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A Tax on Land Value is Not Passed
On to the Tenant
"A tax on rent falls wholly on the
landlord. There are no means by which he can shift the
burden upon anyone else. It does not affect the value
or price of agricultural produce, for this is
determined by the cost of production in the most
unfavourable circumstances, and in those circumstances,
as we have so often demonstrated, no rent is paid. A
tax on rent, therefore, has no effect other than its
obvious one. It merely takes so much from the landlord
and transfers it to the State." — John
Stuart Mill (1806-1873), English philosopher and social
reformer, and an acknowledged major intellectual figure
of the 19th century (Section 2, Chapter 3, Book 5,
“Principles of Political Economy”)
Henry George: The Condition of Labor
— An Open Letter to Pope Leo XIII in response to
Rerum Novarum (1891)
Nor do we hesitate to say that this way of securing
the equal right to the bounty of the Creator and the
exclusive right to the products of labor is the way
intended by God for raising public revenues. For we are
not atheists, who deny God; nor semi-atheists, who deny
that he has any concern in politics and
legislation.
It is true as you say — a salutary truth too
often forgotten — that “man is older than
the state, and he holds the right of providing for the
life of his body prior to the formation of any
state.” Yet, as you too perceive, it is also true
that the state is in the divinely appointed order. For
He who foresaw all things and provided for all things,
foresaw and provided that with the increase of
population and the development of industry the
organization of human society into states or
governments would become both expedient and
necessary.
No sooner does the state arise than, as we all know,
it needs revenues. This need for revenues is small at
first, while population is sparse, industry rude and
the functions of the state few and simple. But with
growth of population and advance of civilization the
functions of the state increase and larger and larger
revenues are needed.
Now, He that made the world and placed man in it, He
that pre-ordained civilization as the means whereby man
might rise to higher powers and become more and more
conscious of the works of his Creator, must have
foreseen this increasing need for state revenues and
have made provision for it. That is to say: The
increasing need for public revenues with social
advance, being a natural, God-ordained need, there must
be a right way of raising them — some way that we
can truly say is the way intended by God. It is clear
that this right way of raising public revenues must
accord with the moral law.
Hence:
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It must not take from individuals what rightfully
belongs to individuals.
-
It must not give some an advantage over others, as by
increasing the prices of what some have to sell and
others must buy.
-
It must not lead men into temptation, by requiring
trivial oaths, by making it profitable to lie, to
swear falsely, to bribe or to take bribes.
-
It must not confuse the distinctions of right and
wrong, and weaken the sanctions of religion and the
state by creating crimes that are not sins, and
punishing men for doing what in itself they have an
undoubted right to do.
-
It must not repress industry. It must not check
commerce. It must not punish thrift. It must offer no
impediment to the largest production and the fairest
division of wealth.
Let me ask your Holiness to consider the taxes on
the processes and products of industry by which through
the civilized world public revenues are collected
— the octroi duties that surround Italian cities
with barriers; the monstrous customs duties that hamper
intercourse between so-called Christian states; the
taxes on occupations, on earnings, on investments, on
the building of houses, on the cultivation of fields,
on industry and thrift in all forms. Can these be the
ways God has intended that governments should raise the
means they need? Have any of them the characteristics
indispensable in any plan we can deem a right one?
All these taxes violate the moral law. They take by
force what belongs to the individual alone; they give
to the unscrupulous an advantage over the scrupulous;
they have the effect, nay are largely intended, to
increase the price of what some have to sell and others
must buy; they corrupt government; they make oaths a
mockery; they shackle commerce; they fine industry and
thrift; they lessen the wealth that men might enjoy,
and enrich some by impoverishing others.
Yet what most strikingly shows how opposed to
Christianity is this system of raising public revenues
is its influence on thought.
Christianity teaches us that all men are brethren;
that their true interests are harmonious, not
antagonistic. It gives us, as the golden rule of life,
that we should do to others as we would have others do
to us. But out of the system of taxing the products and
processes of labor, and out of its effects in
increasing the price of what some have to sell and
others must buy, has grown the theory of
“protection,” which denies this gospel,
which holds Christ ignorant of political economy and
proclaims laws of national well-being utterly at
variance with his teaching. This theory sanctifies
national hatreds; it inculcates a universal war of
hostile tariffs; it teaches peoples that their
prosperity lies in imposing on the productions of other
peoples restrictions they do not wish imposed on their
own; and instead of the Christian doctrine of
man’s brotherhood it makes injury of foreigners a
civic virtue.
“By their fruits ye shall know them.”
Can anything more clearly show that to tax the products
and processes of industry is not the way God intended
public revenues to be raised?
But to consider what we propose — the raising
of public revenues by a single tax on the value of land
irrespective of improvements — is to see that in
all respects this does conform to the moral law.
Let me ask your Holiness to keep in mind that the
value we propose to tax, the value of land irrespective
of improvements, does not come from any exertion of
labor or investment of capital on or in it — the
values produced in this way being values of improvement
which we would exempt. The value of land irrespective
of improvement is the value that attaches to land by
reason of increasing population and social progress.
This is a value that always goes to the owner as owner,
and never does and never can go to the user; for if the
user be a different person from the owner he must
always pay the owner for it in rent or in
purchase-money; while if the user be also the owner, it
is as owner, not as user, that he receives it, and by
selling or renting the land he can, as owner, continue
to receive it after he ceases to be a user.
Thus, taxes on land irrespective of
improvement cannot lessen the rewards of industry, nor
add to prices,* nor in any way take from the individual
what belongs to the individual. They can take
only the value that attaches to land by the growth of
the community, and which therefore belongs to the
community as a whole.
* As to this point it may be
well to add that all economists are agreed that taxes
on land values irrespective of improvement or use
— or what in the terminology of political
economy is styled rent, a term distinguished from the
ordinary use of the word rent by being applied solely
to payments for the use of land itself — must
be paid by the owner and cannot be shifted by him on
the user. To explain in another way the
reason given in the text: Price is not determined by
the will of the seller or the will of the buyer, but
by the equation of demand and supply, and therefore
as to things constantly demanded and constantly
produced rests at a point determined by the cost of
production — whatever tends to increase the
cost of bringing fresh quantities of such articles to
the consumer increasing price by checking supply, and
whatever tends to reduce such cost decreasing price
by increasing supply. Thus taxes on wheat or tobacco
or cloth add to the price that the consumer must pay,
and thus the cheapening in the cost of producing
steel which improved processes have made in recent
years has greatly reduced the price of steel. But
land has no cost of production, since it is created
by God, not produced by man. Its price therefore is
fixed —
1 (monopoly rent), where land is
held in close monopoly, by what the owners can
extract from the users under penalty of deprivation
and consequently of starvation, and amounts to all
that common labor can earn on it beyond what is
necessary to life;
2 (economic rent proper), where there is no special
monopoly, by what the particular land will yield to
common labor over and above what may be had by like
expenditure and exertion on land having no special
advantage and for which no rent is paid; and,
3 (speculative rent, which is a species of monopoly
rent, telling particularly in selling price), by
the expectation of future increase of value from
social growth and improvement, which expectation
causing landowners to withhold land at present
prices has the same effect as combination.
