Should Bare-Land Values
Be Taxed More Heavily?

Harry Gunnison Brown

[Reprinted from the Journal of Land & Public Utility Economics,
Vol. 4, No. 4 (November, 1928), pp. 375-392]

Subjective versus Objective Approach The old saying that "possession is nine points of the law" might well be applied to our economic practices and institutions. It is exemplified in our attitude towards taxation, for whatever method of taxation happens to hold the field at any given time is difficult to dislodge. Doctrines of alleged fairness cluster about it and habituation lulls discontent. A similar psychology causes people to question the new and un- familiar. So even a tax system as far re- moved from our present practice as the "single tax on land values" would probably have among its supporters many of those who are now most definitely opposed to it, if only they had been accustomed to it from youth, had been surrounded by others equally accustomed to it, and had learned the arguments best fitted to defend it instead of those used to defend the tax system we now have.

In the case of any controversy between adherents of substantially our present taxation system and adherents of site-value taxation, the only really objective basis of comparison is one that has reference to the effects, whether observed or indicated, of these divergent tax policies. On the reasonable assumption that the nature and consequences of the existing system are the more familiar, I shall be mainly interested here to show what consequences, be they good or bad, might be expected from the substitution of the system of site-value taxation.

Incidence of Land-Value Tax

At the outset it is important to make clear two facts. One is the fact that a tax on the rental value of land cannot be shifted. The other is that the value of land is not to be arrived at in exactly the same way as the value of produced capital.

That a tax on the rental value of land cannot be shifted either in higher rents to tenants or in higher prices for goods, economists generally insist. Such qualifications as may be made to this statement (however interesting they may be to the theorist) are of little practical importance and need not here be discussed.[1] As a general proposition there can be no question that a tax on the rental value of land, applied equally whether the land is used or not and regardless of how used, is not shiftable and, indeed, may even, by forcing speculatively-held land upon the market, cause land rents to fall.

It is unnecessary to go at length into the argument that a tax on land values cannot increase rents. Suffice it to say that if such a tax did raise rent, people would economize in the use of land just as they economize in other things when they must pay higher prices for them. Thus, more land would be left unused than if the rents had not been raised, and the owners of such unused land, rather than lose all income from it while yet having to pay the new tax, would quickly reduce rents to the former level.

Valuing Capital versus Valuing Land

The value of capital as distinguished from land depends on its cost of production -- or of reproduction. The value of land depends solely on its expected future income and the current interest rate at which this income is capitalized. This is a basis for the contention that a tax on land has different effects -- be they better or worse-than a tax on capital.

Extreme statements usually need qualification and it is not at all my intention to assert that the value of capital is causally influenced only by the cost of producing or of replacing it. The value of any piece of capital, e. g., a steamship, is undoubtedly related to its expected future yield. If it chance to be unseaworthy, its having cost a million dollars to build will not make it worth a million. Likewise, if built for use in a river or lake from which it cannot be moved but where no sufficient demand for its services develops, a vessel will not be worth as much as it cost to build.

Of course, the estimated value of the future services of a ship (as of any piece of capital) is an essential element in determining its present capital value. But this is not the only element. Cost of production (contemporary cost, i.e., cost of reproduction) is a no less essential element. No matter how valuable the expected future services of a steamship, if another just like it can be built now for a million dollars the one already built can hardly be sold for five million dollars or for two million or even for a million and a half. Except as influenced by some necessity of immediate use or by some other special and unusual circumstance, a buyer will not pay for any instrument of capital substantially more than its current cost of reproduction. Nor in any case, could sellers, for long, charge more, for a higher price than this would make the business of supplying such capital more profitable than other lines of business and would tempt new competition, so lowering the price. On the other hand, a lower price than this would cause construction of such capital to cease. As a long-run proposition, then, the value of capital is, of necessity, not much above or below its current cost of production (cost of duplication.)[2]

But in the case of land, there is no cost of production or duplication. No individual and no group of individuals can duplicate Wall Street or the loop area of Chicago. I am not attempting to argue here that no group of individuals is ever in a position strategic enough to start a city. Still less am I contending that never can any individual or group purposely and effectively bring about a change in the value of a specific small piece of land. I have discussed elsewhere[3] the contention that these things may sometimes and in some degree be accomplished and have, I hope, made the requisite allowances. But, after all, the topography, land and water, of the earth is not essentially a matter of human causation, and the establishment of the advantages of specific sites or pieces of land is in only slight degree a matter subject to the conscious and purposeful control of individuals or business groups. I think the reader will see that I am not insisting on any extreme and unqualified view, even though the limits of space make it desirable that I do not now develop the possible qualifications, as I have elsewhere. But, with or without qualifications, the general nature of the difference between capital and land which I am here trying to make clear, will be admitted by most sensible persons once they understand the terms in which it is stated.

To illustrate, Smith contemplates purchasing a lot and a building for the purpose of starting a retail store. Jones offers him exactly the lot and building that he desires, asking a price for the two of $5o,ooo. An equally satisfactory lot, adjacent to the first, is obtainable for $20,000. Smith realizes, therefore, that the extra $30,000 is really a payment for the building. Suppose, however, that an equally good building for his purpose, perhaps an exact duplicate of the one Jones has, can be constructed for $20,000. He will then, clearly, refuse to pay $5o,ooo for Jones' lot and building and will consent to pay only about $40,000. The possibility of constructing another building limits the price Smith will pay for this one. But no such possibility limits the price he will pay for the lot since, in the case of the lot, no such possibility exists. If Smith is not satisfied to pay $30,000 for this specific building he may, indeed, look for another building (which, however, someone had to construct, so that cost of construction will affect supply and, therefore, value), as, if not satisfied with the price of the lot, he may look for another lot. But he can also construct an additional building, duplicating the one desired, and he can not construct a new lot. There is, in short, one more alternative open to him with regard to the building than with regard to the lot.

