A key advantage of the land value tax isits encouragement of
efficient use of landandits discouragement of
speculation in land. Applying an annual charge to all land
holdings, based on the unimproved value of the land, would impose higher levies
on prime land sites, for example, those in central London, thus encouraging
development elsewhere where land values are cheaper, with positive results in terms of regional development.
Property developers would be incentivised not to hold onto large land banks
without building on them, and land, as a scarce social resource, could not be
hoarded or put to inefficient use without incurring regular annual levies.
Furthermore, exponential increases in land values would attract higher annual
levies, helping to restrain soaraway property bubbles in the same way that
higher interest rates bear down on inflation; in the case of inflation, the
imposition of higher interest rates depends on good central banking practice,
whereas an annual land value levy based on a percentage of land values would be
a market mechanism to ward off bubbles and speculation.
Land values would be discounted owing to the prospect of
paying annual levies. In the initial period, this ought to lead to a fall in
property values, although it needs to be emphasised thatin the long run land values could also be enhanced, as in
Hong Kong, by low income and profit taxes, creating a virtuous scenario where
economic activity was not deterred by deadweight losses, and rapid economic
growth still allowed freeholders to benefit from rising demand for their land.
This would help to keep revenues from land value taxes high, continuing to
support the few government services that are needed.
It is important to emphasize thatthe land value tax
cannot be shifted to tenantsin
a way that would add to business costs. Classical economists argue that rent is
not a real cost of production, but merely a price determined by demand for the
land, as shown by the fact that commercial rents fall in a recession. Rent does
not independently affect the cost of products produced by industry, but rather
amounts to the capturing of part of the value of the output created by the
outlay of capital and labor by the landowners. Attempts by landowners to
capture a larger part of their commercial tenants’ revenues by requiring
tenants to cover all taxes and charges incurred by the landowner would, over
the long run, not push up business costs, but reduce the profitability of using
the land, causing tenants to go elsewhere where site valuations were lower.
This reflects the fact
that landowners cannot go elsewhere, the locations of their land sites are
fixed, whereas their tenants can move their businesses out of prime location
sites. Excessive demand for prime land would fall, and less favoured locations,
in the North of England and elsewhere, would attract more investment, with positive
social repercussions.
The confusion between
passive gains and gains that are the result of initiative and investment is
found all the way through our current taxation system. Income tax and
corporation tax are assessed on all income and profits, without attempting to
break out the proportion of the earnings that relate to the three factors of
production: land, labor and capital. Some income is passively gained, and some
profits are passively made on the back of misguided central banking policy to
promote property bubbles. By contrast, a great deal of income and profits is
the result of hard work and initiative, and by obscuring the difference between
the gains from land, labor and capital, three categories kept quite distinct
in the analysis of the classical economists, we are unable to promote investment
and hard work and deter speculation in property.
Land value taxation allows
for a reduction in income and profit taxes, which currently restrict economic
activity. It also allows for the abolition of stamp duty, capital gains taxes
and inheritance taxes. This promotes the productive use of the land by not
impeding property transactions. The key to this is to establish an annual land
value tax on the unimproved value of land sites. This would hold property
values down over the long term, allowing the young to buy properties, allowing
banks to extend mortgages without a constant cycle of property boom and bust,
and this would also allow more of people’s incomes to be devoted to
consumption, instead of spending the majority of their incomes on taxes and
mortgages to finance an economic model based on public debt and property bubbles.
Genuine hard work would not be penalised as it is at present; passive
profiteering would become more difficult, although some increase in land values
based on strong demand in a low-tax economy could still take place
As long as taxation is
geared towards repression of incomes and profits, economic activity in this
country will be held back. Financial services, property and the public sector
are keeping our economy sluggish. Libertarians who support low taxation, and in
particular, forms of taxation with low or zero deadweight effects, should
support land taxation as a way of moving to a more sustainable model of
economic growth.
Crafted from a number
of pieces by D.J. Webb, Ryan Hinds, Wikipedia on Georgism.
[i] Smith, Adam (1776). The Wealth of Nations, Book V, Chapter 2, Article I: Taxes upon the Rent of Houses. "Ground-rents are a still more proper subject of taxation than the rent of houses. 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."
[ii] Thomas Paine contended in his Agrarian Justice pamphlet that all citizens should be paid 15 pounds at age 21 "as a compensation in part for the loss of his or her natural inheritance by the introduction of the system of landed property." "Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
[iii] Milton Friedman stated: "There's a sense in which all taxes are antagonistic to free enterprise – and yet we need taxes. ...So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago."
