Arguments Against Land Value Taxation
George S. Gerber
[Excerpted from a report, A Two-Rate Real
Property Tax System, prepared by the Temporary State Commission on
The Real Property Tax, April, 1986]
The arguments in Support of land value taxation are numerous and
appealing. Nevertheless, uncertainties regarding the merits of this
form of taxation have been expressed.
A. Economic Arguments Against Land Value Taxation
- Most Economists Have Expressed Opposition to Land Value
Taxation. Although a significant number of economists are in
favor of land value taxation, the majority of economists have
expressed negative, mixed, non-committal, or tentative opinions to
the use of land as a tax base, especially in the total manner
advocated by Henry George. The space limitations of this report
prevent presentation of their individual views.
a. Those Opposed to the Theory
J.B. Clark in Distribution of Wealth (1899) disputes the
Georgist classical division of economic inputs into the categories
of land, labor and capital. Clark eliminates land as a category on
the basis that all input factors alike have marginal products, so
the laws of production are symmetrical. Therefore, "rent"
is not set apart as a "residual" due to "differential"
fertility, location, and other qualities. Since land is productive
too, land rent is not "surplus" but, rather payment for
a productive input. Such payment is a real and legitimate social
cost, i.e., the opportunity cost of taking land from the best
alternative use. Philip Wicksteed parallels Clark by postulating
that all resources are fixed. Supply merely reflects a demand for
those already possessing resources. Laws of distribution are
symmetrical and rent is erased. There is no surplus because land
is a variable," i.e., any individual can have as much land as
he wishes, if he can pay the price.
Vilfredo Pareto (1897) conceptualizes "transfer rent"
as a surplus above opportunity cost, which any factor may earn as
well as land. This is at variance with George's classical concept
that human effort constitutes a sacrifice of leisure, comfort and
safety, while land is a gift of nature.
Alvin Johnson (1902) further develops the "transfer rent"
concept, arguing that land is mobile economically among competing
uses and therefore yields no more "transfer rent" than
other factors.
Alfred Marshall, Joan Robinson and Hubert Henderson distinguish
social viewpoint from that of the individual and social
distribution theory from exchange theory. Robinson, for example,
argues that from the point of view of society, land is provided
free and the whole rent is a surplus and none of it is a social
cost.
On the other hand, Frank Knight and George Stigler (1947) combine
the individual and social viewpoints in arguing that a cost to one
is a cost to all. Opportunity cost is social costs and there is no
basis from distinguishing land from capital. Land is merely
investment like any other and competition keeps the returns down
to market level.
Milton Friedman following the concepts of Knight and Pareto,
imputes rents to everything and everyone. Frank A. Fetter likewise
criticizes Ricardian rent, denying any distinction between land
and capital in the vein of Clark.
b. Those Opposed on the Grounds of Applied Economics
Real estate economists, such as R. T. Ely, merge land with
capital on practical business grounds. Richard Ratcliff (1950)
argues that net income can not be split between land and capital.
Henry C. Carey (1840) theorizes that land speculators make no
more on their investment than other investors and hence there was
no surplus. This concept is repeated by Shannon and Bodfish
(1929), who indicate that since land speculation returns were no
more than returns on other investments during the 1920's, no
differential tax was justified. Economic surplus should be
redefined from economic rent to the income received from buying
and selling rents capitalized into land titles. Thus rent, rather
than being only a surplus over opportunity costs, is actually a
surplus over a normal return on the historical purchase price of
the land, whereas for Ricardo and George land value was the whole
surplus above zero. Since land is supplied by nature, they viewed
social issues from a social viewpoint.
Willford King (1921,24) writes that capital itself yields no
profit from its costs were it not for the rise in land values,
i.e., the speculative increase on land yields a return to capital.