If development of the tributary territory or increased population of the city in question brings it about that this site (and, also, the adjacent unimproved lot) promises to the user a much larger annual return than before, competition will compel Smith, if he would possess the lot, to pay a much higher price. Neither Smith nor any one of his possible rivals for the site will be dissuaded from purchasing it at a markedly higher price than the $20,000 it was worth under the circumstances first assumed, on account of any idea that he can make or construct such a site at lower cost. Nor will the fear of any such preposterous eventuality cause the owner of the lot, or of any similar lot, to charge any lower price than seems now to be justified by its probable future yield.

Let us, then, put the valuation of lots in terms of arithmetic. Suppose a lot to have, because of its situation, an expected net yield of $1,000 a year in excess of a reasonable return on the capital invested or to be invested in improvements. And suppose the general rate of return yielded by capital in excess of allowance for depreciation to be 5%. Then the lot in question should sell at $20,000. If the owner confidently expects it to yield him $1,000 a year and knows that $20,000 available to invest in capital construction or otherwise would probably yield no more, he will hardly want to sell for less than $20,000. If the prospective purchaser believes he can make $1,000 on an investment of $20,000 in capital or by lending it to some one for the construction of capital, he will hardly want to pay more than $20,000 for the lot.[4]

Different Consequences from Taxing Capital and from Taxing Land

Now we are prepared to inquire whether a tax on land values, taking any given proportion up to 100% of the rent (actual or, in the case of speculatively- held land, potential) will have the same or different consequences from a tax on produced capital, e. g., on improvements. The fact is that the former tax will reduce the selling value of land, while the latter will not, as a long run proposition, reduce the value of capital, for capital is constantly wearing out and requiring replacement and, unless it is worth what it costs, men will not reproduce it. A very heavy tax on capital may, indeed, discourage its construction. It may, possibly, by reducing the reward of saving, make thrift seem less worth while. It may thus leave the community with less adequate equipment for the forwarding of industry and may so, conceivably, bring about widespread poverty. But in so far as capital is saved and constructed, despite the possible discouragement of the tax upon it, such capital must, in general, be worth as much as it costs to construct. Since the value of land, on the other hand, is determined solely by capitalizing at the current rate of interest the net rent which its owner can expect to receive from it, a tax which decreases what the owner can receive will necessarily make the title to the land less valuable.

The owner of a specific piece of land will not necessarily have his total income reduced by such a tax, if it takes the place of a tax previously levied on all property. Indeed, in case his land is highly improved, his net income will very likely be larger than before, since to remove the tax from his valuable improvements will probably save him more than the increased tax on his less valuable land will cost him. But the total salable value of his property will be less, since the improvements cannot be worth more than their cost of duplication and since the value of the land must be lower than if it were not taxed.

It does not follow that the property owner is any worse off. Although, if desiring to sell, he would have to dispose of his property at a lower price because of the effect of the tax on the salable value of the land, he could for the same reason buy another piece of land at an equally reduced price.

Regardless of whether or not important objections to increased land-value taxation exist, I cannot avoid the suspicion that at least a considerable part of the opposition to it among real estate men arises from a failure to distinguish clearly between taxation of bare-land values and taxation of real estate. I am not here trying to say that the so-called "single tax" would be a lighter burden on real estate in general than real estate now bears. I am rather emphasizing the general principle upon which the single- tax propaganda is based, viz., that the rental value of land, as a community- produced value, is peculiarly fitted to be a source of public revenue. This principle is quite consistent with a lower tax on a great deal of real estate than the tax now levied upon it. Also it would be consistent with such a lower tax even if all the rental value of land were taken by the public. If no more was taken- and a tax on rent can of itself hardly take more than all the rent there is -- nothing whatsoever would be taken from the earnings on the improvements, however extensive or however large their earnings. If such a tax on bare-land rent, even at 100%, could not provide all the revenue needed by government, the remaining revenue required might be raised in various other ways, such as through inheritance, income and consumption taxes, and need not involve any further tax on real estate as such.

An Arithmetical Contrast between Two Tax Systems

In order to make as clear as possible the distinction between bare-land-value taxation and taxation of property in general, let us suppose part of the United States to have one system and part the other. Then we can, at least mentally, compare the two systems advantageously, with a view to determining how each would affect the economic welfare and the industrial development of the territory where it is assumed to be in operation. Let us suppose the new system, viz., land-value taxation, to be in effect in the Coast states, both Atlantic and Pacific, and the old system to be still in effect in the Mississippi Valley states.

We shall consider the problem first in terms of arithmetic, in order to avoid as far as possible any lurking prejudice or sentiment. Then, perhaps, we can all agree as to what are the differences in the effects likely to be produced, however cordially we may later disagree regarding our desire or lack of desire that either set of effects be sought.

It will make the argument clearer if we assume, at the outset, a definite figure for the return to capital. We shall suppose this to average 7% throughout the United States. But in the central area, where all property is taxed, the tax takes about 2%, leaving a net return on all improvements made and all other capital of 5%. Since lenders can get about 5% and since owners of real estate can make 5% on their improvements, no one can afford to buy land (or, having some, to buy more) at a price so high that the future net rent (after tax subtractions) is less than 5% of the price he pays. No owner of land will wish to sell at a price so low that the interest he can earn, after investing the sale price in capital, amounts to less annually than the net rent he would get from the land.

Now we are ready to make our illustration more precisely arithmetical. Suppose a certain person has improvements on his land in the form of one or more buildings worth $6,ooo and which could be duplicated for $6,ooo. The yield, at the current rate here assumed for the Mississippi Valley states, is 7%, or $420 in excess of allowance for depreciation. But of this $420, the sum of $I20, or 2% on the capital, is taken in taxation. Thus a net return of $300 or 5% remains.