Taxes on land values or economic rent
can therefore never be shifted by the landowner to
the land-user, since they in no wise increase the
demand for land or enable landowners to check supply
by withholding land from use. Where rent depends on
mere monopolization, a case I mention because rent
may in this way be demanded for the use of land even
before economic or natural rent arises, the taking by
taxation of what the landowners were able to extort
from labor could not enable them to extort any more,
since laborers, if not left enough to live on, will
die. So, in the case of economic rent proper, to take
from the landowners the premiums they receive, would
in no way increase the superiority of their land and
the demand for it. While, so far as price is affected
by speculative rent, to compel the landowners to pay
taxes on the value of land whether they were getting
any income from it or not, would make it more
difficult for them to withhold land from use; and to
tax the full value would not merely destroy the power
but the desire to do so.
To take land values for the state, abolishing all
taxes on the products of labor, would therefore leave
to the laborer the full produce of labor; to the
individual all that rightfully belongs to the
individual. It would impose no burden on industry, no
check on commerce, no punishment on thrift; it would
secure the largest production and the fairest
distribution of wealth, by leaving men free to produce
and to exchange as they please, without any artificial
enhancement of prices; and by taking for public
purposes a value that cannot be carried off, that
cannot be hidden, that of all values is most easily
ascertained and most certainly and cheaply collected,
it would enormously lessen the number of officials,
dispense with oaths, do away with temptations to
bribery and evasion, and abolish man-made crimes in
themselves innocent.
But, further: That God has intended the state to
obtain the revenues it needs by the taxation of land
values is shown by the same order and degree of
evidence that shows that God has intended the milk of
the mother for the nourishment of the babe.
See how close is the analogy. In that primitive
condition ere the need for the state arises there are
no land values. The products of labor have value, but
in the sparsity of population no value as yet attaches
to land itself. But as increasing density of population
and increasing elaboration of industry necessitate the
organization of the state, with its need for revenues,
value begins to attach to land. As population still
increases and industry grows more elaborate, so the
needs for public revenues increase. And at the same
time and from the same causes land values increase. The
connection is invariable. The value of things produced
by labor tends to decline with social development,
since the larger scale of production and the
improvement of processes tend steadily to reduce their
cost. But the value of land on which population centers
goes up and up. Take Rome or Paris or London or New
York or Melbourne. Consider the enormous value of land
in such cities as compared with the value of land in
sparsely settled parts of the same countries. To what
is this due? Is it not due to the density and activity
of the populations of those cities — to the very
causes that require great public expenditure for
streets, drains, public buildings, and all the many
things needed for the health, convenience and safety of
such great cities? See how with the growth of such
cities the one thing that steadily increases in value
is land; how the opening of roads, the building of
railways, the making of any public improvement, adds to
the value of land. Is it not clear that here is a
natural law — that is to say a tendency willed by
the Creator? Can it mean anything else than that He who
ordained the state with its needs has in the values
which attach to land provided the means to meet those
needs? ... read the whole
letter
H.G. Brown: Significant
Paragraphs from Henry George's Progress &
Poverty: 10. Effect of Remedy Upon Wealth
Production (in the unabridged P&P:
Part IX — Effects of the Remedy: Chapter 1 —
Of the effect upon the production of wealth)
And to shift the burden of taxation from production
and exchange to the value or rent of land would not
merely be to give new stimulus to the production of
wealth; it would be to open new opportunities. For
under this system no one would care to hold land unless
to use it, and land now withheld from use would
everywhere be thrown open to improvement.
The selling price of land would fall; land
speculation would receive its death blow; land
monopolization would no longer pay.* Millions and
millions of acres from which settlers are now shut out
by high prices would be abandoned by their present
owners or sold to settlers upon nominal terms. And this
not merely on the frontiers, but within what are now
considered well settled districts.
* The fact that a tax on the rental
value of land cannot be shifted by landowners to
tenants, though recognized by all competent
economists, is sometimes a stumbling block to persons
untrained in economics. The reason such a tax cannot
be shifted is that it cannot limit the supply of
land. Landowners are presumably, before the tax is
laid, charging all the rent they can get. There is
nothing in a tax on the rental value of land to make
tenants willing to pay more or to make land more
difficult to hire. On the contrary, more land will be
on the market, because of such a tax, rather than
less, since the tax puts a heavy penalty on holding
land out of use and unimproved for mere speculation.
The competition of former vacant land speculators to
get their land used will make land cheaper to rent
rather than more expensive. And since only the net
rent remaining after the tax is subtracted is
capitalized into salable value, land will be very
much cheaper to buy. H.G.B.
And it must be remembered that this would apply, not
merely to agricultural land, but to all land. Mineral
land would be thrown open to use, just as agricultural
land; and in the heart of a city no one could afford to
keep land from its most profitable use, or on the
outskirts to demand more for it than the use to which
it could at the time be put would warrant. Everywhere
that land had attained a value, taxation, instead of
operating, as now, as a fine upon improvement, would
operate to force improvement. Whoever planted an
orchard, or sowed a field, or built a house, or erected
a manufactory, no matter how costly, would have no more
to pay in taxes than if he kept so much land idle.
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The monopolist of agricultural land would be taxed
as much as though his land were covered with houses
and barns, with crops and with stock.
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The owner of a vacant city lot would have to pay as
much for the privilege of keeping other people off
of it until he wanted to use it, as his neighbor
who has a fine house upon his lot.
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It would cost as much to keep a row of tumble-down
shanties upon valuable land as though it were
covered with a grand hotel or a pile of great
warehouses filled with costly goods.
Thus, the bonus that wherever labor is most
productive must now be paid before labor can be exerted
would disappear.
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The farmer would not have to pay out half his
means, or mortgage his labor for years, in order to
obtain land to cultivate;
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the builder of a city homestead would not have to
lay out as much for a small lot as for the house he
puts upon it*;
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the company that proposed to erect a manufactory
would not have to expend a great part of its
capital for a site.
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And what would be paid from year to year to the
state would be in lieu of all the taxes now levied
upon improvements, machinery, and stock.
*Many persons, and among them some
professional economists, have never succeeded in
getting a thorough comprehension of this point.
Thus, the editor has heard the objection advanced
that the greater cheapness of land is no advantage
to the poor man who is trying to save enough from
his earnings to buy a piece of land; for, it is
said, the higher taxes on the land after it is
acquired, offset the lower purchase price. What
such objectors do not see is that even if the lower
price of land does no more than balance the higher
tax on it, (and this overlooks, for one thing, the
discouragement to speculation in land), the
reduction or removal of other taxes is all clear
gain. It is easier to save in proportion as
earnings and commodities are relieved of taxation.
