Reducing Tax Obstacles
to Economic Progress
C. Lowell Harriss
[An address before the Congress of Political
Sydney, Australia, January, 1994. Reprinted from the
American Journal of Economics and Sociology, Vol.53, No.3
I -- The Vision of Henry George
NO TAX ON LABOR. No tax on man-made capital. Government to be
financed from the fruits of land--land, the product of nature, not of
human effort or thrift! Land which will continue to serve no matter
how much of the production attributable to it is taken by government.
Such was the vision of Henry George (1839-1897). A century ago his
proposals had wide public support -- The Single Tax on land "and
the abolition of all taxes upon industry and the products of industry"
(George, The Standard, Aug. 3, 1889). Let me repeat: No tax on labor
or man-made capital.
At that time a tax on pure land rents (in the classical economic
sense) might well have paid for all of American government. (I assume
some way around Constitutional restrictions.) The national government
and the states did very little by present standards. Government was
Looking at the figures, one must be cautious if only because of
changes in the purchasing power of the dollar (inflation). Yet a few
numbers may be helpful. We have the findings of the first Census of
Governments (1902, not long after George's active life). They cover
all three levels of government -- local, state, and national. The
Census found that taxes for all units of government combined were
$1,373,000,000 in 1902. Property taxes were $706,000,000, over half of
the total. A near doubling of the property tax (to pay for total
spending) with all revenue coming from land while removing all taxes
on buildings and personal property would have involved considerable
shifts away from man-made capital and onto land. But such a change --
to a Single Tax -- would, I believe, have been economically possible.
(The two largest non-property taxes were $243,000,000 from the tariff
and $187,000,000 from taxes on alcoholic beverages.) Per capita taxes
for all levels of government were about $18.60. Total taxes were
slightly less than seven percent of personal income.
Such figures help us to understand that Henry George was not the
impractical dreamer sometimes apparently assumed by persons who
dismiss his views as too unrealistic to deserve respectful attention.
Government services were chiefly local, paid for almost entirely by
property taxes. A portion came from land. Enough more might have come
from the land portion to permit a relatively large drop in, even the
elimination of, property tax on man-made capital. Our choices today do
not include a single tax to replace taxes on labor and capital.
However, our choices do include the opportunity to reduce burdens on
man-made instruments of production -- factories, houses, utility
plants, computers, transportation facilities, commercial buildings,
business inventories, and so on.
II -- Total Land Values in the United States
HOW FAR COULD LAND VALUE TAXES GO toward reducing today the burdens
on industry, on production, and on persons as consumers?
Significantly, but far from completely!
For the purposes of this paper I shall exclude oil and other
minerals. The principles involved would call for inclusion of the
natural resource value of minerals extracted. It would be appropriate
to include the value of air rights as an element of location to the
extent not included in land values. Land values depend on current and
prospective benefits--economic rents--capitalized at some rate of
interest. The Federal Reserve BALANCE SHEETS FOR THE U.S. ECONOMY
1945-92 shows "land at market prices" at the end of 1992 as
$4,289 billion, around $16,000 per capita. (Governmentally owned land
is excluded; it would not, one assumes, constitute part of a base for
taxation.) The 1989 figure had been larger by one and a quarter
trillion dollars--$1,265 billion; land values dropped by one third in
three years. The 1977 total is shown as smaller by two and a half
trillion dollars--$2,460 billion. The changes in 15 years were indeed
Land made up an estimated 23.4 percent of domestic wealth in 1992.
The degree of error in these figures must be large. But, in any case,
land totals are substantial.
An additional tax of one percentage point on land value apparently
would yield somewhat under $40 billion a year. This amount would be
more than one-fifth of the $174 billion total property tax revenue in
1992. In most localities an annual tax of five to eight percent on
full value of land would probably finance the complete elimination of
property taxes on man-made capital. Obviously, any such estimate is
subject to a wide range of uncertainty if only because we cannot know
how the shift would affect land prices. Nor do we know how much of the
land included in the total would be exempt on the basis of its
ownership by religious and other tax exempt institutions.