So far we have made no allowance for rent of the lot. Because of its situation an excess return of $280 is secured above the ordinary interest on capital and this is properly to be regarded as rent (land rent or site rent or economic rent). If the surplus $280 were received for efficiency in managing a business, it would not be rent. But as it is $280 in excess of interest on the value of the improvements and can be secured by the owner without productive work on his part, being paid to him by some one else desirous of using the lot, it is properly to be placed in the rent category.

If taxes on rent take 2/7 of the entire rent, as we assumed to be the case with the $420 return from the improvements, then $80 of the $280 will be taken in taxation, leaving $200 as net rent. Since the current net interest rate is 5%, a lot which is expected to yield $200 a year net should normally be worth that sum of which $200 is 5%, namely $4,000. Then we can say that the land and improvements together are worth $4000+ $6000 or a total of $10,000, that the yield is 7% of this or $700, that the tax is 2% on the salable value (2/7 of the income) or $200 and that the net yield is $500 or 5%. The owner, in practice, may not distinguish his land from his capital and may consider simply that he has a net return of $500, or 5% on a $10,000 investment. Yet, however unconscious of it he may be, the fact is that the value of the capital depends largely upon and cannot appreciably exceed its current cost of production, while the value of the land can be arrived at only by capitalizing its expected future rent at the current interest rate.

Now compare one of the sections where a tax on the rental value of land was assumed to have replaced the general property tax. To make the comparison clear we shall suppose in this territory a case similar in the value of the improvements and in the location advantages of the land. Then we shall have the improvements worth $6,ooo with a yield above depreciation of $420 or 7%. And there will be an additional return, due to advantageous situation, of $280.

According to our assumption no tax in this territory was levied on real estate improvements, whether buildings, orchards or drainage systems, or on any other capital. Whatever tax would have been levied on these items rests on the rental value of land. Instead of taxing the improvements $120 and the land $80 (2/7 of the actual or potential annual income in each case), the tax rate is made high enough on the bare- land value to secure the same total of revenue. This means, if the proportionate returns from land are 2/3 what they are from improvements, as in this case, a tax rate on the land of not less than 6/7 of the rental yield. Thus, the tax on this particular piece of land would be 200, leaving a net rent of 80. (If this tax, resting equally on valuable unused land, forced such land into use and so somewhat reduced rents, the remaining net rent from such a piece of land might be between $75 and $70 instead of $80.)

The net return on improvements, since these are not taxed, will be $420 or 7% instead of $300 (or 5%), and the net rent on the lot, after the tax is subtracted, will not exceed $80. What is the bearing of these two facts on the salable value of the lot? Since investment in improvements will net 7% instead of 5% and since borrowers who wish to make improvements can afford to pay about 7% interest and, because of competition for funds, would have to pay substantially that," land would tend to be valued by capitalizing its rent on a 7% basis. The lot in question should therefore be worth that sum of which $80 is 7%, or about $1143 ($1142.93-), instead of $4000 as in the territory where all property is taxed alike.

To purchase a piece of land and construct on it $6000 worth of improvements, in order to get a net yield on both after taxes of $500 ($300 on improvements and $200 rent on land), would require, where property in general is taxed, an initial accumulation of $10,000. Where the entire tax in question is on bare-land values, the amount necessary to save in order to secure an equal income (in this case $420 on improvements and $80 on land) is only $7143. The requisite investment is almost $3000 less for the same income. In other words, the person who works and saves for the purpose of making improvements in or on land or of starting a business can secure a net return of 7% as easily as he could secure 5% if capital were taxed.

Factories, stores, office buildings and houses cannot well be moved from the territory where they are taxed to the territories where they are not taxed, but future construction resulting from new accumulations or savings will be undertaken by preference in the territories where they are not penalized.[6] After all, the average investor does prefer a 7% untaxed return to a return of only 5% (7% minus a tax of 2%). Indeed, we may safely guess that a very large portion of the more conservative business men in the Mississippi Valley states, of those most bitterly opposed to any substitution of land-value taxation for other taxes, would be the quickest to send their own savings into the Atlantic Coast and Pacific Coast states where such savings would yield the higher net returns. This might be most unfortunate and an evidence of lack of loyalty to their professed principles on the part of the conservative persons in question, but there is little doubt that they would be definitely so influenced.[7]

What then? If more and more funds flow into the Atlantic and Pacific Coast states for investment, the amount and quality of land improvements, buildings and equipment in these sections will increase. This will doubtless tend to lower the net return on capital towards that of the Mississippi Valley states, while raising it in the last-named section through a progressive scarcity of capital. The greater amount of capital in the Atlantic and Pacific Coast states should facilitate improvement in methods of production, add to the efficiency of labor, make the productivity of labor, therefore, high, and tend towards high wages and large returns to enterprise.

There is, furthermore, another possible influence which we ought not entirely to overlook, the influence of heavier bare-land-value taxation on the speculative holding of land out of use. Without now discussing this problem fully or inquiring whether or not any good purpose is' ever served by such speculation, we may surely say that in so far as good land is held out of use by speculators, land is for the time being made artificially somewhat scarcer than it otherwise would be, rents and sale prices of land are made higher and wages are made lower. Forcing good land into use has at least three results: more remote and otherwise poorer land need not for the present be used; industry is thus more productive; and the active factors in industry as a whole are better paid.

We have seen that new capital will tend to flow to the Atlantic and Pacific Coast territories where capital is not taxed; that new ventures will prefer to start there, assuming other conditions equally good; and that land for the establishment of these ventures can be obtained there more cheaply. But how about the ordinary wage earner? Is he in any measure a gainer? Will he too prefer the land-value-tax territories to the general-property-tax region?