It is easier to buy land, because its selling price
is lower, if the land is taxed. And although the
land, after its purchase, continues to be taxed,
not only can this tax be fully paid out of the
annual interest on the saving in the purchase
price, but also there is to be reckoned the saving
in taxes on buildings and other improvements and in
whatever other taxes are thus rendered unnecessary.
H.G.B.
Consider the effect of such a change upon the labor
market. Competition would no longer be one-sided, as
now. Instead of laborers competing with each other for
employment, and in their competition cutting down wages
to the point of bare subsistence, employers would
everywhere be competing for laborers, and wages would
rise to the fair earnings of labor. For into the labor
market would have entered the greatest of all
competitors for the employment of labor, a competitor
whose demand cannot be satisfied until want is
satisfied — the demand of labor itself. The
employers of labor would not have merely to bid against
other employers, all feeling the stimulus of greater
trade and increased profits, but against the ability of
laborers to become their own employers upon the natural
opportunities freely opened to them by the tax which
prevented monopolization. ... read the whole
chapter
Louis Post: Outlines of Louis F. Post's
Lectures, with Illustrative Notes and Charts
(1894)
II. THE SINGLE TAX AS A
FISCAL REFORM
1. DIRECT AND INDIRECT
TAXATION
Taxes are either direct or
indirect; or, as they have been aptly
described, "straight" or "crooked." Indirect taxes are
those that may be shifted by the first payer from
himself to others; direct taxes are those that cannot
be shifted.5
5. "Taxes are either direct or
indirect. A direct tax is one which is demanded from
the very persons who, it is intended or desired,
should pay it. Indirect taxes are those which are
demanded from one person in the expectation and
intention that he shall indemnify himself at the
expense of another." — John Stuart Mill's
Prin. of Pol. Ec., book v, ch. iii, sec. I.
"Direct taxes are those which are
levied on the very persons who it is intended or
desired should pay them, and which they cannot put
off upon others by raising the prices of the taxed
article.. . . Indirect taxes on the other hand are
those which are levied on persons who expect to get
back the amount of the tax by raising the price of
the taxed article." — Laughlin's
Elements, par. 249.
Taxes are direct "when the payment is
made by the person who is intended to bear the
sacrifice." Indirect taxes are recovered from final
purchasers. — Jevons's Primer, sec.
96.
"Indirect taxes are so called because
they are not paid into the treasury by the person who
really bears the burden. The payer adds the amount of
the tax to the price of the commodity taxed, and thus
the taxation is concealed under the increased price
of some article of luxury or convenience." —
Thompson's Pol. Ec., sec. 175.
The shifting of indirect taxes is accomplished by
means of their tendency to increase the prices of
commodities on which they fall. Their magnitude and
incidence 6 are thereby disguised. It was for this
reason that a great French economist of the last
century denounced them as "a scheme for so plucking
geese as to get the most feathers with the least
squawking."7
6. Jevons defines the incidence of a
tax as "the manner in which it falls upon different
classes of the population." — Jevons's
Primer, sec. 96.
Sometimes called "repercussion," and refers "to the
real as opposed to the nominal payment of taxes."
— Ely's Taxation, p. 64.
7. Though his language was blunt, the
sentiment does not essentially differ from that of
"statesmen" of our day who meet all the moral and
economic objections to indirect taxation with the one
reply that the people would not consent to pay enough
or the support of government if public revenues were
collected from them directly. This means nothing but
that the people are actually hoodwinked by indirect
taxation into sustaining a government that they would
not support if they knew it was maintained at their
expense; and instead of being a reason for continuing
indirect taxation, would, if true, be one of the
strongest of reasons for abolishing it. It is
consistent neither with the plainest principles of
democracy nor the simplest conceptions of
morality.
Indirect taxation costs the real tax-payers much
more than the government receives, partly because the
middlemen through whose hands taxed commodities pass
are able to exact compound profits upon the tax,8 and
partly on account of extraordinary expenses of original
collection;9 it favors corruption in government by
concealing from the people the fact that they
contribute to the support of government; and it tends,
by obstructing production, to crush legitimate industry
and establish monopolies.10 The questions it raises are
of vastly more concern than is indicated by the sum
total of public expenditures.
8. A tax upon shoes, paid in the first
instance by shoe manufacturers, enters into
manufacturers' prices, and, together with the usual
rate of profit upon that amount of investment, is
recovered from wholesalers. The tax and the
manufacturers' profit upon it then constitute part of
the wholesale price and are collected from retailers.
The retailers in turn collect the tax with all
intermediate profits upon it, together with their
usual rate of profit upon the whole, from final
purchasers — the consumers of shoes. Thus what
appears on the surface to be a tax upon shoe
manufacturers proves upon examination to be an
indirect tax upon shoe consumers, who pay in an
accumulation of profits upon the tax considerably
more than the government receives.
The effect would be the same if a tax
upon their leather output were imposed upon tanners.
Tanners would add to the price of leather the amount
of the tax, plus their usual rate of profit upon a
like investment, and collect the whole, together with
the cost of hides, of transportation, of tanning and
of selling, from shoe manufacturers, who would
collect with their profit from retailers, who would
collect with their profit from shoe consumers. The
principle applies also when taxes are levied upon the
stock or the sales of merchants, or the money or
credits of bankers; merchants add the tax with the
usual profit to the prices of their goods, and
bankers add it to their interest and discounts.
For example; a tax of $100,000 upon
the output of manufacturers or importers would, at 10
per cent as the manufacturing profit, cost
wholesalers $110,000; at a profit of 10 per cent to
wholesalers it would cost retailers $121,000, and at
20 percent profit to retailers it would finally
impose a tax burden of $145,200 — being 45 per
cent more than the government would get. Upon most
commodities the number of profits exceeds three, so
that indirect taxes may frequently cost as much as
100 per cent, even when imposed only upon what are
commercially known as finished goods; when imposed
upon materials also, the cost of collection might
well run far above 200 percent in addition to the
first cost of maintaining the machinery of
taxation.
It must not be supposed, however, that
the recovery of indirect taxes from the ultimate
consumers of taxed goods is arbitrary. When shoe
manufacturers, or tanners, or merchants add taxes to
prices, or bankers add them to interest, it is not
because they might do otherwise but choose to do
this; it is because the exigencies of trade compel
them. Manufacturers, merchants, and other tradesmen
who carry on competitive businesses must on the
average sell their goods at cost plus the ordinary
rate of profit, or go out of business. It follows
that any increase in cost of production tends to
increase the price of products. Now, a tax upon the
output of business men, which they must pay as a
condition of doing their business, is as truly part
of the cost of their output as is the price of the
materials they buy or the wages of the men they hire.
