H. William Batt
Real tax reform
could do away with those taxes that are resented by the large
proportion of our population. We could replace all taxes on wages
and on interest by instead taxing economic rent. Rent is windfall
income; it is income that arises not from the efforts of any person
or corporation; it comes about as a surplus gain from common social
enterprise. There is ample moral warrant for society to lay claim to
that which it has created, as well as to that which no individual or
party has earned. Analysis increasingly makes clear that economic
rent in all its forms is far larger than official government figures
indicate; in fact it is likely sufficient to supplant all current
taxes on labor and capital (wages and interest) which are
acknowledged to have so many negative effects. Recovering economic
rent in all its manifestations by taxing its various bases actually
can foster economic performance and yield other benefits that make
it the natural source of revenue for governments. Such a tax is
Under current tax regimes, some people get hit with onerous bills
while others get windfall gains. If taxes only on windfalls were
collected, we could eliminate those burdens that fall unfairly upon
people who have rightfully earned their income and wealth, and the
total would likely remain revenue neutral. This is my thesis here, one
which should compel the attention of those who would redesign our tax
It is astounding how shameful our tax system has become; one might
guess that its designers - legislatures at all levels of government
-deliberately conceived it just so that they might score cheap points
by taking aim at it. But perhaps this time some chosen leader, some
deliberative body, or some civic constituency will rise to the
challenge of making clear some basic starting points rather than
pandering to prejudice and low motives. Perhaps. It leads me to write
The starting points should be the lessons that have been learned over
the course of the past three hundred and more years about what is a
good tax. Most basic textbooks in public finance enumerate them in
very clear form, and they constitute benchmarks against which to
measure the soundness of any particular tax. They are listed as few as
three or as many as eight such principles but little disagreement
exists as to their substance, regardless of ideology or government.
Most commonly enumerated are neutrality, efficiency, equity,
administrability, simplicity, stability, sufficiency. Tax theorists
typically measure revenue structures according to any or all of these
Tax neutrality refers to the influence (or absence of such)
that any particular design has on economic behavior. Typically taxes
are perceived as a damp on economic activity-- taxing income reduces
the incentive to work, taxing sales discourages retail transactions,
and taxing savings reduces the propensity to save. The more a tax is
perceived to be neutral the less the identifiable distortions it
imposes on the economy. The common assumption of most tax theorists is
that all taxes impose distortions; it's simply a matter of which ones
are least burdensome to economic health. A tax which imposes no
distortions is ideally best.
Tax efficiency is much like tax neutrality, and is the measure
of how much shifting of behavior it imposes, resulting in what is
called "excess burden," or "deadweight loss" on
the economy. Tax economists usually hold that the best taxes are those
that are shifted little if at all. Because the elasticities (a
technical word for the slope of supply and demand curves) of each are
very different, a tax on land values and a tax on improvement values
have very contrastive effects on economic choices. Using a tax base
that has little or zero elasticity is the best way of assuring that
taxes are not shifted. Zero elasticity is another way of saying fixed
The principle of equity is central to any discussion of tax
design. Tax design requires concern with both what is fair and the
extent to which it must sometimes be compromised to satisfy the other
principal criteria. Fairness can be evaluated according to what is
termed "horizontal equity" -- the extent to which those in
similar circumstances will pay similar tax burdens, and "vertical
equity" -- how well those in different classes bear different
burdens in the tax structure. It is this latter perspective that leads
to the use of terms like "proportional," "progressive,"
and "regressive" in referring to tax structures. A tax is
progressive with respect to income if the ratio of tax revenue to
income rises when moving up the income scale, proportional if the
ratio is constant, and regressive if the ratio declines. There is an
ancillary question of whether taxing to reach greater equity should
employ measures of income or of wealth, difficult as this is to
measure. Such questions of equity are a matter particularly central
when discussing the property tax.
Administrability refers to the ease with which a tax can be
administered and collected. Taxes which distort the economy are
inefficient but so are taxes that cost lots to administer. This is
measured not only in the direct costs of tax avoidance and accounting
expenses, but in the level of evasion and cheating, and by the cost of
government auditing and policing. When the taxpaying public perceives
that a tax is easily evaded, cumbersome, and unfair, it loses its
legitimacy and calls government itself into question.
This is why the principle of simplicity is important: the
more complex the tax design, the more lawyers and accountants will
find loopholes, encourage the appearance of unfairness, and drive up
the cost of its administration. People know that with simple taxes
other parties are also paying their fair share, and all this enhances
the legitimacy and therefore the compliance of the tax system.