Frank Knight (1953) develops J. B. Clark's doctrine of vested
interest acquired by innocent purchasers of land at advanced
prices, a doctrine shared by Francis A. Walker, J. S. Mill and
others to the effect that regardless of the origins of rent, since
society has underwritten the purchase contract it would destroy
confidence in contracts to do otherwise. Thus, land is a moral
equivalent of man made capital.
c. Those Opposed on Collectivist Grounds
Karl Marx (1867) merges land rent with capital and its "mode
of production". Marx subordinates land to capital, which
seizes all surpluses however generated, even though the supply is
elastic.
Charles Spahr (1891) sees land value produced not by all men, but
by certain groups collectively. All wealth is private, both land
and capital.
d. Those Arguing an Inelastic Supply of Capital
T. S. Adams (1916), H. J. Davenport (1917) and E. R. A. Seligman
(1916) argues that if taxes borne by capital lower the after
return on capital, they divert investment into land until prices
rise, equalizing the return on all investments. Thus, the new
owner may buy clear of land taxes, but he is indirectly taxed by
taxes on capital which lower the capitalization rate and raise the
price of land. An old tax is a good tax, because the market
adjusts to it and that a change has to injure someone.
Jens Jensen (1931), assumes that the supply of capital is fixed,
believing that a property tax on producer's goods must therefore
rest on the owners of capital in general. Ragnar Frisch (1939) ,
attacked the concept of taxing land to meet the deficits of
marginalist pricing with decreasing costs.
Jacob Stockfisch (1956,57) and Earl Rolph (1954) follow the
doctrine of Adams, Spahr and Seligman in rationalizing the
taxation of capital. Mason Gaffney (1971) argues that the property
tax is a progressive one on fixed capital, which in most respects
is superior to land as a tax base.
e. Those Claiming Social Functions of Land
Speculation
Richard T. Ely advances the theory of "ripening costs"
to explain the function of land speculation. Holding land idle
until a rise in value performs a social service, i.e., preventing
land from premature under-improvement, while it ripens into a
higher use. The holding cost -- the unrealized latent rents -- is
the cost of ripening. Land taxes would force premature use at less
than optimal intensity. He further denies that land supply is "fixed".
Higher price, he argues, creates more man made supply. He believes
that capital improvements, land use conversions, migrations,
discoveries and substitutions of capital for land actually
increase land supply.
Donald Shoup (1970), Peter Mieszkowski (1970) Roger Smith (1979)
and Louis Rose (1971) follow Ely's premises by suggesting that
land taxes motivate premature conversion. John Krutilla applies
Ely's doctrine to preemption of scenic resources, whereas Orris
Herfindhal (1974) sees mineral rents as a return of discovery
costs. J. B. Clark (1899), H. P. Davenport (1917) and B. H.
Hibbard (1930) argue that land taxation inhibits "rent-seeking"
behavior in the form of development of frontiers that were
otherwise sub-marginal. Alvin S. Johnson (1914) finds the same
effect in cities, i.e., unearned increments, lead men to build in
anticipation of future demands. H. J. Davenport believed that land
taxes would encourage mining, looting and abandonment of erosive
soils.
F. Y. Edgeworth (1906) writes that land taxes would restrict
building profits to the extent that it would deter building and
would hamper raising money on security of the premises.
f. Those Viewing Land Taxation as an Incentive to
Overcrowding Central Cities
Alfred Marshall and Leonard Darwin (1907) see land taxation as
resulting in overcrowding of central cities. Edwin Cannan (1907)
defends taxing buildings on the grounds that they increase local
public costs in proportion to building value. Buildings receive
more services in large cities than small. Untaxing them would
subsidize congestion in central cities, thus, destroying them.
Fiscal sharing more than physical congestion concerns Colin Clark
who suggests the necessity of pooling tax revenues at higher
levels of government, rather than taxing purely at a local level.
g. Those Questioning the Adequacy of Land as a Tax
Base
Charles Spahr (1891) and later E. R. A. Seligman (1895) write
that marginal communities have little land value and hence no land
value tax base. This was based on the belief that taxes on capital
are borne by capital. If local capital taxes come instead of land
rents, then a direct tax on land is simply a more efficient way of
tapping the taxable surplus, which cannot exceed rent anyway.