Therefore, such a tax upon business men tends to
increase the price of their products. And this
tendency is more or less marked as the tax is more or
less great and competition more or less keen.
It is true that a moderate tax upon
monopolized products, such as trade-mark goods,
proprietary medicines, patented articles and
copyright publications is not necessarily shifted to
consumers. The monopoly manufacturer whose prices are
not checked by cost of production, and are therefore
as a rule higher than competitive prices would be,
may find it more profitable to bear the burden of a
tax that leaves him some profit, by preserving his
entire custom, than to drive off part of his custom
by adding the tax to his usual prices. This is true
also of a moderate import tax to the extent it falls
upon goods that are more cheaply transported from the
place of production to a foreign market where the
import tax is imposed than to a home market where the
goods would be free of such a tax — products,
for instance, of a farm in Canada near to a New York
town, but far away from any Canadian town. If the tax
be less than the difference in the cost of
transportation the producer will bear the burden of
it; otherwise he will not. The ultimate effect would
be a reduction in the value of the Canadian land.
Examples which may be cited in opposition to the
principle that import taxes are indirect, will upon
examination prove to be of the character here
described. Business cannot be carried on at a loss
— not for long.
9. "To collect taxes, to prevent and
punish evasions, to check and countercheck revenue
drawn from so many distinct sources, now make up
probably three-fourths, perhaps seven-eighths, of the
business of government outside of the preservation of
order, the maintenance of the military arm, and the
administration of justice." — Progress and
Poverty, book iv, ch: v
10. For a brief and thorough
exposition of indirect taxation read George's
"Protection or Free Trade," ch. viii, on "
Tariffs for Revenue."
Whoever calmly reflects and candidly decides upon
the merits of indirect taxation must reject it in all
its forms. But to do that is to make a great stride
toward accepting the single tax. For the single tax is
a form of direct taxation; it cannot be shifted.11
11. This is usually a stumbling block
to those who, without much experience in economic
thought, consider the single tax for the first time.
As soon as they grasp the idea that taxes upon
commodities shift to consumers they jump to the
conclusion that similarly taxes upon land values
would shift to the users. But this is a mistake, and
the explanation is simple. Taxes upon what men
produce make production more difficult and so tend
toward scarcity in the supply, which stimulates
prices; but taxes upon land, provided the taxes be
levied in proportion to value, tend toward plenty in
supply (meaning market supply of course), because
they make it more difficult to hold valuable land
idle, and so depress prices.
"A tax on rent falls wholly on the
landlord. There are no means by which he can shift
the burden upon anyone else. . . A tax on rent,
therefore, has no effect other than its obvious one.
It merely takes so much from the landlord and
transfers it to the state." — John Stuart
Mill's Prin. of Pol. Ec., book v, ch. iii, sec.
1.
"A tax laid upon rent is borne solely
by the owner of land." — Bascom's Tr.,
p.159.
"Taxes which are levied on land . . .
really fall on the owner of the land." —
Mrs. Fawcett's Pol. Ec. for Beginners, pp.209,
210.
"A land tax levied in proportion to
the rent of land, and varying with every variation of
rents, . . . will fall wholly on the landlords."
— Walker's Pol. Ec., ed. of 1887, p. 413,
quoting Ricardo.
"The power of transferring a tax from
the person who actually pays it to some other person
varies with the object taxed. A tax on rents cannot
be transferred. A tax on commodities is always
transferred to the consumer." — Thorold
Rogers's Pol. Ec., ch. xxi, 2d ed., p. 285.
"Though the landlord is in all cases
the real contributor, the tax is commonly advanced by
the tenant, to whom the landlord is obliged to allow
it in payment of the rent." — Adam Smith's
Wealth of Nations, book v, ch. ii, part ii, art.
i.
"The way taxes raise prices is by
increasing the cost of production and checking
supply. But land is not a thing of human production,
and taxes upon rent cannot check supply. Therefore,
though a tax upon rent compels land-owners to pay
more, it gives them no power to obtain more for the
use of their land, as it in no way tends to reduce
the supply of land. On the contrary, by compelling
those who hold land on speculation to sell or let for
what they can get, a tax on land values tends to
increase the competition between owners, and thus to
reduce the price of land." — Progress and
Poverty, book viii, ch. iii, subd. i.
Sometimes this point is raised as a
question of shifting the tax in higher rent to the
tenant, and at others as a question of shifting it to
the consumers of goods in higher prices. The
principle is the same. Merchants cannot charge higher
prices for goods than their competitors do, merely
because they pay higher ground rents. A country
storekeeper whose business lot is worth but few
dollars charges as much for sugar, probably more,
than a city grocer whose lot is worth thousands.
Quality for quality and quantity for quantity, goods
sell for about the same price everywhere. Differences
in price are altogether in favor of places where land
has a high value. This is due to the fact that the
cost of getting goods to places of low land value,
distant villages for example, is greater than to
centers, which are places of high land value.
Sometimes it is true that prices for some things are
higher where land values are high. Tiffany's goods,
for instance, may be more expensive than goods of the
same quality at a store on a less expensive site. But
that is not due to the higher land value; it is
because the dealer has a reputation for technical
knowledge and honesty (or has become a fad among rich
people), for which his customers are willing to pay
whether his store is on a high priced-lot or a
low-priced one.
Though land value has no effect upon
the price of good, it is easier to sell goods in some
locations than in others. Therefore, though the price
and the profit of each sale be the same, or even
less, in good locations than in poorer ones,
aggregate receipts and aggregate profits are much
greater at the good location. And it is out of his
aggregate, and not out of each profit, that rent is
paid, For example: A cigar store on a thoroughfare
supplies a certain quality of cigar for fifteen
cents. On a side street the same quality of cigar can
be bought no cheaper. Indeed, the cigars there are
likely to be poorer, and therefore really dearer. Yet
ground rent on the thoroughfare is very high compared
with ground rent on the sidestreet. How, then, can
the first dealer, he who pays the high ground rent,
afford to sell as good or better cigars for fifteen
cents than his competitor of the low priced location?
Simply because he is able to make so many more sales
with a given outlay of labor and capital in a given
time that his aggregate profit is greater. This is
due to the advantage of his location, and for that
advantage he pays a premium in higher ground rent.
But that premium is not charged to smokers; the
competing dealer of the side street protects them. It
represents the greater ease, the lower cost, of doing
a given volume of business upon the site for which it
is paid; add if the state should take any of it, even
the whole of it, in taxation, the loss would be
finally borne by the owner of the advantage which
attaches to that site — by the landlord. Any
attempt to shift it to tenant or buyer would be
promptly checked by the competition of neighboring
but cheaper land.
"A land-tax, levied in proportion to
the rent of land, and varying with every variation of
rent, is in effect a tax on rent; and as such a tax
will not apply to that land which yields no rent, nor
to the produce of that capital which is employed on
the land with a view to profit merely, and which
never pays rent; it will not in any way affect the
price of raw produce, but will fall wholly on the
landlords." — McCulloch's Ricardo (3d ed.),
p. 207 ...
