What Do We Need to Know about Land Value Taxation?

Abstract

DICK NETZER (*) Introduction MORE THAN A century ago, Henry George concluded that poverty existed in America's rapidly growing cities in midst of unparalleled of economic growth and prosperity for some people because owners of land and other opportunities, who do not contribute to productive process, were appropriating fruits of labor and capital. His solution lay in taxation of rent of land and natural opportunities -- that is, recapture of rent for public use, rather than taxation of labor and capital. George's insights were foreshadowed in writings of classical economists a few generations before him. They, however, had not pressed ahead with policy implications; in Progress and Poverty, George did just that. The political movement created by that book had some early, partial successes in form of adoption of various types of differentially heavy taxes on land. But, by World War I, momentum had given out, and there were some retrograde developments, like reducing already low taxes on land in some places (notably, local rates in England and Wales). There have been very few political successes since then. In recent years, more and more public finance and urban economists have had positive things to say about land value taxation, but with no policy effect. That lack of success has always been something of a mystery, and there are various unproven hypotheses to explain away mystery. At least one explanation that has a degree of plausibility is that land value taxation has an antiquarian flavor about it. From this perspective, it was a good idea in its time (when only important level of government in U.S. was local, and only important tax was property tax), but world is so much more complicated today, and its problems call for complicated solutions. So there is an obvious challenge: is land value taxation still relevant to and feasible in today's world? To respond, we need to answer question in title of this essay: what do we need to know about land value taxation? Economists and Land Value Taxation: Then and Now I AM ABOUT to take some liberties, but story might best begin by looking, in very general terms, at what we economists knew about land value taxation thirty years ago and what we know now. I choose thirty years ago, because there was little attention by economists--in North America or anywhere else-to property tax, in any of its manifestations, from about 1930 until 1960s. In U.S., most public finance economists had been convinced that property tax was a dying, anachronistic institution by three factors: 1) decades of savage criticism of low quality of tax administration, which had not improved much, 2) collapse in property tax collections during Great Depression of 1930s, and 3) its replacement by state-collected sales or income taxes. As late as 1956, a leading economist forecast that, in another 20 years, the property tax will ... have become an all-but-forgotten relic of an earlier fiscal age (Mitchell 1956). Even as he wrote, however, role of property tax in American state and local finance had stabilized. A new decline began in mid-1960s, to be followed by stabilization in years since 1980, but in late 1950s, economists began to examine property tax once again, and an extensive literature emerged. What did we learn specifically about land value taxation from that literature? As you will see, I do not think we learned a great deal. To me at least, that is reason enough for first-rate scholars to direct their attention to appropriateness of land value taxation in contemporary world, which is now being done under sponsorship of Lincoln Institute of Land Policy. Thirty Years Ago The state of knowledge of land value taxation in economics profession up through 1960s can be summarized as follows: 1) The theoretical literature on land value taxation after Henry George was very sparse indeed. …