It is, indeed, very hard to conclude otherwise. Suppose that we consider seriatim the advantages to him of the land-value-tax system. He finds that the territories which apply it are -- or soon become-better supplied with capital. This makes his labor more effective and, therefore, more in demand, and so tends towards high wages. The resulting gain is somewhat accentuated by the fact that the best land is available for use-since speculative holding does not pay. With more available space city congestion is somewhat relieved and rents tend to be lower. If the wage earner saves something from his wages, he can lend or invest it with hope of a higher return because it is untaxed. At any rate he can secure such a higher return unless or until the inflow of capital and possibly new accumulations encouraged by the higher net interest reduce the return to the level realizable in the less favored territory. In case he desires to own his home, the greater cheapness of land will be frequently a net advantage to him of hundreds of dollars. With his larger income he can the sooner save a given amount for a home and with the lower price of land he need not save so much.

Professional economists sometimes fail to comprehend that any advantage is secured to the thrifty poor man anxious to earn enough to secure land for a farm, home or business, by the greater cheapness of land induced by the tax. What such economists say is that the lower salable value of the land induced by the tax is offset by the higher tax on it so that whatever the buyer gains on the one hand he loses on the other. So common is this objection among trained economists that it is hard for one to realize its utter superficiality. Even if the lower price of land is entirely offset by the higher tax on the land, we must not forget that this higher tax on the land displaces a tax on improvements. Not to have the tax on the improvements is, then, an absolute net gain to the buyer and improver of land whether he wants it for a home or for some other purpose. No one can deny it who admits that land value is determined by the capitalization of net rent and who follows his arithmetic. He may feel this result of a land- value tax to be lamentable but he can scarcely deny that it is a result.

Two further points are to be noted. We have temporarily put out of account the possible higher, because untaxed, net interest on capital in the territories taxing only land values, as a result of which the salable value of land, being capitalized at a higher rate, might fall in greater proportion than its net rent. For the moment we have also ignored the possible effect of such a high land- value tax in discouraging land speculation, increasing competition to get land used, and so lowering both the net rent of land and the salable value which depends on it. Can it possibly be claimed that the lower price of land, which is caused by the tax subtraction from its rent, by the further possible diminution of its rent because of discouraged land speculation and by the capitalization of this remaining rent at a higher interest rate and, along with all this, the removal of all taxes on improvements, does no more for the thrifty poor man who finally saves enough to buy a home than to balance the increased tax on the bare land and so leave him no better off?

If the arithmetic of the above argument is correct, it would seem that no tax on incomes, specific commodities or sales can possibly make the conditions of life so favorable for a poor man who is nevertheless thrifty and desirous of some day being an owner of land, as a tax on bare-land values. Few, if any, of these other taxes would completely avoid burdening him either directly or indirectly, and none of them would have all of the desirable consequences for him which land-value taxation would have.

Furthermore, the system of land-value taxation would make easier the economic rehabilitation of those whom bankruptcy has reduced to financial ruin or whose children, because of the business reverses suffered by their parents, must again start at the bottom of the business ladder.

It must be said, however, that the smaller the area in which land-value taxation is applied, the more ephemeral are its special benefits to the people of that area. Thus, if it should be applied in but a single city or county, any resulting benefits to the majority of the population (of such city or county) would too soon be largely neutralized by the inflow of population from the less- favored places outside and by the resulting increased competition for jobs and for land. It would perhaps indicate undue optimism to expect that notable apparent consequences would follow the gradual adoption of such a land- value-tax system here and there in cities or other local governing units.

Nevertheless, even some who are a bit doubtful of the merits of such a tax system might without inconsistency urge its adoption in a few places by way of experiment and in order that the growth and development of such places under its operation might be studied. Or, is the system demonstrably so terrible, on theoretical or a priori grounds, that we should strenuously resist its securing even a precarious foothold in our American life -- if it has not already done so in the "graded tax system" of Pittsburgh and Scranton, Pennsylvania!

The "Confiscation" or "Vested Rights" Argument

I am not going to offend either the conservative supporter of the status quo by asserting that the private owner's claim to economic rent may properly be confiscated entirely or the enthusiastic single taxer by contending that it stands on the same basis as every other property right. After all, as a practical proposition, large political bodies, like large physical masses, can be got under motion only slowly, and so no general change can be brought about except by degrees. Is it not, therefore, academic and futile to dispute at great length the question whether, as a matter of abstract ethics, society has a "right" suddenly to substitute for our present taxation system, a system appropriating practically all the rental value of land? That question may, of course, be debated. But I fear that the debating of it here would cloud the real and practical issue with passion and so be worse than useless. The real question is rather whether society has a right, by gradual steps, to change its tax policy in the indicated direction, if and when the majority is convinced that the public welfare would be thus furthered.

While the argument that increased taxation of land values would violate vested rights may be effective propaganda against such taxation, it is probable that many of those who use this argument are far from being, in other respects, consistent supporters of vested rights. Thus, to illustrate, a local gas company is started with a cost for plant construction of $5ooooo. A reasonable net return might be $35,000 or 7%. But through lack of regulation, the company is enabled for some years to charge rates making $105,000 net or 21%. On the basis of this rather large return the stock of the company is in great demand and sells for $300 a share or at the rate of $1,500,000 for the whole concern. If the rates are now brought down by regulation, the salable value of stock bought in good faith by innocent purchasers will be reduced to perhaps only 1/3 of what they paid for it. Will those who say that no increase of land-value taxation, however gradual, is permissible, though it greatly relieves capital and enterprise, also agree that, if innocent parties have in good faith purchased stock in an unregulated monopoly, then the public is forever morally estopped from regulation and must be willing to pay monopolistic rates for all future time? Who does not suspect, if he does not indeed know, that many sticklers for vested rights as against land-value taxation, are not only favorable to rate regulation in the circumstances above described, but even favor that economically unreasonable regulation which would make no allowance to the regulated companies, in this day of high prices and values, for the great depreciation of the dollar?