Q20. Would not the single tax increase the
rent of houses?
A. No. It takes taxes off buildings and materials,
thus making it cheaper to build houses. How can house
rent go up as the cost of building houses goes down?
Read pp. 5 to 8 and the related notes.
Q23. Would not the merchant shift his land
value tax by adding it to the price of his
goods?
A. No. Read note 11. .. read the book
Charles B. Fillebrown: A Catechism of Natural
Taxation, from Principles of Natural
Taxation (1917)
Q28. How are landlords privileged?
A. Because, in so far as their land tax is an "old"
tax, it is a burdenless tax, and because their
buildings' tax is shifted upon their tenants; most
landlords who let land and also the tenement houses and
business blocks thereon avoid all share in the tax
burden.
Q34. Why does not an increase in ground rent
tend to cause an increase in prices?
A. Usually sales increase faster proportionately than
rent, thus reducing the ratio of rent to sales. The
larger the product, the lower the individual costs. The
larger the gross sales, the lower the competitive
prices.
Q38. What are the three legs of the tripos, the
threefold support upon which the single tax
rests?
A. They are:
(1) The social origin of ground rent -- that the
site value of land is a creation of the community, a
public or social value.
(2) The non-shiftability of a land tax -- that no
tax, new or old, on the site value of land can be
recovered from the tenant or user by raising his
rent.
(3) The ultimate burdenlessness of a land tax -- that
the selling value of land, reduced as it is by the
capitalized tax that is imposed upon it, is an
untaxed value. Whatever lowers the income from land
lowers proportionately its selling price, so that
whether the established tax upon it has been light or
heavy, it is no burden upon the new purchaser, who
buys it at its net value and thus escapes all part in
the tax burden which he should in justice share with
those who now bear it all.
Q45. Why tax $1,000 invested in a vacant lot
while exempting $1,000 invested in New York Central
stock?
A. Because: (1) the land is made worth $1,000 and so
maintained at public expense without any contribution
from the owner; (2) the $1,000 New York Central stock
adds nothing to the public expense, but a tax upon it,
if collected at the source, falls directly on the road
and thence upon the public, and so adds to the cost of
living.
Q51. Does not a land tax increase house rent or
store rent?
A. The landlord, as a rule, exacts the full ground rent
for the use of his land. Neither by taking three
dollars nor $30 per thousand in taxation can land to be
made worth any more for use.
Q55. How would the single tax effect the
tenant?
A. It would neither increase nor decrease his land
rent. It would reduce his house rent by the amount of
the house tax. ... read the whole
article
Brian Kavanaugh: Why a
landlord can not just pass on the cost of LVT to the
renter
quotes from 11 economists suggest there is wide
agreement on this.
Fred E. Foldvary — The Ultimate Tax Reform:
Public Revenue from Land Rent
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.
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 the owner,
not the tenant. If a landlord, who was already charging
what the market could bear, tried to pass on the tax,
he would face 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. ... read the whole
document
People are frequently most concerned about the fairness
of a tax, which is typically measured according to both
horizontal and vertical equity. Horizontal equity means
that those in similar circumstances will bear similar
burdens. Vertical equity prescribes that those with
greater resources will pay more. Although studies have
yet to show this, land taxes are likely the most
"progressive" of any levy, as tenants bear no
passed-through burden at all. [22] Not only
does no household or office tenant bear any tax burden,
locational sites distant from the urban core, mostly
homeowners and farmers, typically find their burden
reduced. Vacant or underused lots in high value areas
pick up the difference, employing a design that employs
an alternate criterion of equity: taxing according to
use. "Paying for what you take and not for what you
make" encourages efficient consumption of space and
resources in an automatic and non-coercive manner. The
one-third of households that own no land are relieved
of all taxes, and residential and non-residential
property owners split the rest. Farmers, whose land is
typically of inconsequential value relative to sites in
urban areas, are likely to pay little if anything even
if they are not already protected by other
save-harmless provisions. By eliminating taxes on
building improvements they typically enjoy savings just
as do other businesses. ... read the whole article
Henry George: Why The
Landowner Cannot Shift The Tax on Land Values
(1887)
A VERY common objection to the proposition to
concentrate all taxes on Land Values is that the
landowner would add the increased tax on the value of
his land to the rent that must be paid by his tenants.
It is this notion that increased Taxation of Land
Values would fall upon the users, not upon the owners
of land, that more perhaps than anything else prevents
men from seeing the far-reaching and beneficent effects
of doing away with the taxes that now fall upon labor
or the products of labor, and taking for public use
those values that attach to land by reason of the
growth and progress of society.
That taxes levied upon Land Values, or, to use
the politico-economic term, taxes levied upon rent, do
not fall upon the user of land, and cannot be
transferred by the landlord to the tenant is conceded
by all economists of reputation. However much they may
dispute as to other things, there is no dispute upon
this point. Whatever flimsy reasons any of them may
have deemed it expedient to give why the tax on rent
should not be more resorted to, they all admit that the
taxation of rent merely diminishes the profits of the
landowner, cannot be shifted on the user of land,
cannot add to prices, nor check production.
...
The reason of this will be clear to everyone who
has grasped the accepted theory of rent — that
theory to which the name of Ricardo has been given, and
which, as John Stuart Mill says, has but to be
understood to be proved. And it will be clear to
everyone who will consider a moment, even if he has
never before thought of the cause and nature of rent.
The rent of land represents a return
to ownership over and above the return which is
sufficient to induce use — it is a premium paid
for permission to use. To take, in taxation, a part or
the whole of this premium in no way affects the
incentive to use or the return to use; in no way
diminishes the amount of land there is to use, or makes
it more difficult to obtain it for use. Thus
there is no way in which a tax upon rent or Land Values
can be transferred to the user. Whatever the State may
demand of this premium simply diminishes the net amount
which ownership can get for the use of land, or the
price it can demand as purchase money, which is, of
course, rent or the expectation of rent,
capitalized. ...
To put the matter in a form in
which it can be easily understood, let us take two cases.
The one, a country where the available land is all in
use, and the competition of tenants has carried rents to
a point at which the tenant pays the landlord all he can
possibly earn save just enough to barely live. The other,
a country where all the available land is not in use and
the rent that the landlord can get from the tenant is
limited by the terms on which the tenant can get access
to unused land. How, in either case, if the tax were
imposed upon Land Values (or rent), could the landlord
compel the tenant to pay it?
...
But a tax on Land Values does not
add to the cost of producing land. Land is not a thing of
human production. Man does not produce land! He finds it
already in existence when he comes into the world. Its
price, therefore, is not fixed by the cost of production,
but is always the highest price that anyone can give for
the privilege of using a particular piece. Land, unlike
things that must be constantly produced by labor, has no
normal value based on the cost of production, but ranges
in value from nothing at all to the enormous values that
attach to choice sites in great cities, or to mineral
deposits of superior richness, when the growth of
population causes a demand for their use.