No immediate, abrupt freeing of buildings, machinery, and inventories
from property tax lies in the realm of probability. But over the
years, not necessarily many, the phasing out of tax on man-made
capital does seem possible--economically. Legally, and politically,
change presents a variety of problems. Many state constitutions would
have to be modified. Leaders, and then the public, would have to be
instructed and convinced, community by community, state by state.
III -- Some Fundamentals
THIS AUDIENCE will be familiar generally with many of the important
aspects of theory and practice of property taxation in the United
States. But I shall venture a few points that relate to what seems to
me to be essential for understanding the potential for improving the
well-being of Americans as well as that of persons in many other
1. In an economic sense "the" property tax consists of two
elements. They differ substantially. One is land as the product of
nature. The other consists of things men and women have produced.
2. In the United States "the" property tax differs from
state to state and from locality to locality. To generalize
responsibly is risky; innumerable special elements differentiate
property taxation from one place to another. States may act
independently; so too may localities within many states.
3. A tax system is a human institution. What exists has been created
by men and women. It can be changed.
4. Taxes bring revenue to governments. And taxes do more. They
influence the ways individuals, businesses, and other institutions
carry on their affairs. The non-revenue effects can be large and
small, obvious and hidden, direct and indirect, and of many types.
Different tax structures that yield the same total revenue can have
significantly different non-revenue results.
5. Taxes take without ordinarily giving the specific taxpayer
anything identifiable as a result. There is striking contrast with
prices and the market transactions that they make possible. In an
exchange in markets there is a quid pro quo. Where taxes are involved,
in contrast, the individual, quite generally, gets neither more nor
less service if he or she pays more or less tax.
Sometimes it is better for the taxpayer to arrange affairs and accept
results that in a fundamental sense are second- or third-choice ones
in order to save on taxes. There is loss since the resources involved
could have been used to better advantage in the absence of taxes. The
government treasury loses. So does the taxpayer. But the taxpayer
would be worse off had he chosen the inherently most productive
alternative and paid the higher tax. The economy produces less than it
could. The real burden of the tax exceeds the dollars the government
receives. There is an "excess burden," one largely hidden
IV -- Effects of Taxes on Structures on Well-being
HUMAN WELFARE can be improved by reducing the tax on structures. Two
percent or so a year levied against their capital value, not the
income they produce, will usually be large relative to that income. A
tax at this level would be a considerable burden. For the record, when
I say "structures" I include other man-made
capital--telephone, electric, other utility facilities; computers;
machinery and equipment; trucks and planes; inventory of business; and
so on. Stocks, bonds, bank accounts, and other intangibles, however,
Buildings will come into existence and will be maintained only if
someone with resources expects to get as much net benefit from
providing and maintaining them as is obtainable elsewhere. Buildings
are long-lived. Decades may be required for the person committing
resources to get back amounts equivalent to the original outlay above
and beyond an appropriate annual net yield.
Similarly, production equipment must also meet the test of
prospective benefit after tax.
Will users pay enough so that the owner can meet operating costs and
get a net income (net benefit in the case of owner-occupants) at least
equal to alternatives? The higher the property tax on the structure,
the greater the obstacles to be overcome. Note that the higher this
tax, the fewer the cases that can jump the tax hurdle. Thus property
taxation operates to make for a smaller quantity of housing and other
Their quality also suffers. The tax induces smallness in structures,
buildings and rooms, as compared with what would be built if there
were less or no tax. Society, human beings, lose because of the
reality of the "law of the cube." Cubic content differs more
than in proportion to the dimensions of walls, ceiling, and floor.
What people want is living space, not merely the walls. Per unit of
space, the costs of plumbing, electricity, heating, and other
facilities tend to decline as the space increases. The property tax on
structures, by raising costs of occupancy over the lifetime of a
building, induces the construction of smaller units. The "saving"
in labor and materials neither saves government expenses nor brings
revenue. Consumers have less for living.