But let us turn our attention to the tariff. Suppose that, during a long period of Democratic control of Congress, the tariff is lowered and stays low and that, in consequence of the greater cheapness of certain raw materials a number of manufacturers build up an export trade of considerable proportions in products made of these materials. Then come Democratic defeat and revision of the tariff upwards. How many Republicans, conservative supporters of vested rights, would say that a moral obligation exists not to increase the tariff because of the injury which might follow to a business man in the described situation? Or, reversing our hypothesis as to parties, how many of Democratic persuasion, who favor tariff reduction, will admit that the long continuance of a high tariff, the fact that people have made their investments on the supposition of its continuance and the fact that to reduce it will lower the salable value of the property of people who have thus in- vested-how many will regard all this as conclusive against any tariff reduction, even a gradual one?

Whatever may be the reader's opinion about the desirability of prohibition, all of us must admit that its establishment lowered the salable value of the business property of some of the people. Surely it cannot be denied that here was an infringement of "vested rights." But the policy was adopted with fairly widespread support and with almost no reference to the bugaboo of "confiscation."

Those who favor regulation of monopoly prices, or who believe in tariff increases or decreases, or who were eager for prohibition, despite the effects of any or all of these changes in reducing the value of some people's property, and who oppose increased land-value taxation, will say of the last named: "Oh, that's different." And yet, is it utterly different? Do investors in all these other ventures invest at their peril and does the purchaser of land purchase it with the implied moral obligation on the part of society never to move, no matter how gradually, in the direction of relatively heavier taxes on land values? Might there be some excuse for a slightly different view, viz., that the purchasers of land have not bought it with any binding implied pledge on the part of society never to change its tax system, even by degrees, to the possible disadvantage of such purchasers, but merely with the practical certainty that no such change will, as things work themselves out in our political life, be made suddenly and without warning?[8]

Is Speculation in Vacant Land Desirable?

After having discussed the arithmetical aspects of land-value taxation, let us turn to a very few of the more important specific objections made to the proposal. I have discussed most of these at some length elsewhere[9] and do not believe that the entire matter need be repeated here, especially as some of the objections are so seldom presented and others are almost pitifully untrue or beside the point or insignificant. A few of the more important objections, however, ought by all means to be examined carefully.

One of the points sometimes made by opponents of land-value taxation may be termed an attack on a kind of outpost, though perhaps not an altogether unimportant one, of the land-value-taxation philosophy. In answer to the argument that an increased tax on land would discourage speculative holding of land out of use, it is often said that such speculative holding is desirable and ought not to be prevented. This answer does not seem to me a convincing one, yet it contains a very small admixture of truth. Holding a piece of land out of use during a few years will sometimes save it for a later and better use, obviating the expense of building and tearing down again a structure less suited to the long-run potentialities of the land.

Thus, suppose a land speculator held vacant a piece of land near the center of a rapidly growing town. Conceivably some one might otherwise build a house on this lot and, a very few years later, the circumstances might call for a twelve or fifteen-story office building on the site. Meanwhile the house might not have earned enough to justify its having been built. To tear it down in order to make room for the skyscraper would be an expense that might have been avoided. To leave it up until it is old and no longer serviceable would keep the land from a use in which it would be of more service.

Yet there is clearly a loss to the community from the holding of land out of use. More remote and poorer land has to be used instead. In a city the speculative holding of lots forces builders sooner into the suburbs. As a result, streets, sewers and gas mains have to be extended farther from the center of the city; telephone and electric light wires have to be stretched over longer distances; transportation problems become more difficult of solution; store delivery service is made more expensive, and the expense to individuals of riding or walking longer distances to and from their work is increased.

Losses such as these may actually be much greater where speculation is commonly thought of as not acute than where it is supposed to be rampant. The speculator in a rapidly growing town who soon sells out to users, even though at a high profit to himself, at least does not cause the incident waste, so far as his lots are concerned, to continue a very long time. But the owner of vacant lots in a slowly growing town who holds them for many years waiting for them to rise in price or, equally, to avoid selling at a loss, is to that extent responsible for the long continuance of waste and loss to others.

If, with all this economic loss to the community from the keeping of good and well-situated land out of use there may be also at times some avoidance of waste, the ideal method might be to penalize keeping the land out of use when such speculation causes a net waste and not to penalize such action when it avoids waste. But no legislature or administration could formulate any precise and satisfactory rule for determining when such balance of good exists.

Something might be gained if we could devise a system which would cause the gains and losses incident to land speculation to impinge on a single mind; and that, the mind of the person who has title to the land, is in a position to determine whether the land shall or shall not be yet used. If the gains from holding the land out of use until a later date accrue to a private speculator, whereas the economic losses therefrom fall on the community at large, then, even though these losses vastly exceed the gains, this fact will exert no slightest influence towards getting the land used and so terminating the losses.

But there is perhaps danger in assuming that the speculation in question is more intelligent than it really is. What about that large mass of owners of vacant lots who have property which they hold with a kind of vague hope that it may rise in price, who are unwilling to sell except at a price higher than available buyers will pay, no matter how great the economic waste to the community, and whose holding of the land certainly is no benefit, in the way of economy, to the community.

If, in general, vacant lots in cities were kept vacant until they could be used for banks, office buildings, and department stores, then the tearing down of less valuable structures would be avoided, although the waste of waiting through the years and having meanwhile to extend wires, delivery service, etc., longer distances might amount to a sum far exceeding the incident benefits. But what if the vacant lots are held vacant and builders of dwelling houses are driven farther out from the city's center, only that the lots may be sold after the lapse of 10 or 20 or 30 years to new residents who build there houses of the same general type as would have been built in the first place? All of us see lots remaining unused for years, even for decades, while new houses are built farther from the city's center, the unused lots, however, being developed, after more distant sections have been partly settled, for the building of houses similar to those farther out. We know that, after years have passed, the more centrally located areas finally come to have very few vacant lots, so that when the need for putting skyscrapers upon them does arise the ground is encumbered by buildings which must be torn down. It would be rash to assert, on the basis of the evidence, that land speculation, with the speculator comparatively untaxed and a loss from his holding the land idle falling heavily on others, actually benefits the community or that it does not, on the average, cause a real and definite loss.