Hence a tax on Land Values, instead of enabling
the holder of land to charge that much more for his
land, gives him no power to charge an additional penny.
On the contrary, by making it more costly to hold land
idle, it tends to increase the amount of land which
owners must strive to secure tenants or purchasers for.
Thus the effect of a tax on Land Values is not to
increase the rent that the tenant must pay the owner
for the use of the land, but rather to reduce it. And
since the tax must be paid out of what the land will
yield the owner, its effect would be to reduce the
price for which the land could be sold outright.
...
read the whole article
Nic Tideman: The Case for Site Value
Rating
The Social Justice of Site Value
Rating
The Efficiency of Site Value
Rating
How Valuations would be Made
Both for reasons of social justice
and for reasons of economic efficiency, site value rating
deserves a continued place in the programme of the
Liberal Party.
The case for site value rating in
terms of social justice is founded on two
understandings:
-
first, that the value of land in the absence
of economic development is the common heritage of
humanity, and
-
second, that increases in the rental value of
land arising from economic development and government
expenditures should be collected by governments to
finance those activities.
-
What is meant by "land" is the unimproved value of
sites and the value of extractable natural resources such
as North Sea oil.
While there may someday be
institutions capable of implementing a recognition of
land as the heritage of all humanity on a worldwide
basis, in the absence of such institutions each nation
should implement a recognition that land within its
boundaries is the common heritage of its citizens. This
is accomplished not by making the nation a gigantic
Common or by instituting government management of all
land, but rather by requiring all persons and
corporations that are granted the use of land to pay a
fee or tax equal to what the rental value of the land
they control would be if it were in an unimproved
condition.
The case for site value rating in
terms of economic efficiency is founded on the fact that
a tax on resources that are not produced by human effort
is one of the few sources of government revenue that does
not reduce incentives for people to be productive. Two
other revenue sources that have this virtue are taxes on
other government-granted privileges such as exclusive use
of radio frequencies and taxes on activities with harmful
consequences, such as polluting the air. An economy will
be more efficient if revenue sources that do not diminish
productivity are employed to the greatest possible extent
before any use is made of taxes that impede
productivity.
What makes a tax efficient is that
the amount of tax that is due cannot be reduced by
reducing productive activities. When incomes are taxed,
people can reduce the amount of taxes owed by working
less. They do so, and the productivity of the economy
falls. When houses are taxed, people can reduce the
amount of taxes owed by building fewer house and smaller
houses. They do so, and the housing shortage worsens. But
when the unimproved value of land is taxed, there is no
resulting diminution in the quantity of land. Thus taxes
can be levied on land without diminishing the
productivity of an economy. And shifting taxes from
other, destructive bases to land will improve the
productivity of an economy.
Subsequent sections explain in more
detail these social justice and efficiency arguments for
site value rating, describe procedures for implementing
such a tax system, and explain why a variety of potential
objections are without merit.
...
It has sometimes been alleged that
if site value rentals were taxed, the owners of sites
would simply pass the taxes on to the users of sites.
Such assertions generally come from a serious
misunderstanding of economics. An economic understanding
of payments for the use of land presumes that
negotiations between owners of land and potential users,
over the terms on which land is to be used, are conducted
on the basis of each side doing as well for itself
financially as its position permits. Owners rent land for
the most they can get, and if one potential user is not
prepared to pay what the land is worth, then the owner
will find someone else who is prepared to pay that much.
There are, nevertheless, two ways in which site value
rating could result in higher payments for the use of
land.
- One way is that there could be individuals
who rent land for amounts less than what the market
will bear. If there are such individuals, they would be
able to raise the rents they charged, to at least some
extent, when they were required to pay site value
ratings.
- The second way in which higher payments for
the use of land could come about from site value rating
is that if site value rating is accompanied by
reductions in other taxes, as it ought to be, then
these tax reductions would make land more valuable.
Where this occurred, rents paid for the use of land
would rise. But this does not constitute "passing a tax
on." There is no guarantee that the amounts by which
rental values would rise would correspond to the site
value ratings. And in any case, if land were taxed
according to its full rental value, all of what owners
of land now collect in rents would be collected by the
government. ... Read the
whole article
Karl Williams:
Social Justice In
Australia: ADVANCED KIT
WHY LVT CANNOT BE PASSED ON TO
THE TENANT
"A tax upon ground-rents would
not raise the rents of houses. It would fall altogether
upon the owner of the ground-rent, who acts always as a
monopolist, and exacts the greatest rent which can be
got for the use of his ground." - Adam Smith,
(1720 - 1790)
Adam Smith's statement above is the voice of
authority. But we are going to prove what he just
states. In this section we shall endeavour:
- To prove that a landlord cannot shift a tax
levied on land values on to a tenant
- To deepen your understanding of classical
economics and
- To stimulate in you a bit of love for the
understanding of real economics, instead of thinking it
as dry and dead boring.
With most commodities, the imposition of taxes
leads producers/traders to pass on the tax to
consumers, eventually resulting in higher prices and
lower sales. But land is something quite unique, as
we've seen, and doesn't behave like a mere
commodity. ... Read the
entire article
Herbert J. G. Bab: Property Tax -- Cause
of Unemployment (circa 1964)
Let us now turn to that part of
the tax that is assessed on land. Increases in
population, immigration from the farms and other forces
have led to a rapid increase in the population of our
large cities and metropolitan areas. Population pressure is bound to increase the
value of urban land. Yet an adequate system of land
taxation could have prevented the steep rise in urban
land values.
Economists agree that taxes on land can not be
shifted but are capitalized. For instance a lot having
a value of $10,000 -- will have an imputed or expected
income of $500 -- assuming a 5% rate of capitalization.
A 2-1/2% yearly "ad valorem" tax would reduce the
imputed income by $250 -- or 50%. Such a tax would
naturally reduce the value of the land by the same
percentage. Read the whole
article
Henry George: Justice
the Object -- Taxation the Means (1890)
We do not propose a tax upon land,
as people who misapprehend us constantly say. We do not
propose a tax upon land; we propose a tax upon land
values, or what in the terminology of political economy
is termed rent; that is to say, the value which attaches
to land irrespective of any improvements — in or on
it; that value which attaches to land, not by reason of
anything that the user or improver of land does —
not by reason of any individual exertion of labour, but
by reason of the growth and improvement of the community.
A tax that will take up what John Stuart Mill called the
unearned increment; that is to say, that increment of
wealth which comes to the owner of land, not as a user;
that comes whether he be a resident or an absentee;
whether he be engaged in the active business of life;
whether he be an idiot and whether he be a child; that
growth of value that we have seen in our own times so
astonishingly great in this city; that has made sand
lots, lying in the same condition that they were
thousands of years ago, worth enormous sums, without
anyone putting any exertion of labour or any expenditure
of capital upon them.
