.

• The pure land rent is the natural rent, the payment for the resource as provided by nature.
• The second component is a rental for the advantages of a site due to the civic works. This is the infrastructure such as streets, parks, utilities, security, schools, and the legal system which makes real estate much more useful. This rental is really a return to capital goods and labor services rather than land.

• Those landlords not under rent control would be able to raise the rents of their low-income tenants, since if the tenant could afford to live there before the raise, he can also afford it if the higher rent brings him back to the same after-rent income.
  
• Those tenants in rent-controlled apartments would get a double subsidy, rent and wages, increasing the inequality between those with privileges and those who were not lucky enough to get the government grants.

Being absolutely well off means,

• first, that one is able to rise substantially above subsistence through peaceful and honest means, whether from one's labor, from one's rightful share of natural and contractual benefits, or from gifts.
• Secondly, to be absolutely well off requires complete liberty, so that the only legal restriction is the prohibition of coercive harm to others. Liberty includes security against attack, either by government or by private persons, since one is not really free if one is under substantial threats of death and theft against which one is helpless.

With liberty, one is free to establish whatever relationships one wishes, so long as others are also willing. With liberty and the ability to obtain wealth, one can obtain assurance of future wealth both because one is able to earn it and also because one is able to store wealth and insure oneself against risk.

My Dictionary of Free-Market Economics defines "well-being" as "The amount and degree to which individuals in an economy are able to pursue and attain their ends." The only requirement for absolute well being, for someone who is mentally and physically able to produce wealth, is liberty. With liberty, one can obtain wealth, friends, and future security, express oneself as one pleases, and enjoy life in accord with one's values and lifestyle preference.

Being absolutely well off does not involve any particular level of wealth beyond subsistence, since this depends on personal preference. An artist may prefer to live at subsistence and devote her time to art, and that person is absolutely well off because she is pursuing happiness in her own way. As with relative well being, one can be well off in the absolute sense without being happy, as for example a person who has much wealth but has lost love or has a serious illness.

What is required for there to be complete liberty? There must be a basic law such that any act that does not invade the domain of others is not prohibited or taxed. In liberty, there are only prohibitions if there are victims who are coercively harmed, and there is restitution for damages to others. In liberty, people have equal rights and no special legal privileges. In a free society, nobody starves, because one is able to save for the future, because on obtains one's equal share of natural and civic benefits, and because the sympathy of society will not let people starve.

The economic policy of liberty has four rules: