Libertarianism and Land Value Taxation

NOTE: The opinions and commentary expressed in this essay are those of the author and are an exercise of free speech. They do not necessarily represent the views of Free State Project Inc., its Directors, its Officers, or its Participants.

Libertarianism and Land Value Taxation

By John H. Beck
Professor of Economics
Gonzaga University

1. LIBERTARIAN FOLLOWERS OF HENRY GEORGE

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.

2. ARGUMENTS FOR LAND VALUE TAXATION

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.

3. POLITICAL CONSIDERATIONS

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).

4. IMPLEMENTATION ISSUES

"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.

5. EMPIRICAL STUDIES OF LAND VALUE TAXATION

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.

6. CONCLUSION

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.

REFERENCES

Borcherding, Thomas E.; Patricia Dillon; and Thomas D. Willett. "Henry George: Precursor to Public Choice Analysis." American Journal of Economics and Sociology 57 (April 1998): 173-182.

Bourassa, Steven C. "Land Value Taxation and New Housing Development in Pittsburgh." Growth and Change 18 (Fall 1987): 44-55.

Bourassa, Steven C. "Land Value Taxation and Housing Development: Effects of the Property Tax Reform in Three Types of Cities." American Journal of Economics and Sociology 49 (January 1990): 101-111.

Cord, Steven B. "Taxing Land More Than Buildings: The Record in Pennsylvania." In The Property Tax and Local Finance, pp. 172-179. Edition by C. Lowell Harriss. New York: The Academy of Political Science, 1983.

Durning, Alan Thein, and Yoram Bauman. Tax Shift: How to Help the Economy, Improve the Environment, and Get the Tax Man off Our Backs. Seattle: Northwest Environment Watch, 1998.

Edwards, Mary E. "Site Value Taxation in Australia: Where Land Is Taxed More and Improvements Less, Average Housing Values and Stocks Are Higher." American Journal of Economics and Sociology 43 (October 1984): 481-495.

Feser, Edward. "Taxation, Forced Labor, and Theft." The Independent Review 5 (Fall 2000): 219-235.

Gaffney, Mason. "Equity Premises and the Case for Taxing Rent." American Economic Review 82 (May 1992): 274-279.

George, Henry. Progress and Poverty. New York: Walter J. Black, 1942.

Hartwell, R. M. A History of the Mont Pelerin Society. Indianapolis: Liberty Fund, 1995.

Horton, Joseph, and Thomas Chisholm. "The Political Economy of Henry George: Its Ethical and Social Foundations." American Journal of Economics and Sociology 50 (July 1991): 375-384.

Martin, Thomas L. "Protection or Free Trade: An Analysis of the Ideas of Henry George on International Commerce and Wages." American Journal of Economics and Sociology 48 (October 1989): 489-501.

Nash, George H. The Conservative Intellectual Movement in America. Wilmington, DE: Intercollegiate Studies Institute, 1996.

Netzer, Dick. "On Modernizing Local Public Finance: Why Aren't Property Taxes in Urban Areas Being Reformed into Land Value Taxes?" American Journal of Economics and Sociology 43 (October 1984): 497-501.

Nock, Albert Jay. Our Enemy the State. New York: Free Life Editions, 1973.

Oates, Wallace, and Robert Schwab. "The Impact of Urban Land Taxation: The Pittsburgh Experience." National Tax Journal 50 (March 1997): 1-21.

Peirce, William S. "The Progressives and the Property Tax: Ohio's Constitutional Convention of 1912." Paper presented at the Public Choice Society meeting, Nashville, TN, March 2003.

Raimondo, Justin. Reclaiming the American Right: The Lost Legacy of the Conservative Movement. Burlingame, CA: Center for Libertarian Studies, 1993.

Teti, Dennis. "The Socialist Idealism of 'Supply Side' Economics -- Henry George's Progress and Poverty." The Political Science Reviewer 14 (Fall 1984): 195-228.

Wenzer, Kenneth C. (ed.), Land-Value Taxation. M.E. Sharpe, 1999.

Whitaker, John K. "Enemies or Allies? Henry George and Francis Amasa Walker One Century Later." Journal of Economic Literature 35 (December 1997): 1891-1915.

Yeager, Leland B. "Henry George and Austrian Economics." History of Political Economy 16 (1984): 157-174.

Youngman, Joan, and Jane Malme. "Issues in Land Taxation and Property Taxation in Central and Eastern Europe." In Proceedings, 91st Annual Conference on Taxation, pp. 137-143. Washington, DC: National Tax Association, 1999.

Independence Way

NOTE: The opinions and commentary expressed in this essay are those of the author and are an exercise of free speech. They do not necessarily represent the views of Free State Project Inc., its Directors, its Officers, or its Participants.

Independence Way

By Lady Liberty

While most Americans were gearing up to celebrate the summer's biggest holiday, a lot of them had only the vaguest idea of what they were commemorating with their flags and fireworks. A poll (abcnews.go.com/sections/us/Politics/fourthofjulypoll030703.html) released just prior to Independence Day showed that, while the majority of Americans thought the Constitution had an impact on them, even more had only the most general idea of what that venerated document actually says. Further questioning of respondents showed that fewer still knew much about the Declaration of Independence. So in a post 9/11 climate, earmarked by the accelerated loss of liberty, people celebrated a freedom they largely no longer have, and apparently don't remember having.

While the lack of knowledge afflicting many people offers some shallow excuse for their failure to rail against lost liberties, some of those who do know their history and who do understand what we've lost and are losing also aren't fighting. Some did, but have been felled by the apparent futility of their lonely uphill battle. Some, seeing themselves in the small minority, gave up without fighting at all. And then there are the folks of the Free State Project (www.freestateproject.org)

The brainchild of Yale graduate student Jason Sorens, the Free State Project is dedicated to establishing a bastion of liberty to hold against a rising tide of socialism and apathy. Sorens hasn't fooled himself by believing he and those who have joined him can turn the juggernaut that is America's headlong fall away from freedom. His proposal involves instead just one state. That one state hasn't yet been chosen, but there are currently ten candidates under consideration. Those ten were selected based on several factors, the most important being population. Sorens calculated that, for states with a population of 1.5 million or less, a relatively few pro-freedom activists could not only make a difference but could actually stem and turn the political tide.

The dream held by the Free State Project is a relatively simple one. It imagines a place where the Constitution isn't a memory but is once again the basis for the law. Invasive and unconstitutional laws would be repealed by liberty loving legislators elected by a pro-freedom populace. Taxes would be few and strictly restrained; free trade would rule the marketplace. The Free State would, in short, be a place where Americans could once again live free in the manner envisioned by the Founding Fathers.

According to the game plan for the establishment of the Free State, once the Project's total membership reaches 5,000, members will vote to select a target state. Current projections estimate that the Project will have 5,000 members by sometime this August (which means you still have time to make your voice heard in the selection process if you join now). After that, when membership numbers reach 20,000, those who've signed onto the project will have five years to relocate to the chosen state. Those 20,000 freedom-loving individuals will, according to all of the best calculations, represent enough votes to put at least one state in the union back on the track built by the Founders. It is Sorens' fondest hope that, once there's one Free State, others will look at its success and take it upon themselves to see that their state becomes a Free State, too.

I freely confess that, when I first heard of the Free State Project, I considered it more an intellectual exercise than an achievable goal. But I visited the group's website anyway, and what I learned there proved to me that the membership was entirely serious, and to a man (and woman), believe the goal of a Free State can be met.

After having been convinced myself that a Free State could become a reality, and that I could help make it so, I began to talk to others about it. Although a few have become excited at the prospect and have announced their own willingness to work toward the Project's ultimate success, too many have told me that it will never work or that it will be too difficult for them to relocate. To some degree, I'm forced to admit that they're right.

It's perfectly true that the Free State Project will never work if enough people don't want it to and aren't willing to do something - even a little! - to help it along. Small donations, helping to spread the news by word of mouth or emails, researching candidate states, and many other relatively minor contributions will all add up toward success. And, having moved more times than I care to count in my own life, relocation is a serious inconvenience at best so I can understand the reluctance of some to pack up and go.

On the other hand, I remember that some 227 years ago a group of men (and, in many cases, the unsung women at their sides) offered everything they had to the cause of Revolution. They gave up their fortunes. They rode from town to town passing out leaflets or speaking to small gatherings while their farms, businesses, and families suffered. They bled. They risked the loss of property as punishment for small "crimes" against the state, and they risked execution for treason. Some of them lost everything but their lives; some lost everything including their lives. But no matter their great sacrifices, almost all of us today would have to say that what they did - the country they created - was worth their pain and suffering.

By working together and taking some significant risks, a relatively small group of brave men and women gave us our freedom. We now have the opportunity to travel a similar route but with far less personal consequence and a far greater chance of success. Our forefathers gave their blood. All we need to do is give our word. The revolutionaries died. We merely need to endure the inconvenience of packing and unpacking. The Founders winning of an Independence Day makes it possible for us to follow the independence way laid out neatly for us in the Free State Project. The only real question is whether or not we've enough of our forefathers in us to take the path once again toward liberty.

Lady Liberty is a pro-freedom activist whose goal is the education of the ignorant, and the inspiration of the educated to political activism. Her online home is at http://www.ladylibrty.com.

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An Immigrant on Liberty

NOTE: The opinions and commentary expressed in this essay are those of the author and are an exercise of free speech. They do not necessarily represent the views of Free State Project Inc., its Directors, its Officers, or its Participants.

An Immigrant on Liberty

by Lu Norton

October 26, 2003

I moved to America in search of Liberty. Twenty-three years of deprivation from freedom, individualism, and personal happiness ... Twenty-three years of strategic mental detachment from the madness around me, to keep myself sane. I had come to the point of giving up. But I was still breathing, and my mind still functioned ... clandestinely. Until the first day I set my feet on the "holy" land – The United States of America. A mere stamp on my foreign passport by the Immigration Officer meant one thing to me – Freedom. At that moment, the sweet taste of Freedom was for me still an ideal.

But ... as I remain, the reality unfolds. Despite of the abundance of goods, there is still government control – of businesses, schools, citizenship, professional licenses, animal ownership, property, even one's morality. Businesses are crippled or go bankrupt from taxes, environmental regulations, and zoning laws. Affordable, competent, private schools are almost non-existent due to the incompetent public schools' near monopoly on education. Professional licenses are required of the most able in society, such as doctors – and this affects the costs of the doctors' services. Licenses are also required of accountants, which affects the integrity and efficiency of their work. Animal ownership is regulated, requiring individuals to pay a fee for having their own pets. Private property ownership is regulated and taxed, in fact depriving individuals from owning their own private property. And morality is controlled, through drug laws, gun control, gambling laws, FCC-controlled radio and television stations, government anti-tobacco advertisements (paid for by money extorted from the tobacco companies), and public schools, with their advocates of socialism, collectivism, and nihilism. Their near monopoly on education is their means of teaching us what to think, of teaching us to be good little citizens who surrender our freedom to them.

If America is the best country to live in, if the rest of the world is so much worse ... where else then can an individual move?

This is not the America that I had always envisioned. A place where respect for the individual, finally, existed. America was free, years ago. But now that freedom is eroding fast. But why let it go?

I will not let go my vision of a perfect society. A benevolent society with a rational government. A rational government that respects individual rights. I shall work toward a freer society for myself and those whom I value. I am not alone – for a quest for freedom has always been man's quest. Therefore, I reach out to those able people who seek to live independently and rationally with each other. I seek out to those who are willing and able to work to change the course of an America which is heading toward the frightening reality of socialism. I seek those who advocate individualism, political freedom and capitalism. I seek those who are sincere and persistent with their goals.

You can be free – ACT NOW – and join the Free State Project. It is a plan in which 20,000 or more liberty-oriented people will move to a single state in United States – New Hampshire, where they will be active in the political system to lessen government interventions and lessen the burden of taxes. So much benefit will take place in the Free State when government interventions are minimized. This will be a real-life, practical step toward the creation of a society that acknowledges freedom and individualism.

This is your life and it's the only one you're going to get – do not let a free society remain just an unknown ideal. Work to make it a reality.

Free Jim Perry

NOTE: The opinions and commentary expressed in this essay are those of the author and are an exercise of free speech. They do not necessarily represent the views of Free State Project Inc., its Directors, its Officers, or its Participants.

Free Jim Perry

by Kat Dillon, 1/17/05

Fed up with high taxes and the Massachusetts nanny state, Jim Perry joined the United States' fastest-growing freedom movement, the Free State Project, and publicly broke his bonds from big government. To symbolize this event, Jim chained himself to a pole in Massachusetts at its border near Nashua. Freestaters at the event witnessed thousands of cars pouring in to New Hampshire from Massachusetts for sales-tax-free shopping. Jim remained chained for about an hour, holding a sign urging people to "Cut the chains of statism. --freestateproject.org". Compatriots in the Free State Project handed out flyers explaining the project and held signs:

"Escape to NH. --freestateproject.org"

"Honk if you love NH. --freestateproject.org"

"Now escaping Massachusetts"

Freestaters who had already made the move to NH then broke his chains, allowing him to make a mad dash to his freedom. Once there, he celebrated some of the freedoms one immediately gains when crossing the border: he destroyed a MA income tax form (NH has no state income or sales taxes); he drove a car without a seatbelt (NH is the only state without a seatbelt law for adults); and he openly carried a handgun, reveling in the freedom to protect himself and his loved ones.

Not all who attended the event were Freestaters. Two assisting in Jim's break for freedom were NH natives who welcome the Free State Project. They admitted that before they began working with the Freestaters moving to NH, they were ready to leave New Hampshire. Now they've decided to stay and be a part of Liberty in our Lifetimes.

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The Life of Freedom

NOTE: The opinions and commentary expressed in this essay are those of the author and are an exercise of free speech. They do not necessarily represent the views of Free State Project Inc., its Directors, its Officers, or its Participants.

The Life of Freedom

Whenever I think of freedom I think it looks a lot like New Hampshire. Because of all the freedom loving people who live here, this state becomes freedom. With the colors of the great outdoors, the free-thinking can do anything as long as it follows the two fundamental laws: do all that you have agreed to do, and do not encroach on other persons or their property. The taste of it is as sweet as a violet lollipop on a stick. Sappy and piney, the smell has a natural scent to it. Liberty has a way of making persons want to change the all-powerful government.

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