Land Owners Pay No Taxes
[Reprinted from Land and Freedom,
Notwithstanding the lusty and painful wailings of land owners against
high and oppressive taxes, I think it can be shown that they pay no
taxes. It may require some brief explanation of elementary economics
to make this clear to the casual reader.
About 125 years ago David Ricardo, an Englishman, formulated the law
of rent named after him. Being a natural law, it had always existed,
but had not received much attention. It may be stated as follows: "Rent
is the excess product or value of any land over that of the poorest
land in common use."
The poorest grade of land in common use is that from which the user,
with the usual application of labor and capital, can produce a minimum
acceptable living, and nothing more. He cannot pay rent nor taxes.
Less productive land is "submarginal," and will not be used.
Whether land is supermarginal, marginal or submarginal depends upon
quality or content, and location.
Let us suppose a farmer on marginal land, applying the usual amount
of labor and capital, can produce 25 bushels of corn per acre, or its
equivalent in other products, and that his products will supply a
common living for himself and family, and no more; it is plain that he
cannot pay rent. Without rent such land has no commercial value. It
may have speculative or future value, which we are not considering.
If another farmer on a better grade of land, with the same
application of labor and capital, can produce 50 bushels of corn per
acre, or its equivalent in other products, there is an excess of 25
bushels. This excess is "rent," or "ground- rent."
It is a free gift of nature. It has cost nothing. It is sometimes
called the "unearned increment." It goes to the land owner
without any compensating return by him. It is this that gives land
Now suppose a careful business man has money to invest, and desires a
safe and certain income from it. After canvassing the market with care
he finds a tract of land for sale occupied by tenants, who pay rentals
of $1,500 a year. It can be purchased for $20,000. On inquiry he finds
the taxes, 2 per cent, are $400 a year. There are other trifling
expenses about highways and enclosures and collecting rent. It will
pay 5 per cent or a little better on his investment. And he invests.
Is it not clear in this case that the gift of nature, ground-rent,
has paid the tax, and without cost to the new owner? Is it equally
clear that this is an average case? I think it is. For we must use the
word "average" in applying the natural laws of economics to
our millions of citizens and our millions of acres, each different
from the others. Our measuring rod may not fit the individual case
with accuracy; some will buy or sell a little above the economic line;
but an equal number will buy or sell a little below.
The purchaser of lands, consciously or unconsciously, claims a rebate
or discount of ground-rent value sufficient to cover taxes and other
common charges, so as to secure the net income he expects, usually not
less than the current interest rate. Is it not a fact that he must do
so or suffer a loss? The owners of land desiring to sell recognize
this as a natural law. They may demand what they think they should
receive; but purchasers finally fix the price. Buyer or seller may be
unconscious of a discount of ground-rent value to cover taxes; but it
is there. The owner pays no tax: nature's gift, the excess
ground-rent, pays it, and on the average pays the owner his expected
return. The purchase of land is not the cause of ground-rent, but net
ground-rent is the incentive to purchase. Marginal land is not
purchased for use, but for speculation, if at all.
The land owner pays no tax. He is not a producer. He adds nothing to
the wealth or well-being of society. In spending his ground-rent he is
only a consumer of goods produced by others. If he makes a gift of his
income he only transfers it to other consumers. To tenants all land is
marginal, for the landowner takes all above the margin, leaving the
tenant only wages and interest.
But a building and its taxes are in a very different economic
category. A building is capital, a product of human labor, as any
student can explain. It produces no economic rent, no gift of nature.
While land is subject, for value, only to demand, supply being
constant and without original cost; buildings are subject to the law
of supply and demand. Their value is primarily based on cost of
production, varied by many circumstances. They are produced only in
answer to demand.
If our careful business man should decide to invest his $20,000 by
erecting a business building in a suitable location, his tenants must
earn their living, and interest on their capital. Then out of their
occupations they must pay annual "rent" to cover the
Taxes on the building at 2 per cent, $400; repairs, 1 per cent, $200;
insurance, $50; heating, $300; light and water, $150; janitor service,
$300; owner's time, vacancies, etc., $200: risk and interest on
investment, 7 per cent, $1,400; obsolescence, 2 l / 2 per cent, $500;
total, $3,500. The above is only a crude estimate.
These costs, unlike ground-rent, must be added to cost of goods and
services sold by the tenants. There is no gift of nature here, no
excess unearned income. But the investor is a benefactor, adding to
the assets and the convenience of the community. Should he be taxed,
and the investor in a gift of nature go free of taxes?