A Land Tax: A Model for Effective Fiscal Policy

| Austin Schlueter | April 22, 2019 |

In 1978, in his book Capitalism and Freedom, Milton Freidman espoused support for a new tax by uttering “the least bad tax is the property tax on the unimproved value of land.” He was by no means the first to promulgate such a tax; this notion goes back much further to 18th century British Commonwealth laws and by the likes of old classical economists, such as Adam Smith, David Ricardo, and John Stuart Mill. However, in the late 19th century, Henry George, in his book Progress and Poverty, again proposed such a tax: A single tax on the unimproved value of land that would wipe out all other forms of taxation. This led George, an American economist, to become a notable figure in the populist movement and therefore narrowly missed being elected mayor of New York in 1886. In our country’s current economic and political environment of never before seen income inequality, a diminishing middle class, and a loss of faith in our elected officials, the time is ripe to revisit George’s “baby.” Here, I will argue the Land Value Tax (LVT), in replace of the status quo property tax, is a more equitable, fair, and efficient tax.

It is first important to gain an understanding of how an LVT would compare and contrast to our current property tax system. As of now, property is evaluated by an assessment of both the value of the land plus the value of all buildings and equipment. So, for instance, if the land were assessed at one-hundred thousand dollars and the property at four-hundred thousand dollars, then the overall improved land assessment would total five-hundred thousand dollars. The tax incidence, therefore, is placed respectively on each assessment. Thus, if a small business rented from a landowner, any property improvements made by the small business would increase their property tax burden. An LVT, however, would only tax that initial assessment given on the raw land.

From this description alone, one may already envision how an LVT creates a more economically efficient tax system. Many economists, since George, have demonstrated through economic theory the benefits of a land-value tax. They have suggested, and it is quite obvious, that land is a fixed resource; in which, one cannot simply decrease its quantity or move it to a different location. Land also, differentiating itself from capital, does not generally depreciate in value. In other words, there are no distortive effects of an LTV on the economy, and it does not change the allocation of resources. Because land is in fixed supply, and unlike just about every other tax, a land tax is capitalized solely in land values (there is a Danish study providing an empirical confirmation on that last point, which I will leave for further inquiry). Whereas the tax incidence on milk, for example, is often shifted to consumers. Moreover, proponents argue a land-value tax could be used to make the property market more efficient. There would no longer be a disincentive placed on property improvements, rather, the use of land would then only produce economic value, and thereby tacitly incentivizing those who own land to continue to invest in property improvements.

As with any tax, a question of fairness is always present. We must therefore think of those who have been lucky enough to own land in Silicon Valley over the past 20 years—whether by inheritance, an endowment, luck, or some unexplainable foresight. The value of that land has skyrocketed through little to no fault of the landowners, and yet, I would be utterly shocked if any were unhappy with their payments received on its rent. It should then come with no surprise that land prices mainly reflect location; as demand for a particular area of land increases so does its price. Landowners, in essence, enjoy unearned income from the benefits provided by the community (i.e. proximity to suppliers and consumers, transport links, and so on)—who, in turn, receive none of the surplus besides a spike in rent prices. If anything, through this analysis, we can view how land speculation and land banking has become a boom or bust market, which not only leads to rapid increases in that unearned wealth, but also to the ever-increasing instability of land prices. A land-value tax, on the other hand, has the potential, depending on the magnitude of the tax, to shift rapid increases to earned wealth by incentivizing construction booms which leaves land prices relatively stable. And most importantly, land speculation would be nearly impossible because, as aforementioned, the use, not merely speculative selling and buying, of land would provide economic value. This outcome seems closer to Locke’s justifiable reasoning for private land ownership: any production by one’s own labor on one’s private land ought to result in ownership of that production. But this reasoning loses meaning if the landowner’s own labor has nothing to do with the production on that particular piece of land—as what often occurs now in urban areas.

In Wisconsin, the problem of using a property tax has been highlighted very nicely each time a Wisconsin municipality hikes up their property tax rate in an attempt to supply a sufficient amount of funds to pay for their required expenditures. If the goal is to provide a sufficient tax stream, but at the same time maximize economic productivity, this is clearly not the most effective way to go about it. The property tax will continue to negatively affect the economic decision to innovate one’s property, and consequently, it will continue to shrivel the income stream of the tax. A land-value tax would simply not produce this contradiction.

Opponents of an LTV often, unsurprisingly, constitute land speculators. Since land speculators typically hold large amounts of wealth, any proposal at the federal level has been a political non-starter. However, others argue it is an administrative hassle, or, there is a fear of the nationalization of land. These arguments puzzle me insofar can both not be applied to our current property tax? Do we hold the same fear that our government will expropriate property owners by such a tax? Thus, I believe these arguments fail to posit any justifiable grounds to outright oppose a land-value tax. Moreover, Pittsburgh has used the LTV on and off for over a century with many economists promulgating it as proof of the benefits. If others have tried and had success, it is time for more regions to forego the status quo property tax, listen to Milton Friedman and Henry George, and opt for a more economically efficient and equitable land-value tax.

Austin Schlueter is a Junior majoring in Economics and Political Science. Austin grew up New Glarus, WI and is interested in all things besides winter.