Abstract
Real tax reform could do away with those taxes that are resented by the large proportion of our population. We could replace all taxes on wages and on interest by instead taxing economic rent. Rent is windfall income; it is income that arises not from the efforts of any person or corporation; it comes about as a surplus gain from common social enterprise. There is ample moral warrant for society to lay claim to that which it has created, as well as to that which no individual or party has earned. Analysis increasingly makes clear that economic rent in all its forms is far larger than official government figures indicate; in fact it is likely sufficient to supplant all current taxes on labor and capital (wages and interest) which are acknowledged to have so many negative effects. Recovering economic rent in all its manifestations by taxing its various bases actually can foster economic performance and yield other benefits that make it the natural source of revenue for governments. Such a tax is essentially painless.

Introduction

Under current tax regimes, some people get hit with onerous bills while others get windfall gains.[1] If taxes only on windfalls were collected, we could eliminate those burdens that fall unfairly upon people who have rightfully earned their income and wealth, and the total would likely remain revenue neutral. This is my thesis here, one which should compel the attention of those who would redesign our tax system.

1. A windfall, usually defined, is "an unexpected financial gain, or a stroke of luck." But, as one exhaustive study makes clear, it is typically the consequence of some public policy decision. ...

... Any tax on capital has its downside effects, so that taxing savings causes people to save less, taxing consumption causes people to buy less, and taxing buildings causes people to build less. The result is that economists as well as businessmen usually frown upon taxing capital. Another alternative is to tax labor, but it is even more widely understood that taxing labor normally discourages people from working as much as they would in the absence of a tax. From this comes sentiment against taxing labor, even though for want of any alternative, people have today commonly come to accept it as a necessity. But electing to tax labor, just as for taxing capital, forecloses a discussion of the virtues of taxing land — not necessarily land as earth, but rather land as location. Yet land rent is the most attractive tax base of all, as rent is not earned; it is windfall income, entirely the result of being well situated in any market of scarce natural resources and where community demand (rather than one's own efforts) leads to an appreciation of that land's price. To be sure many people have learned to position themselves in situations where a land's market value is likely to rise — indeed these people come to think of themselves as astute investors. But the fact is that that market gain is not of their own doing at all; it is the result of common enterprise creating a surplus that comes to settle on land sites. An investment in land, in any form it might take, is speculation in greater or lesser degree. ...

To be sure, by replacing taxes on labor and capital with taxes on land rent, people will enjoy greater returns for their enterprise and will be able to keep what they have earned. But people will also cease, at least those few who have been so lucky, to be able to rely on windfall unearned gains that they have in many cases come to regard as their entitlements. The greatest forfeiture of such windfall gains will be homeowners who have come to see their title to a home as an investment, and not a place to live. But whereas some residential locations have seen enormous increases in market prices — as much as 20 percent yearly on occasion — others have enjoyed no such fortune. People may come to understand that houses depreciate just like cars, refrigerators and computers. They may also see that it is only land value that increases, and realize that any gain which their land has is due to the general vitality of their community and region. It may help them to realize that they are linked to and dependent upon the society as a whole, and that their fortune is not in this dimension of their own making.

Well over a century ago, John Stuart Mill recognized that

landlords grow richer in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.[17] ... read the whole article

Indeed, one could say that the term ‘tax’ is a misnomer because what is really involved is value created by the community being retained by the community rather than being appropriated by private landholders. For example, under current arrangements landowners receive ‘windfall’ gains when the market value of their land rises as a result of publicly provided infrastructure being built nearby, or when local government zoning decisions reclassify their land as appropriate for further development. In this way, individual landowners stand to reap huge benefits at the expense of community-generated processes. Such arrangements create an odd incentive: allowing landholders to appropriate the unearned wealth generated by rising land values, thereby rewarding this unproductive activity, while taxing productive endeavour. The Georgist land tax ‘remedy’, by contrast, would eliminate such perverse incentives and thereby more effectively align private and public interests in the use of society’s resources. ...

Georgist analysis strongly emphasises landownership as a principal source of inequality. Because land is a strictly limited resource, its private ownership necessarily excludes large sections of the community from its benefits. A landowning class thereby gains political economic power. In George’s own time the social identity and power of this landowning class was distinctive. Those who could not afford to buy land were forced to pay rent to the wealthier few who could. By taxing the value of land, George posited that publicly created wealth could be recouped from the private landowners and redistributed throughout the community more equitably in order to address social goals.

Are George’s arguments about land ownership and wealth inequality relevant today? Australia provides an interesting example, because land is the single largest item in national wealth. Laurie Aarons outlines the concentration of farming land in particular in the hands of a few very wealthy corporations and individuals – what he refers to as ‘corporate squattocracy’ (Aarons, 1999: 23). The relentless increase in urban land values in recent years has also produced dramatic redistributions of wealth. In the State of New South Wales, for example, land values increased by about $361 billion over the period 1993 – 2003. The existing land-based taxes clawed back only $44 billion in government revenues, comprising only about 12% of the land-related economic surplus. So 88% was retained as ‘unearned income’ by landowners (Stilwell and Jordan, forthcoming). A higher rate of land tax with fewer exemptions could have substantially reduced this private wealth appropriation. This is not necessarily to posit the desirability of recouping 100% through land tax, because that would certainly raise major problems of people’s ability to pay, given that much of the increased wealth resulting from land price inflation has not been realised as current income. But it is indicative of the current imbalance between private and public appropriations of the surplus arising from increases in land-based wealth. ... read the whole article