A couple of days ago, Julian made a post on Hit & Run inspired by an email discussion we’d had (with some other libertarian friends), inspiring a lengthy comments thread. Commenter Jason Ligon’s take on the matter is darn close to mine, so I won’t expand on it. However, another commenter (Scatalogicus) raised a different topic of interest: the Georgist proposal to fund government entirely via land and property taxes. I have a few comments to make on the subject.
1. Georgists are correct to claim that a tax on land differs from other taxes. Specifically, whereas taxes on other things (such as goods or labor) increase their price to the buyer, a tax on land decreases the price of land to the buyer. Why? While taxes are often regarded as taxes on specific people, they are really taxes on transactions. A cigarette tax only gets paid if cigarettes get sold, for instance. But a tax on land is different because no transaction is required – if you own land, you pay the tax. When you sell the land, the tax burden is transferred along with the title to the buyer. Realizing this, the buyer won’t pay as much as he would have for land unencumbered by the tax. Suppose the present discounted value of the land is V, and the present discounted value of the tax attached to it is T. Then the buyer won’t willingly pay more than V – T. Thus, the tax liability is capitalized into the value of the land. The Georgists are therefore correct to claim that land taxes drive down land prices.
2. What Georgists often fail to realize is that the entire burden of the tax is carried by the owners at the time of the tax’s imposition. This is not obvious, because current land owners pay taxes each year, despite the tax having been imposed years ago. But the capitalization logic above shows that the current owners were compensated for the tax burden by having been enabled to pay a lower price to acquire the land in the first place. This means that creating a new land tax (or increasing the rate of an old one) effectively confiscates a portion of the wealth of those who own land at the time the tax is enacted (or increased). It is as though the government had claimed part ownership in the land for itself.
Also, some Georgists claim the lower land prices as a benefit of the land tax. The fallacy here is the mirror image of the fallacy that current owners carry the burden of the tax. In general, the tax liability exactly balances the reduction in price, for a net effect of zero on those who acquire land after the tax’s imposition.
3. Smart Georgists recognize the two points above. At this point in the discussion, they will usually claim that it is fair and just for “society” (i.e., the state) to claim partial ownership of the land, because nobody creates land – it just exists. They argue that the owners of land have expropriated the public by removing land from the commons and taking it for their own use. For reasons I will discuss in my next post, the notion that land is never created is misleading – but for now, suppose it's true. It is nonetheless false to assume that current land owners (at the time of the tax's imposition) did the expropriation. In general, current owners have acquired the land in some other way – either through inheritance or purchase. If they inherited it, their ancestor either inherited or purchased it. Keep going back in time, and in general you’ll find a purchaser at some point in the land’s history. Rarely has a parcel of land been removed from the commons and delivered in an unbroken chain of pure inheritance through multiple generations all the way to the present. (The best examples I can think of are lands claimed by conquest and still owned by the government.)
So what? Well, if the owner of land at the time of the tax’s creation purchased it from someone else, then the wealth expropriated by the tax most likely did not derive from the removal of land from the commons. It could just as easily have resulted from labor. Suppose, for instance, that a school teacher works for many years to accumulate enough money to buy a home. Then the property tax rises. That tax takes a portion of the teacher’s labor-created wealth.
The irony here is that other taxes (income, sales, etc.) are typically regarded as taxes on people, whereas the property taxes are regarded as taxes on things. The truth is nearly the opposite. Income and sales taxes can in principle be avoided, even after their imposition, by avoiding the transactions to which they attach. Admittedly, it’s not always easy – few people could live without a job. But a property tax falls on the owners of land at the time of the tax’s creation, who have no prospect of escaping it. They can sell the land, but only at a reduced price, so the tax loss travels with them. The land tax can only be dodged by anticipating it and selling the land early. And even then, the dodge will only be successful if others don’t expect it (otherwise, the expected tax liability will be capitalized into the land), and it only succeeds by shifting the burden to the less-foresighted person who buys the land.
Lest I be misunderstood, I’m not claiming that land taxes are necessarily worse than other taxes. In comparison, land taxes might be the least of all evils (taking as given that the state will raise revenue one way or another). But even the advantages relative to other taxes are exaggerated by the Georgists – as I’ll discuss in my next post (in which I’ll also attempt to work in a Man in the Yellow Hat reference).