Economists sometimes present a theoretical argument intended to show that land speculation is really very little practiced. This argument runs to the effect that speculative holding of land is not on the whole profitable, and that people will not therefore engage in the practice. It is supposed that the landowner, even if he hopes for a rise in the value of his land, will not refuse to make use of this land or allow others to do so for a price, while he is waiting for the rise in value to come. He will, it is supposed, allow his land to be used because to do so is more profitable than not to do so.

The trouble is that much land which, if improved, would be well worth using, cannot be advantageously used unless it is improved. But who is to do the improving. It must be the speculating owners themselves, or tenants who are users of the land, or other owners who acquire it by purchase. Let us see, by considering each class of persons, why land may be held out of use although such holding is less profitable than use would be.

Among those who hold land out of use for a rise are some who have not the means to improve it, unless they sell part to raise the means for improving the rest, and this, if they anticipate a rise, they will not desire to do. Others among such owners expect, although doubtless often mistakenly, such rapid increase in the value of land, that they would rather purchase more of it than to improve what they have, hoping to make a higher return than by improving. Still others have not the energy or confidence to go ahead with improvements.

To say that people will not hold land out of use speculatively because such holding does not pay on the average, is just as reasonable as it would be to say that people will not engage in lotteries or in wagering money on roulette wheels because in the long run such gambling does not pay. Whatever the advantages, in economic reasoning, of positing an "economic man," it is unsafe to base conclusions on the supposition that every person is such an "economic man." Everyone who is not inwardly determined to believe the contrary knows that land speculation is practiced and practiced on a considerable scale.

What about the possibility of the speculatively-held land being improved by potential tenants with the owners' consent? Here the trouble lies in the fact that tenants cannot afford to make improvements except as they can secure long leases or other satisfactory guarantees against losing to the owners most of the benefits of the improvements. Moreover, speculating owners, who desire the privilege of selling their land without restricting encumbrances when a good chance comes, will not ordinarily consent to such long leases.

Construction by non-owners of the speculatively-held lots, who must buy them before improving them, may be further prevented by exaggerated notions of the speculative owners regarding their value. Speculative anticipations of owners who will not themselves improve their land, may cause them to refuse to sell except at prices so high as to make purchase by persons who would improve the land seem, for a long time, not worth while.

If owners of vacant land do not have the losses of the community from land speculation brought home to them as personal losses, if they are induced to hold land vacant because of exaggerated hopes, and if improvement by themselves, by potential tenants or by possible new owners is thus prevented, may it not be desirable to penalize the holding of land out of use to a greater extent than it is now penalized, to the end that a saner balance be established between used and unused land?

However, it may be noted that a per- son who believes speculative holding of land to be socially desirable, may still consistently support very heavy taxation of land values. But he would need to urge that only used land be taxed. Or, if he believed land speculation to be, on the whole, socially advantageous, but believed also that it is carried too far at times and should be somewhat discouraged, he might at the same time uphold very heavy taxation on rent actually received and lower taxation on the potential rent of valuable land held out of use.

Is the Principle of Taxation According to Ability Valid?

The idea back of the ability principle seems to be that the relative sums taken from rich and poor should be such as to impose "equal sacrifice" upon them, per individual. If it takes $1,000 to live, a person with an income of $100,000 has as much ability to pay $99,000 as a person with an income of $1001 has to pay $1. But this is not what ability theorists seem to have in mind. Their idea apparently is that a tax of $10,000, for example, from the richer person may, in the average of cases, mean as much "sacrifice" to him as does a contribution of $1 from his poorer fellow citizen. Then these theorists would wish, in case the latter citizen were taxed l/10 of 1% on his annual income, to tax the former l0%.

One may well inquire where a logical defense is to be found for this principle. Surely it does not lie in the idea of maximizing utility? To do this would involve carrying the tax discrimination against the rich very much further. Suppose we have already taxed the richer man $10,000, and still more funds are needed for governmental purposes. Clearly it will cause less sacrifice, less loss of utility, to take the 10,001st dollar from the same individual than to take a dollar from the other. So with every additional dollar (assuming the individuals to be similar in their needs and wants, as they would tend to be except for differences in habituation and utterly incalculable differences in inborn traits) up to the point where the remaining incomes are equal. In short, it is a fair question whether one who favors the "ability theory" of taxation on the ground that it involves less sacrifice or burden than some other system can logically stop with the proposal to establish equal sacrifice. Must he not insist on a basis of least sacrifice? Must he not also, if his theory of public policy is so based on maximizing utilities and minimizing disutilities, necessarily end by supporting the whole theory of communism? Logically, and in all consistency, where else can he end?

But, of course, he will not want to end there and he will demur to the contention that he must. In the long run, he may say, such a communistic system, whether applied in general or applied only to taxation, would so penalize efficiency and thrift as to reduce the productiveness of industry and decrease the total of goods which all may enjoy. To maximize utility for the time being would not, therefore, he may say, maximize utility in the long run and would not be desirable public policy.

Probably so. In other words further effects are to be considered besides the possible temporary maximizing of utility. But on what basis is it to be argued, then, that we are to levy taxes in such a way as to impose equal (as distinct from least) sacrifice? Is the advocacy of such a policy the result of a secretly felt agreement with the communistic ideal, coupled with a sense of horror at the notion of the consummation of communism? Such a complex of feelings might result in the advocacy of a certain amount of communism in our tax system yet not enough of it to change very greatly the general nature of our economic institutions.

