Libertarianism and Land Value Taxation
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Libertarianism and Land Value Taxation
By John H. Beck
Professor of Economics
- LIBERTARIAN FOLLOWERS OF HENRY GEORGE
- ARGUMENTS FOR LAND VALUE TAXATION
- POLITICAL CONSIDERATIONS
- IMPLEMENTATION ISSUES
- EMPIRICAL STUDIES OF LAND VALUE TAXATION
For some libertarians any tax is illegitimate (Feser 2000). However, one tax that has received some support from libertarians who advocate a limited government financed by taxation is a tax on land values. The most famous advocate of land value taxation is Henry George, the author of Progress and Poverty (1879). Yeager (1984) identifies several libertarian views shared by Henry George, including his opposition to protectionist trade policy, his rejection of socialism, and his defense of natural rights including property rights. Several prominent libertarians in the early twentieth century were influenced by Henry George, including Albert Jay Nock, author of Our Enemy the State (1935), and Frank Chodorov, who became the director of the Henry George School of Social Science and editor of the Freeman in 1937 (Nash 1996, 11-14; Raimondo 1993, 114-129). Maurice Allais, one of four future Nobel prize winners attending the first meeting of the Mont Pelerin Society in 1947, declined to sign the society's Statement of Aims because its defense of private ownership of land conflicted with his Georgist ideas (Hartwell 1995, 42). This illustrates that Georgist ideas about land ownership and taxation have frequently been divisive among libertarians. Yeager (1984, 160) notes that Murray Rothbard rejected George's moral and economic arguments for land value taxation, although Rothbard applauded George's discussion of patents and copyrights as well as his advocacy of free trade.
There are both equity and efficiency arguments for land value taxation. The equity argument is that land is given by nature and the value of the land was not created by human effort. Furthermore, increases in the value of land are caused by public services and economic development in the neighborhood, not by the effort of the landowner. For example, the construction of an interstate highway will increase the value of land near a highway interchange as this becomes a more desirable site for business development. Therefore, it is argued, because the landowner has done nothing to deserve the gain from his ownership of land, the government should capture this gain through taxation and use it for the benefit of all members of society. However, as discussed in section IV below, there are also equity arguments against replacing the current system of property taxation with a tax only on land values.
The efficiency argument for land value taxation is that, unlike almost all other taxes, it does not discourage productive activity or distort choices among consumer goods. A tax on wages discourages work effort. The property tax on improvments discourages construction and other improvements. Tariffs on imported goods discourage international trade. But the supply of land is fixed, given by nature. A tax on the value of land (based on its potential use), will not discourage the landowner from making the land available. The owner must pay the same tax regardless of what he does or does not do with the land. It should be noted that the method of assessing land values is crucial; changes in the market value of land attributable to permanent improvements to a site should not be included in the taxable land value.
Advocates of any tax reform proposal need to consider likely sources of opposition and support and to devise strategies to minimize opposition and build a coalition of supporters.
Opponents of land value taxation have often charged that this would shift the burden of taxation to farmers, who own large areas of land (Peirce 2003, 6). Although in fact family farmers might benefit from an increase in the tax rate on land value offset by a reduction in the tax on improvements (Wenzer 1999, 239-268), a reform strategy assuaging farmers' fears would have greater chance of success. Limiting land value taxation to urban areas rather than adopting it as the "single tax" for all state and local government revenues would eliminate opposition from farmers.
Environmentalists are not often allies of libertarians, but land value taxation is one issue which both might support. Environmentalists support replacing the property tax on improvements with land value taxation in urban areas because it would encourage more development in urban centers and discourage sprawl (Durning and Bauman 1998, 57-65; Wenzer 1999, 205-223).
"An old tax is a good tax." This adage does not merely reflect the fact that people prefer the taxes to which they have grown accustomed to new, unfamiliar taxes. The implementation of any tax reform affecting the taxation of durable assets raises serious equity issues, and land is the most durable of assets. This is due to the phenomenon of "tax capitalization." The value of an asset reflects the present value of the expected future income to be derived from that asset. Anticipated future taxes reduce the expected future income and thus are "capitalized" in the value of the asset.
To understand how tax capitalization may create inequities when unexpected tax reforms are implemented, consider an unanticipated shift from a property tax applied at the same rate to land and improvements to a tax on only land value that yields the same total revenue. Compare the effects of this change on the values of two properties, a parking lot and a parcel with a ten-story office building. Almost all of the value of the parking lot is the land value, but most of the value of the parcel with the office building consists of "improvements." The market value of the office building will increase as the anticipated future taxes fall, and the value of the parking lot will fall as the tax rate on the land value increases. When the current owners of these properties purchased them, they each paid a price that reflected the expectation that the old property tax system would continue into the future. The unanticipated tax reform causes a "windfall gain" to the owner of the office building and a "windfall loss" to the owner of the parking lot. Many people consider such windfalls "unfair."
One method to ameliorate such windfalls is to implement tax reforms gradually. For example, rather than immediately abolishing the property tax on improvements and imposing a tax on land values sufficient to raise all the desired revenue, a "split-rate" property tax might be adopted. Under this system the land component of property values is taxed at a higher rate than the tax rate on improvements.
Pittsburgh, along with a few smaller Pennsylvania municipalities, has had a "graded" or "split-rate" property tax for several decades. Prior to 1979, the city of Pittsburgh taxed land at twice the rate applied to structures (although county and school district property taxes applied the same rate to land and improvements). After 1980, the city of Pittsburgh raised its rate on land to about five times the rate on structures. This policy change provides an opportunity for researchers to test empirically whether land value taxation really does have the beneficial effects ascribed to it by theoretical analyses. Oates and Schwab (1997) analyzed building activity in 15 "rust belt" cities from 1960 to 1989 and found a significant increase in building activity in Pittsburgh after the 1980 tax reform. Of course such empirical studies are plagued by the difficulty of measuring the effect of a change in one variable when other variables that might affect the outcome are changing as well. In the case of Pittsburgh, the increase in taxes on land was accompanied by large tax abatements on new structures although there was no decrease in the property tax rate applied to old buildings. Oates and Schwab conclude that the revenue raised by the land tax increase allowed the city to grant tax abatements on new building and to avoid raising other taxes that would have discouraged economic activity in the city. Additional studies showing the effects of the split-rate tax in Pennsylvania are Bourassa (1987 and 1990) and Cord (1983).
Cord (1983, 172-173) briefly mentions evidence of the effects of land value taxation compared to the conventional property tax on land and improvments from Australia. A more extensive study of the Australian experience was done by Edwards (1984), who found that the value of new housing and the housing stock was greater in Australian communities that taxed land at a higher rate than improvements than in communities with a uniform property tax on land and improvements.
For libertarians who believe markets generally allocate resources efficiently, the best tax is one which creates the least distortion of market incentives. A tax on the value of land meets this criterion. Furthermore, the benefits of local government services will be reflected in the value of land within the locality. Therefore, it may be deemed fair that landowners pay taxes to finance these services in proportion to the value of the benefits they receive. Although Henry George advocated a tax on land values as the "single tax" to replace all other taxes, a tax on land value seems especially appropriate for municipal governments. If a complete shift from the current property tax to a tax on land value alone seems too radical, municipal governments might reduce the property tax rate on improvements while imposing a higher tax rate on the value of land.
Land value taxation has been under consideration in several eastern European countries. As reported by Youngman and Malme (1999), Estonia adopted a tax on the market value of land in 1992. Nations considering a tax structure fostering a market economy in the post-communist era may present one of the most promising opportunities for implementing land value taxation.
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