Other economists likewise question land's adequacy as a tax base.
Ernest Kurnow (1959, 1960 and 1961), Mason Gaffney (1970) Jens
Jensen (1931), John A. Zangerle (1927) all point out that land
taxes are capitalized, that the value of capital has to remain at
cost of production and, therefore, capital is able to yield
enormous revenue as compared with land.
h. Those Opposed on the Ground it is a Scheme for
Wider Distribution of Landownership
Alvin S. Johnson (1914), preceded by Charles Spahr (1891) and E.
R. A. Seligman (1895), see the land value tax as a device for
despoiling the middle and lower classes because they own most of
urban and farm land. Later economic critics argue similarly that
any property tax, including land value tax, is regressive.
- Land Value Taxation Could Alter the Market Allocation of
Land and Construction Resources Away from the Competitive "Ideal".
The argument that a shift from the present real property tax to
land value taxation could distort the real estate market is
predicated upon the fact that a land value tax is not an ad
valorem or proportional tax on the entire real estate asset. A
land value tax constitutes a higher percentage of the value of
land-intensive real estate as compared with real estate with above
average improvements to land ratios. The essence of the arguments
in favor of land value taxation is that real property taxes would
not be increased by more capital-intensive development of sites,
since land value alone rather than the land and buildings together
forms the base of the tax. It follows that land value taxation
would discourage land-intensive urban uses such as parking lots,
low rise buildings, obsolete structures and the like. Conversely,
it would tend to encourage capital-intensive uses such as high
rise structures and newer buildings.
a. Neutrality of the Present Real Property Tax
Unlike a land value tax, the present real property tax is an ad
valorem tax on the entire real estate asset. Apart from the
distortions that occur due to faulty assessment procedures, which
could occur under land value taxation as well, the tax burden is
proportional to the value of the asset taxed. A proportional tax
is neutral with respect to investment decisions, since taxes are
the same percentage of value of the asset regardless of what is
done with it. Thus, in the case of real estate, the amount of
property taxes varies as a constant proportion of value depending
upon on how expensive and well maintained the improvement is.
Conversely, a land value tax would not be proportional and would
decrease as a percentage of property value and income as the
parcel is more extensively improved. Hence, theoretically, there
would be a stimulus to the development of more capital-intensive
uses.
However, the argument that an ad valorem tax is neutral with
regard to real estate investment applies only to the alternatives
within the general area of real estate investment. It does not
mean that real property taxes have no allocative effects on
investment alternatives when considering all possible uses of
investment funds. Any such specialized tax, can be expected to
reduce the taxable asset's relative share of total investible
funds. However, given the assumption that a fixed sum of money is
to be raised through some type of real property tax, a
proportional tax levied at equal rates of a total asset value on
every parcel of private real property is neutral in its effect
upon investment decisions as among various alternative types of
real estate investments. That is, no matter how a person chooses
to develop his property, real property taxes would always
represent the same percentage of the resulting real estate asset
value. Thus, he cannot reduce his relative tax burden by choosing
certain types of uses over others.
b. An Ad Valorem Land Tax Is Not Neutral
It is argued that a land value tax is a proportional ad valorem
tax on land and thus neutral as to its effect on land uses.
However, the real estate investment decision is one of land
development. This is true even if a person is investing in vacant
land. Land can only be productive if used and its current and
potential productivity are determined by improvements that are, or
will be made upon it. Thus, real estate investment decisions are
decisions with regard to land development, its nature, and its
timing. Viewed thusly, land ownership is only part of the entire
process. This is particularly true in American real estate
practice where landowner, developer and owner of the improvement
are frequently the same person.
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