Let it be understood that I am not attempting here to take an extreme or dogmatic position. I am not asserting either that the comparative utility at the margin of the incomes of different persons or classes should or should not have any bearing on the relative amounts of their taxes. But I am contending that there is no single principle on which the so-called "ability theory" can be defended except a principle which, if it is to be followed, must in all consistency carry us to communism. And if it be said that this principle is not the only one to be considered but that other principles are of great importance to justice and wisdom in taxation, then the question immediately arises whether these other relevant principles may not support a system of taxation which is not at all in proportion to ability.

There are at least two classes of persons who cannot with logic and consistency support taxation according to "ability" in preference to taxation of the rental value of land, although many of both classes actually do so. First, there are those who favor taxation on the basis of "ability" because they sympathize with the masses and desire that the "common man" shall have the best possible chance for attaining high net current income and a modicum of property. As hinted earlier in this article, a tax on the rental value of land is not only really less burdensome to the masses than present taxes but even than a highly progressive tax on incomes in general or on all property. A tax on the rental value of land is certainly not shifted to laborers in the form of reduced wages. The person who, though poor, is hard- working and thrifty, seeking thus to rise economically above the ranks of those who are merely workers by becoming an owner of property, finds that he can secure a larger interest (because it is untaxed) on his savings. Furthermore, the land will cost him enough less under the land-value tax system fully to make up or more than make up for the tax on it. Whether or not there are classes that would bear an extra burden from a land-value tax, which may properly discredit it as a revenue raising device, is not the present question. The question here is whether those persons who profess adherence to the so-called ability theory of taxation because they want to make conditions the best possible for the masses and who prefer such taxation to land-value taxation for that reason, do not simply lack understanding of the nature of the consequences to which land-value taxation leads.

The other class of opponents of land- value taxation whose position is an illogical and inconsistent one is that class which professes itself opposed to communism -- shall we say to Bolshevism? -- and which thinks itself further away from such "isms" in supporting progressive taxation of all incomes than in supporting heavier taxes on land values. I am not here arguing that taxation based on the idea of maximizing utility is "wrong" or even that communism or "Bolshevism" is necessarily and inevitably "wrong" but merely that such taxation bears fundamentally a closer resemblance to communism than does heavier taxation of community-produced land values.

For land-value taxation takes for public purposes only what is almost altogether community-produced value, and, so far as it is concerned (i. e., unless or in so far as it is supplemented by other taxes), the more efficient laborer, professional man or executive receives higher income than the less efficient one by the entire amount of his superior efficiency with no tax subtraction. Any tax on his land value does not take more from him by virtue of his superior efficiency but only by virtue of a superior location which is made superior almost solely by the community rather than by himself. Likewise the thrifty person, who is trying to accumulate a competence and who is thus responsible for adding to the capital equipment of society, is allowed to receive all the benefit of his thrift in the form of return or interest on the capital saved and with no tax deduction. In short, land-value taxation, whatever may be its evils, distinctly does not attempt to reduce the efficient to the level of the inefficient or the thrifty to the level of the thriftless, while taxation according to so-called ability does, in at least some degree, exactly that.

d Bare-Land-Value Taxation Burden the Farmers?

The idea that removing taxes from improvements and concentrating them on the economic rent of the bare land would be an especial burden upon owners of farms as compared with owners of land in cities seems to be widespread. I am strongly of the opinion that this idea is entirely incorrect. Indeed, I rather suspect it may be the opposite of the truth. Certainly there can be no doubt that a good many farmers are now paying annually in taxes much more than the economic rent of their bare land and that if the maximum tax they were asked to pay should become even l00% of their economic rent, their taxes would be greatly reduced below what they now pay.

I believe that the important requirement here is for us to get clearly in mind just what economic rent is. It is the amount which a person could afford to pay, and which the competition of others would force him to pay, for the use of a given piece of land, in excess of what he would pay for the use of its improvements. Or, it is what the land yields to the person who owns and works it, in excess of return on improvements and return on the efficiency of his work. It is something which he derives from the bare land, as such, and its situation. It is not the extra sum which an efficient manager gets above what an inefficient one would get. That is return for efficient management, i. e., pay for a particular kind of labor. Economic rent is a surplus over this due to the land. Furthermore, the fertility of agricultural land is constantly being exhausted and having to be restored. Constant care in crop rotation, treatment with manure or artificial fertilizer, and sometimes treatment with lime, are essential to its continued productiveness. Fertility then is to be reckoned, in large part, as capital.[10]

But the tax on bare-land value is supposed and intended, by its adherents, not to be a tax on improvements. The present system is indicted because it fines a man for building or for painting a house or for planting an orchard. It would clearly not be consistent for those who oppose our present tax system and who would substitute a tax on bare-land values, to desire to tax that part of a farm's fertility value which is restored or even maintained by the farmer's effort and investment. Logically, then, the taxes on the economic rent of land would have to be so levied that the farmer who improved or who merely maintained the fertility value of his land would be asked to pay no higher tax than the farmer who, with an equally good situation, allowed the fertility of his farm to run down.

But surely those persons are really inconsistent who, in the same breath, contend that farmers in general cannot now get any reasonable return for their effort and also that land-value taxation would burden them. As we have seen, a tax on economic rent, as such, takes only from the surplus above wages and managerial productiveness and above interest on worth-while improvements. If it takes more it is not a mere tax on rent, but something else. Now to say that such a tax on the rental value of a farmer's land would be a heavy burden is to say that the farmer does receive a considerable surplus above remuneration for his effort and above interest on all his improvements including fertility.