Stability refers to the ability of a tax to produce revenue in
the face of changing economic circumstances. Income and sales taxes,
for example, vary greatly according to phases in the economic cycle;
the property tax, in contrast, is highly stable regardless of the
state of the economy. This is one reason why school administrators
have typically been supportive of using the property tax base rather
than some other tax to support school services.
The certainty of a tax's collection ensures that the number
and types of tax changes be kept to a minimum. Frequent changes in tax
rates and bases interfere with business decisions and the ability to
make long-term financial plans. This concept reinforces the need for
stability because an unstable revenue system is more likely to require
In assessing the value of a tax it is also important, of course, to
understand its potential to bring in revenue for the purposes of
government, usually deemed revenue sufficiency. Income, sales
and property taxes, along with corporation taxes to a lesser extent,
have come to be regarded as the workhorses of the American revenue
structure. But, as anti-tax politicians are quick to note, the higher
these taxes are, the more they impose a drag on the economy. This is
why one should ponder whether to consider raising taxes which have
demonstrable distorting effects.
The Tax Base
The next concern should be upon what base to impose a tax - not about
taxing whom but taxing what. There are only three possibilities, as
all revenue streams necessarily come from one of three factors of
economic production - 1) upon resources found raw in nature (what was
classically called land), 2) upon our labor, or 3) upon things created
by human hands or minds (capital). No other source exists; every
possible tax must be on one or some combination of these parts. Each
of these factors has its price: the price of land is counted in
economic rent; the price of labor is in wages, and the price of
capital (its liquid form) is in interest.
Any tax on capital has its downside effects, so that taxing savings
causes people to save less, taxing consumption causes people to buy
less, and taxing buildings causes people to build less. The result is
that economists as well as businessmen usually frown upon taxing
capital. Another alternative is to tax labor, but it is even more
widely understood that taxing labor normally discourages people from
working as much as they would in the absence of a tax. From this comes
sentiment against taxing labor, even though for want of any
alternative, people have today commonly come to accept it as a
necessity. But electing to tax labor, just as for taxing capital,
forecloses a discussion of the virtues of taxing land - not
necessarily land as earth, but rather land as location. Yet land rent
is the most attractive tax base of all, as rent is not earned; it is
windfall income, entirely the result of being well situated in any
market of scarce natural resources and where community demand (rather
than one's own efforts) leads to an appreciation of that land's price.
To be sure many people have learned to position themselves in
situations where a land's market value is likely to rise - indeed
these people come to think of themselves as astute investors. But the
fact is that that market gain is not of their own doing at all; it is
the result of common enterprise creating a surplus that comes to
settle on land sites. An investment in land, in any form it might
take, is speculation in greater or lesser degree.
Land in all its forms is a tax base that also conforms well to all
the classic principles of sound tax theory as enumerated above. Land
is classically taken to mean not just surfaces of the earth but places
in time, in space, in any medium whether it be solid, liquid or gas,
and even as a form of light, in the electromagnetic spectrum, and in
life forms. One needs to return to 19th century classical economic
definitions of the factors of production to appreciate the separate
significance of land as it was understood in its manifold forms. One
should ask how it is that land, so important to 19th century classical
economic theory, has been given so little attention today in
neoclassical economics. This is a story only now recovered from the
dusty archives of academic economic history. Once understood and
appreciated, it may be one of the greatest, if very silent, political
revolutions of world history.
The conventional wisdom of most contemporary tax designers, despite
lip service to the enumerated principles above, is that the best tax
regime relies essentially upon three tax bases - property, sales, and
income -- perhaps ideally in equal weight. But it is very
questionable why, given the measurable and demonstrable virtues of
taxes upon land bases, one would resort to any other revenue stream.
When it becomes clear that taxes imposed upon other factors of
production effectively work their way through the economy to settle
ultimately upon land in any case, one sees that it simply hamstrings
the economy, distorts its natural equilibrium, and fosters resentment
and challenges to political legitimacy every step of the way.
The Possibility of Land (Rent) Taxation
The key to understanding how taxing various forms of land conform to
sound tax theory comes with an appreciation of the importance of
economic rent. Largely discarded in 20th century economic analysis,
rent is the price for the use of land. Just as the price of labor is
paid in wages and the price of capital is paid in interest, land rent
is the unearned increment that attaches to land in the form of a
surplus when its price is not paid by its users. All taxes,
ultimately, come out of rent; however, by collecting revenue from
other sources, the rent is left to settle in ever increasing
encrustations on land sites, i.e., capitalized, ultimately raising
their market price. In so doing, these land prices are distorted so
that their optimal use is not secured.
Examples of such distortion are not difficult to identify. Consider,
first of all, the use of locations in our urban environments, many of
which are underused while prospective entrepreneurs are driven to
second-best locations because titleholders opt to let the rent accrete
and passively raise their market price. Land speculation is rife most
of all in instances where there is a great disparity between the tax
rate on these sites and the rate of rent appreciation. When the
holding costs of ownership are nominal, there is no incentive for
improving them or selling to others who will, and urban environments
suffer as a result. Another example is rent that collects to the
electromagnetic spectrum, making it attractive for owners of
electronic media, communications networks and so on, to rely on
returns to their investments even when the resource itself is sparsely
used. So also with the time slots for take-offs and landings at
airports. These opportunities are respected as private property, even
while they gain in market value in response to the general traffic
volume of the facility. This occurs regardless whether the particular
airlines use their slots or not. London Mayor Ken Livingstone has
proposed to tax the rent from Heathrow and Gatwick both for their
revenue advantage and to assure their more optimal use. One could
go on, pointing to any number of instances where economic rent is
available to be had for the support of public services in lieu of
conventional taxes which we recognize as destructive in their
effects. It is not surprising that when pressed even conventional
(neoclassical) economists are often willing to concede that the best
possible tax of all is one placed on land rent.
Although one can infer innumerable instances where economic rent
inheres in land factors, the econometric data maintained by public
agencies has not been compiled in a way that makes it easily
identifiable. In fact the US Census of Housing ceased to keep records
on the assessed value of land in 1987, reasoning that the quality was
so poor that it was more misleading than it was helpful. The actual
account of the "rental income of persons" in the US
government National Income and Product Accounts is estimated at less
than 2%, yet this figure is widely acknowledged to be so
unrealistic an estimate that it is ludicrous by itself. What studies
have been performed to calculate economic rent suggest that the amount
for real property alone is in the neighborhood of 30 percent of a
nation's GDP. This realm of research begs for attention, but it
will not likely be more than approximate as long as government
statistics are so lacking and unreliable.
The growing availability of data, and of computer power, increasingly
offers the promise that researchers will be able to "back into"
some estimates, even if they are suggestive more than they are
conclusive. With such inviting questions, there may well arise the
prospect of better data collection, and which will allow for even
It should also be noted that a transition to a tax on land rent would
not be not difficult. In lieu of the conventional real property tax,
it is already widely used, and many localities are presently
phasing in such a shift, downtaxing improvements and uptaxing
land. As for taxes at other levels of government, it is already
conceded, for example, that "The Public Owns the Airwaves,"
a statement that is belied by the fact that the media and
communications industry treats its rights to the use of frequency
licenses as private property and whose market value is typically
reflected when such corporations are sold. One should also note as
another example the case of the Alaska Permanent Fund, which provides
a reliable citizen's dividend every year to everyone in that state,
derived from oil revenue. Development Administrator Paul Bremer
proposed such a design for the new government of Iraq in 2003, a
design idea that was also endorsed by the United Nations
Association. Many other instances could be cited where already
land rent is recovered as a surplus to support public services.
A New Tax Ethic
Beyond the greater conformity to sound tax principles as noted
earlier, the taxation of economic rent that accretes as a surplus upon
land can offer two additional advantages. The first of these is the
removal of the distortions wrought upon urban land use configurations
and the negative environmental impacts which are presently apparent.
The greatest of these affects is in the form of suburban sprawl, a
phenomenon viewed with increasing alarm not only by its degradation of
life quality but in the increased expenditures of time and resources
(especially energy). Land use patterns, as intractable as they tend to
be, will have to modify simply on account of the evolving limitations
of future life. There are likely to be changes also in the way by
which air, water, and other public goods are exploited. Treatment of
these resources as "free goods" or as captive property of
private parties will end if it is realized how generous the rental
flow to public treasuries can be.
The second benefit to be obtained by the recovery of socially created
economic rent is the restoration of a moral dimension to taxation and
to economics generally. Taxation policy today is faced with a loss of
legitimacy, and it is not sufficient to rely on totems that have
sustained its design until now. A groundswell of resentment has
occurred in all realms of tax policy - for income taxes, for sales
taxes, and for real property taxes. All levels of American government
are suffering on account of our impoverished fiscal design. Stalemate
has reached such proportions that nothing is being accomplished.
