Land Owners Pay No Taxes

John Harrington

[Reprinted from Land and Freedom, January-February 1939]

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 commercial value.

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 following items:

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?