If farmers in general are now doing so poorly as is commonly stated by their spokesmen, then most of them must be receiving either no economic rent at all or, at best, very little. If so, a tax only on economic rent would be either no tax at all upon them or a very light tax. It hardly seems likely that in most cases such a bare-land-rent tax could be as burdensome as the tax now levied on the assessed value of the entire property. It is evident that the taxes now being paid by a great many farmers much exceed their entire economic rent.

At any rate, attempts which have been made in economic literature to show that the "single tax" would burden the farmer but which have been based on the supposition that all fertility value -- and sometimes even the value of established fruit orchards -- is to be classed as land value, certainly are of little evidential significance.

In passing, the reader might be asked to recall the fact emphasized in a previous section, that to tax bare-land values operates to make the sale price of land low and to make easier the road from tenancy to ownership.


And now, for those who, though they may be doubtful of the virtues of the land taxation policy with tax exemption of all improvements, yet do not regard any slightest step in that direction as mortal sin, I venture one parting suggestion. There might be some advantage in allowing such a system to get a fair foothold in the United States, as a matter of experiment. If a dozen or score of cities of consequence were to move by degrees in that direction, the result would hardly be calamitous. (No economic earthquake has destroyed Pittshurgh!) And we might so have a chance, by watching their growth and development, to determine whether we wished to extend the system further.

Some would willingly, if they could, apply the system everywhere without waiting for such a trial, being confident from general reasoning and from apparently satisfactory results in Australia and elsewhere that only good could come. Others would not consent, under any circumstances, to even a brief and narrowly localized trial in the United States of a system they think so wholly bad. Is there, also, a third group, of which, perchance, the reader is one, who are not quite certain either way, but who are willing to support a trial of the scheme, here and there, as a bit of worth-while adventurous exploration? To leave bare-land value untaxed makes land prices high. Home and farm ownership are therefore difficult save through the assumption of heavy mortgage indebtedness which, in every period of unemployment in the cities or of price recession of farm products, leads to bankruptcies, foreclosures and distress.


  1. The reader who is interested in a consideration of these qualifications will find them in Harry Gunnison Brown, The Economics of Taxation, (New York: Henry Holt & Co., 1924), pp. 2I9-232.
  2. For analysis and criticism of possible objections, see Harry Gunnison Brown, Economic Science and the Common Welfare, (Columbia, Mo.: Lucas Bros., 1926, 3rd ed. pt. II, Ch. IV, secs. 5, 6 and 9.
  3. op. cit., supra n. I, pp. 219-232.
  4. Here, as elsewhere, some little qualification may be desirable. Many buyers and sellers of lots probably make no calculations regarding probable actual yields. They sell for what they can get or buy for a price that corresponds to what others seem to be paying. They may buy solely for speculation intending to sell to others for as much as they can persuade the latter to give. But would-be purchasers of land who themselves wish to use it productively can scarcely afford not to calculate the probable future advantage or yield of the sites they would purchase. And would-be sellers who are themselves capable of using the land they would sell are unwise unless they too make such calculations. Even the would-be buyers and sellers who do not themselves so calculate are bound to be affected, at least indirectly, by the estimates of those who do. Thus we get back, inevitably, to our original basis for the valuation of land, viz., its expected future net yield and the current rate of interest.
  5. Except as, possibly, kept down by inflow of funds from the area where capital is taxed. See the next paragraph but one.
  6. 0f course it will be said, and with some justice, that the flow of investment is likely to make impossible the continuance of such a difference in rates of return on improvement. Such an objection, however, if made, would be at the same time a significant admission. It would be an admission that the territories which tax bare land more and improvements not at all are more desirable or profitable places for investment than the territory which continues to tax all property alike.
  7. Clearly, we must guard against the danger of exaggeration. Even though net returns on all new investments were raised by 2% in the coast states, while remaining the same in the valley states, this might not at once greatly affect the flow of investment. Only as education of investors proceeded to the point where they really comprehended the effects of the policy, or at least became cognizant of the difference in net per cent. return, would they be influenced. But it is truly difficult to avoid the conclusion that sooner or later such a flow of investment funds must occur.
  8. I once heard, in conversation with an agricultural economist of some reputation, an interesting comment on the proposition that the tax on land values might be increased gradually. The comment was to the effect that to increase the tax by degrees was like cutting off a dog's tail by degrees. Of course, any real thought at once reveals the fact that the analogy is false. To cut off a dog's tail in sections multiplies the animal's pain according to the number of times it is done, whereas to raise a tax on bare land by degrees very greatly reduces the loss to the landowner, even assuming that the removal of taxes on improvements does not really offset or more than offset his loss in regard to the land. For the salable value of the land is arrived at, as we have already seen, by capitalizing its prospective rent, and, in this process of capitalizing, the rent of the more remote future years is of negligible arithmetic significance. So a gradually rising tax which slightly diminishes net rents of the first few years and diminishes greatly only the rents of the remote future, lowers the present salable value of the taxed land and its salable value for the first few years by a comparatively small amount; whereas an immediate increase of the tax to the maximum lowers the present salable value of the land by a great deal. All this is not to deny, of course, that whatever advantages land-value taxation might bring are also delayed in their arrival by the attempt to postpone, for the benefit of present landowners, any rapid fall in land values. (It should not be necessary to elaborate on the arithmetic of this. It is simple enough to be understood by anyone who knows the process of finding the present value of a series of future incomes.)
  9. See Harry Gunnison Brown, Economic Science and the Common Welfare, 3rd edition, (Columbia, Mo. Lucas Bros., 1926), Part II, Ch. VI and Taxation of Unearned Incomes, 2nd edition (Lucas Bros., 1925), and various articles in the Journal of Political Economy in 1925-1928.
  10. For a more precise theoretical formulation of the line of distinction, see Harry Gunnison Brown, Economic Science and the Common Welfare, Part II, footnote beginning on page 253.