Now, the distinction between a tax
on land and a tax on land values may at first seem an
idle one, but it is a most important one. A tax on land
that is to say, a tax upon all land — would
ultimately become a condition to the use of land; would
therefore fall upon labour, would increase prices, and be
borne by the general community. But a
tax on land values cannot fall on all land, because all
land is not of value; it can only fall on valuable land,
and on valuable land in proportion to its value;
therefore, it can no more become a tax on labour than can
a tax upon the value of special privileges of any kind.
It can merely take from the individual, not the earnings
of the individual, but that premium which, as society
grows and improves, attaches to the use of land of
superior quality. Read
the entire article
Bill Batt: The
Merits of Site Value Taxation
To a land economist, the land value and any
building value must be regarded separately: each has
its own economic dynamic. As to the land component, one
must understand that the value of that site is due not
to how the owner uses it but rather due to the activity
of the whole neighborhood or even the region. Any value
which a land parcel accrues above the cost of its
creation is due to the accretion of what economists
call economic rent. The word rent has a very different
meaning than that used in everyday discourse. Since the
community is responsible for the rise or fall in the
value of a land site, or rather of all those in the
neighborhood, any increase in the value of that
location can be reclaimed by that community more than
by the titleholder alone. Were it not for the accretion
of land rent on a parcel, all land would have the same
market value.
When one looks at the value of land in any broad
way, its value will be highest at the center and falls
as one looks out to the frontier. The highest value
land, that with the greatest accrued rent, is at the
very center of the city -- usually where the commercial
parcels are located. In the spring of 1998, one land
parcel (the building was to be razed) of less than an
acre and split in two pieces in New York City's Times
Square was sold by Prudential Life to Disney for an
estimated $240 million,19 more than the value of all the
land and buildings together in the lands north of the
Mohawk River/Erie Canal in New York State. The highest
value land is typically surrounded by a belt of
residential areas, and with farmlands starting at the
fringe. The more valuable parcels are taxed, the more
their titleholders will find ways to recover their
carrying costs. And it cannot affect the behavior of
tenants as any change in burden is not passed through.
In this sense, land value taxation fosters clustered
development and reverses the egregious patterns of
sprawl. Jessica Matthews, now with the Council on
Foreign Relations, recently wrote a syndicated piece
observing that,
In a now familiar sequence, developers reach for the
cheapest land, out in the cow pastures. Government is
left to fill in behind with brand-new infrastructure --
roads, sewerage systems and schools -- paid for in part
by those whose existing roads and schools are left to
decline. Property values rise in a ring that marches
steadily outward from the city and fall in older
suburbs inside the moving edge.
Because residential development can't meet the public
bills, local governments compete for commercial
investment with tax discounts that deplete their
revenues still further. Property taxes then rise,
providing an incentive for new development.
Years of such leapfrogging construction devours land at
an astonishing pace.20
Taxing high value land parcels encourages their
efficient use. The highest value parcels will then be
settled at sufficient density that public
transportation services become economically viable --
experts recognize that it typically takes at least
10-12 households per acre for this to
happen.21 This
both relieves dependency upon motor vehicle
transportation and enhances the livability of
communities. Taxing land alone also removes the penalty
for titleholders who want to improve their properties.
Under current property tax structures, one is penalized
if one adds a garage, an extra wing of rooms, or in any
way makes an upgrade. This is perverse: when people
maintain and improve their homes and other buildings it
is a social and economic benefit.
Taxing land by its value has many economic
advantages. The first is that it is equitable: those
who have title to the most land value will pay the most
taxes; those who have no land pay no taxes.
Because a tax on land alone cannot be
passed on to tenants, this means that all those
households that do not own their own home will pay no
taxes. Nationally only 65 percent of households
are homeowners; in New York State, it's only 52
percent.22
And since we know that it is typically the
wealthier element of the society that owns there is a
certain fairness in this. Of those parcels that
currently pay taxes on their real property, about half
are homeowners, and the remainder are commercial,
industrial, and agricultural titleholders. Agricultural parcels typically have very
little market value because their location is so
remote; they would have little if any tax burden.
Commercial parcels, in
contrast, are usually sited in very high value
locations, and therefore would pay the most. A shift of
taxes away from buildings and onto land alone typically
relieves homeowners, and adds to the burden of high
value parcels (usually in commercial cores) that are
underused relative to their value -- fully depreciated
structures, parking lots, drive-in banks, gas stations,
fast food services, and so on.... Read
the whole piece
Bill Batt: The
Nexus of Transportation, Economic Rent, and Land
Use
The one kind of tax where there is no deadweight
loss whatsoever is that imposed upon an base with
inelastic supply. Since land and some other elements of
nature cannot be increased in quantity resulting in a
completely vertical supply curve, no inefficiency is
incurred by such a tax. Consider two cases of a tax
commonly found worldwide on real estate. Because a real
property tax is actually two taxes from the standpoint
of economic dynamics -- the tax on the land component
and the tax on the improvement component, each is
considered here as a separate case. In the first case,
the tax on the land component alone is illustrated. In
the other case, the tax on the improvement component
(i.e. the building) is shown. What
happens?
The tax on land alone is completely capitalized
in the market value of the land parcel and is not
passed forward to the tenant. This is important,
because when the roughly 1/3 of all American households
that rent rather than own their own homes are removed
from the burden of property taxation, it has the effect
of making the land tax far more progressive. Those land
parcels that do pay taxes are split between residential
and non-residential titleholders. Even though the
residential households are likely to constitute the
overwhelming number of parcels in the tax base, they
are likely to bear only about half the taxes paid, the
remaining share borne largely by commercial sites.
Agricultural parcels may in some instances represent a
large area of land, but it is likely to be of far lower
market value and represent less than five percent of
the revenue paid. The land component of a tax on real
property then is actually highly progressive.
...
Consider now the tax on the improvement portion of the property parcel.
Here, depending upon the slope of the supply curve and
the demand curve, the tax is likely to be passed
forward to a greater or lesser extent to the tenant.
Very little of it in fact is typically borne by the
landlord. The existence of the tax on structures incurs
a depressing effect upon the rate of investment, just
like all such taxes with more than zero elasticity. And
the greater scarcity of sites for rent, either
commercial or residential, has the impact of driving up
prices for their use. What is even more significant, as
noted earlier, is that the shift of taxes off
improvements and onto landsites encourages the use of
those sites to the full extent of their locational
value, thereby halting and even reversing the
centrifugal forces of sprawl development. Greater
investment in high value landsites creates greater
density and proximity in the community, enhancing the
accessibility of those sites to one another and
reducing the need for transportation mobility....
read the whole article
Frank Stilwell and Kirrily Jordan: The Political Economy of
Land: Putting Henry George in His Place
The demand for land involves both use values and
exchange values. People seek land because the housing
built on it provides shelter and security, but they
also purchase it as a store of wealth and a means of
capital appreciation. A particularly important driver
of real estate prices has been the speculative demand,
as investors seek capital gains in the property market.