Infrastructure is deteriorating; educational quality is perceived to
be declining, environmental ambience is threatened, and public safety
services are curtailed.
To be sure, by replacing taxes on labor and capital with taxes on
land rent, people will enjoy greater returns for their enterprise and
will be able to keep what they have earned. But people will also
cease, at least those few who have been so lucky, to be able to rely
on windfall unearned gains that they have in many cases come to regard
as their entitlements. The greatest forfeiture of such windfall gains
will be homeowners who have come to see their title to a home as an
investment, and not a place to live. But whereas some residential
locations have seen enormous increases in market prices - as much as
20 percent yearly on occasion - others have enjoyed no such fortune.
People may come to understand that houses depreciate just like cars,
refrigerators and computers. They may also see that it is only land
value that increases, and realize that any gain which their land has
is due to the general vitality of their community and region. It may
help them to realize that they are linked to and dependent upon the
society as a whole, and that their fortune is not in this dimension of
their own making.
Well over a century ago, John Stuart Mill recognized that
landlords grow richer in their sleep without working,
risking or economizing. The increase in the value of land, arising
as it does from the efforts of an entire community, should belong to
the community and not to the individual who might hold title.
A more appropriate ethic for the 21st century is "Pay for what
you take, not for what you make." "Tax bads, not goods,"
or "Tax waste, not work," is another way. At the heart of
this approach is a very profound message: the earth is the common
heritage of humanity; it belongs to everyone. That which grows out of
our own personal efforts and ingenuity is ours to keep, and no part of
it should be subject to taxation. Taxes on income, sales, savings,
structures, and things that come from the sweat of our brow can be
replaced by taxes on land rent -- which, when all forms of it are
included, is a revenue source that can fully pay for the full services
of government and is nonetheless essentially burdenless to taxpayers.
John Houseman, an actor perhaps most widely known as Professor
Kings-field in the film and long-running television series, The
Paper Chase, later became the pitchman for Oppenheimer Mutual
Funds. In that advertisement, his tag line was "We get our money
the old-fashioned way -- we earn it" That we should earn
our money rather than live off the efforts of others seems a simple
enough moral tenet.
NOTES AND REFERENCES
1. A windfall, usually defined, is "an
unexpected financial gain, or a stroke of luck." But, as one
exhaustive study makes clear, it is typically the consequence of some
public policy decision. Donald Hagman & Dean Misczynski, Windfalls
for Wipeouts: Land Value Capture and Compensation, (Chicago: APA
Planners Press, 1978). This is illustrated in one widely read story in
William L. Riordan's Plunkitt of Tammany Hall, (New York:
Dutton, 1905): "Honest Graft and Dishonest Graft."
There's an honest graft, and I'm an example of how it works. I might
sum up the whole thing by sayin': "I seen my opportunities and I
Just let me explain by examples. My party's in power in the city, and
it's goin' to undertake a lot of public improvements. Well, I'm tipped
off, say, that they're going to lay out a new park at a certain place.
I see my opportunity and I take it. I go to that place and I buy up
all the land I can in the neighborhood. Then the board of this or that
makes its plan public, and there's a rush to get my land, which nobody
cared particular for before.
Ain't it perfectly honest to charge a good price and make a profit on
my investment and foresight? Of course, it is. Well, that's honest
2. Presidential candidate Jimmy Carter called the American tax
system, "a disgrace to the human race." A recent estimate is
that one-third to half of all Americans cheat in some way on their
federal tax returns, and far more feel it would be all right to do so
if they could get away with it. Donald L. Bartlett & James B.
Steele, The Great American Tax Dodge (Boston: Little, Brown,
3. For a discussion of what students of tax policy regard as the
principles which should guide their design, see, for example, George
Break, "Taxation," Encarta Encyclopedia by Microsoft,
1993; "Principles of Taxation, in Light of Modern Developments,"
Washington: Federal Tax Policy Memo, The Tax Foundation; "Principles
of a High Quality Revenue System," Tax Notes, March 21, 1988;
David G. Davies, United States Taxes and Tax Policy, (New
York: Cambridge University Press, 1986), pp. 17-19; and David Brunori,
State Tax Policy: A Political Perspective. Washington: Urban
Institute Press, 2001, Ch. 2. State studies cited above also typically
list any or all of these criteria. I have seen accountability,
balance, certainty, competitiveness, and complementary included as
4. For an extensive discussion of this shift in direction from the
three-factor economics of land, labor and capital, to the more recent
framing of economics largely in terms of labor and capital, see Mason
Gaffney, The Corruption of Economics (London:
Shepheard-Walwyn, 1995). Some of its implications are explored in H.
William Batt, "How the Railroads Got Us on the Wrong Economic
Track," The Torch, Winter, 98. Online at
5. For a discussion of this, see this author's The Fallacy of the
AThree-Legged Stool@ Metaphor, published in State Tax Notes,
Vol. 35, No. 6 (February 7, 2005), pp. 377-381; and printed online
6. See Mason Gaffney, AThe Philosophy of Public Finance,@ especially,
pp. 188-192, in Fred Harrison (ed.), The Losses of Nations:
Deadweight Politics versus Public Rent Dividends. London: Othila
7. Economic Intelligence: Bulletin of the Center for Land Policy
Studies, Vol 1 (4), October, 2002, p. 4, and
8. See Mason Gaffney, "Sounding the Revenue Potential of Land:
Fifteen Lost Elements," an address delivered at the annual
meeting of the Council of Georgist Organizations, Albuquerque, July,
2004, at http://www.earthrights.net/docs/fifteen.html
9. To confirm this notion, here are some quotes from prominent
American Nobel Prize winners in Economics. See www.urbantools.net
Their political philosophies run the gamut from Right to Left: Milton
Friedman: "I share your view that taxes would be best placed
on the land, and not on improvements."
Paul Samuelson: "Pure land rent is in the nature of a
'surplus', which can be taxed heavily without distorting production
incentives or efficiency." A site value tax can be called "the
useful tax on measured land surplus."
Franco Modigilani: "It is important that the rent of land
be retained as a source of government revenue. Some persons who could
make excellent use of land would be unable to raise money for the
purchase price. Collecting rent annually provides access to land for
persons with limited access to credit."
Robert Solow: "Users of land should not be allowed to
acquire rights of indefinite duration for single payments. For
efficiency, for adequate revenue and for justice, every user of land
should be required to make an annual payment to the local government
equal to the current rental value of the land that he or she prevents
others from using."
William Vickrey, "It guarantees that no one dispossesses
fellow citizens by obtaining a disproportionate share of what nature
provides for humanity."
James Tobin: "I think in principle it's a good idea to
tax unimproved land, and particularly capital gains (windfalls) on it.
Theory says we should try to tax items with zero or low elasticity,
and those include sites."
James Buchanan: "The landowner who withdraws land from
productive use to a purely private use should be required to pay
higher, not lower, taxes."
10. Fred Harrison, et al., The Losses of Nations (London:
Othila Press, 1988, pp. 64-75; and
11. See, for example, Terry Dwyer, "The Taxable Capacity of
Australian Land Resources," in Australian Tax Forum,
January, 2003. www.prosper.org.au/Documents/TaxableCapacity.pdf; and
infra. See also Steven Cord, "How Much Revenue Would a Full Land
Value Tax Yield? Analysis of Census and Federal Reserve Data,"
American Journal of Economics and Sociology, Vol. 44, No. 3
(July, 1985), pp. 279-293. More work is forthcoming on this question,
and much greater documentation will be available shortly.
12. Robert V. Andelson, Land-Value Taxation Around the World.
American Journal of Economics and Sociology, Vol 59. No. 5
(Supplement, 2000), and Blackwell Publishers, 2000.
13. For a record of cities in the United States that are either
currently or intending to phase in a tax on land value to replace the
conventional real property tax, see the website of the Center for the
Study of Economics, in Philadelphia, PA: www.urbantools.net .
14. Although clearly a low estimate, one new research organization
based in Washington has been exploring the potential rental value of
the spectrum. See the work of the New America Foundation,
http://www.newamerica.net/, particularly the work of Michael
Calabrese, Program Director, and as referenced in The Real State
of the Union, New America Foundation, 2003.
15. See The Alaska Permanent Fund corporation: http://www.apfc.org/,
and Alanna Hartzok, "Alaska Permanent Fund: A Model of Resource
Rents for Public Investment and Citizen Dividends,"
17. John Stuart Mill, Principles of Political Economy, bk. 5, chap.
2, sec. 5.