In Australia, this has been such common and
longstanding practice that it has been referred to as
‘the national hobby’ (Sandercock, 1979). By
‘creaming off’ a part of this potential
capital gain, a higher uniform rate of land tax would
act as a disincentive to this property speculation, and
could therefore be expected to exert a downward
influence on property prices. Georgists have always
been emphatic that land taxes are different from other
taxes in this respect – they depress prices
because they reduce demand. So the usual fears that a
tax will be ‘passed on’ to customers (such
as housing tenants, in this case) do not apply.4 By
making land less attractive as an item to be purchased
in the hope of making capital gains, land tax can
therefore be an important check on the inflationary
process. ... read
the whole article
Bill Batt: Comment on Parts of
the NYS Legislative Tax Study Commission's 1985 study
“Who Pays New York Taxes?”
Analysis of “Who Pays?”
Sufficient time has passed, I think, that I can now
freely make observations on some work of the Tax Study
Commission, particularly both since I have more
expertise on tax policy and because the Commission's
work really reflected the views of Professor Pomp and
no one else. Only one paper touched on the real
property tax, and only in a few passages. It was
originally contracted to University of Missouri
Professor Donald Phares, and this draft was then
rewritten by the Commission (i. e., Rick Pomp) to be
released as a working paper. “Who Pays New York
Taxes?” is accessible, by those with resources,
in major libraries at least in New York State. The most
recent statistical data available at that time was for
1980, and in only three paragraphs of the thirty-three
pages of text is the real property tax treated
explicitly. An additional seventy pages have occasional
references to it, with some rather interesting tables
and graphics. All of these, however, are somewhat
misleading. Were Messrs. Phares and Pomp consciously
part of the confusion common in dealing with matters of
property taxation or were they simply unaware of the
sleight-of-hand that underlies most of the work in this
area? My personal view is that they were simply not
interested in probing more deeply into an area that was
really beyond the Commission's scope. Still, the
authors recognized that “Property taxes are the
fiscal mainstay of local government. The incidence of
the property tax is of substantial consequence in
evaluating the State's overall tax
structure.”6
As for their treatment of the New York Local
Property Tax, the authors first identified seven
separate categories of real property: owner-occupied,
rental, commercial, industrial, public utilities,
farmland, and unimproved. This is a somewhat unusual
classification, different even than those universally
used in New York State.7 One can see immediately that
there will necessarily be some overlap –
“unimproved” parcels can sometimes be
assigned in other categories according to their zoning.
And rental property is commercial, whomever the tenants
may be, whether households or businesses.
To their credit, however, the authors devoted
considerable attention to the issue of tax shifting,
which is never an easy subject, including a discussion
of taxes on real property. They recognized that no
shifting occurs for vacant parcels and titleholders
therefore bear the full burden. So also for homeowners.
For rental properties they assigned 50% of the burden
to tenants, 25% to corporate stockowners, and 25% to
real estate owners. For commercial, industrial,
farmers, and public utility parcels, the shifting was
put at 67%. In every instance where shifting is
recognized, the part never shifted, of course, is the
land component, and this is implicit in their
assumption. These were referred to as “consensus
incidence assumptions regarding the property
tax.”8
A third consideration they recognized is the
potential for tax exporting to other states, more often
important for classes other than residential property
but still significant. It occurs both on account of
titleholders being out-of-state and also because of
what is known as the “federal offset,”
i.e., the deductibility of state and local taxes for
federal tax itemizing. For all New York State and local
taxes taken together, they estimated that roughly 10%
percent of total revenue is exported, but for real
property taxes, the total exported is only about half
that.
Except in the implicit recognition involved in their
analysis of shifting, the distinction between land and
improvements was opaque. This is a remarkable
oversight, because improvements typically depreciate at
the rate of 0.5 to 1.5 percent annually; only land
values appreciate.9 And in view of the fact that
assessments in New York localities have historically
been very infrequent, one can understand how the land
values are in reality a far higher proportion of parcel
value than assessments would suggest.10 This means that
in a period of seven years, for example, a property
parcel could easily increase in price by 50 percent,
far more if recent real estate market history is to be
illustrative. Moreover real estate prices varied
greatly in their rates of change during this time span;
upstate New York was largely stable, but downstate
localities experienced huge booms and busts.
Recognition of this would tend to favor what is
known as the “new view” of property tax
incidence, an acceptance of the idea that ”the
burden of the tax on improvements remains with the
owners of capital in the form of a lower net return
instead of being shifted to users of property in the
form of higher rents or prices.”11 Proponents
point out that “the tax on improvements is
essentially a nationwide tax on capital . . . [and
therefore] its incidence will depend on the
characteristics of supply and demand for capital
nationally rather than on a single market.”12 The
effect of this is to make the tax ”highly
progressive.”13 Nonetheless, in a small footnote,
Messrs. Pomp and Phares elected to go with the
“old view” in stating that, “it seems
most appropriate to assume that the new view does not
apply to the analysis of tax burdens within one
specific state (underlining in original). Thus, the old
or traditional view was adhered to in the analysis. . ;
that is, the excise effect of the tax was considered
dominant.”14 The ubiquity of New York's property
tax, and that it has over 1,300 local assessment and
tax districts, may well have escaped their notice.
This point is significant because the authors took
great pains on several occasions to emphasize that the
New York real property tax was the “most
regressive element in the State's tax
structure.”15 In the Executive Summary, two of
the thirteen bullets stressed that ”the dominant
influence in the tax system is the local real property
tax,” and that ”the local property tax is
highly regressive, particularly the owner-occupied
component.”16
This was portrayed graphically, along with an
accompanying table, using fourteen separate tax
brackets showing effective tax rates ranging in a U, or
a “reverse J curve,” from a high of 20.51
percent of income for the lowest group, to 3.37 percent
for the second to highest group.17 Nowhere in the
Report is there an indication of what income measure
was employed – Federal Adjusted Gross Income or
Taxable Income, most likely. But it may also have been
household income. If so, this could well have excluded
significant income sources, particularly from those
households receiving social security income and/or
retirement income for New York State or local
pensioners which is not taxable for state purposes.
Whatever, this was recognized implicitly in the
observation that ”many persons are only
temporarily in the lowest class ($0 - $4,199 for 1980)
because of retirement, short-term unemployment, and so
forth. If their income were measured over a longer
period of time, rather than on the basis of only one
year, they would not fall in the lowest class. Thus,
the [drastically high effective tax rate] figure for
this class . . . overstates the true burden on this
group.”18
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