The property tax on buildings also discourages maintenance and
improvement. We have absolutely no way of knowing by how much. But the
tax must discourage actions that people, acting freely, would make to
better their lives without harming others and without adding to the
costs of government. The property tax on man-made capital has other
adverse effects. Business policy and practice on inventory are
sometimes distorted. From various effects the tax on structures brings
excess burden, deadweight loss. People lose in benefit more than
governments receive in revenue.
A regressive element exists. We do not know with confidence how the
burden affects persons with different incomes, but families with low
income are likely to be burdened more than many of us would consider
V -- Property Taxes on Land
GOVERNMENTS can reduce the adverse effects of taxes on structures by
cutting applicable rates and making up the revenues by higher rates on
Land owes its existence to nature, not to human effort. No incentive
is necessary to get the present stock created. It exists--and not
because of human effort in the sacrifice of other alternatives. (Some
will point out that considerable efforts have been involved in opening
frontiers. But these costs are "sunk" and now are remote
from the problems of obtaining space for modern life.)
With minor exceptions, the amount of land today does not depend upon
incentives to produce land. But the quantities made available for one,
as against another use can be affected by relative prices, rents,
incentives. Land has a crucial role in life. But unlike other factors
of production the quantity of land will not decline if the net income
after taxes drops, nor will its quantity rise if payments for its use
increase. In this respect land has unique characteristics.
In cities over the world users of land pay more (in prices adjusted
for inflation), often very much more, than was required a decade or a
generation ago. The higher payment has not gone to create more land.
Inflation-adjusted increases in land prices (and allowing for capital
spent to improve a site) result, in part, from the growth of
population. Other reasons include community change, government
spending on streets, schools, utilities, and other facilities.
Business development can make neighboring sites (land) more or less
desirable. Changes in technology and in consumer taste also affect
Landowners may become richer while they sleep. But sometimes
landowners do devote capital, labor, and entrepreneurship to make
their land more desirable. The distinction obviously relates to
incentives. There is no need for society to provide incentives for the
passive owner. Development effort, however, deserves respect and not
The pure economic rent offers an attractive potential as a source of
revenue to finance (local) government. Higher tax would not induce the
owner to reduce the amount of land (as space on the earth). The
quantity of space in the area would not decline. In this respect, to
repeat, land differs from other productive resources.
The tax can, however, affect the use made of parcels of land. As a
general matter, of course, owners should make the best use possible of
land whether their tax is high or low. But, as a practical matter, the
need to pay tax in cash each year can provide incentive to put land to
use earlier than it would be otherwise, or to move it to a higher and
better use thus beneficially serving the community!
VI -- The Proposal
GOVERNMENT SHOULD REDUCE THE TAX RATE on structures and raise the
rate on land enough to keep revenue stable. More sweeping change could
be recommended, e.g., replacing some onerous non-property taxes. My
proposal is a starter.
Most homeowners and some other property owners would not experience
much change in tax bills. Indeed, some studies of the results when
cities adopt a split-rate tax find that a large number of homeowners
get some tax reduction. Owners with exceptionally fine improvements --
an outstanding building or well-equipped factory -- would generally
see their taxes going down. Owners of vacant land would get higher tax
Capitalization of the higher tax on land would reduce its price.
Price increases on structures and machinery from capitalization of
their tax reduction would be restrained by the reproducibility of
Improved net yields of man-made capital would tend to increase the
demand for land and thus benefit some landowners. And so on. The
variety of change would differ from one case to another and depend
upon the rate differentials.
Two kinds of beneficial results can be counted upon. Reduction in the
adverse incentives for new construction and for installing new
man-made capital will improve housing and production capacity. More
than insignificant pressure on owners of land to put it to the best
potential use indicated by market conditions will benefit the general
VII -- Why Have the Benefits Not Been Seized Upon?
THE CASE FOR REDUCING THE ANTI-PROGRESS TAXES on structures and
getting more revenue from taxes on land were made so very clear by
Henry George that one asks, "Why were the opportunities not
utilized long ago?" I do not know enough about the conditions of
his time to presume a responsible conclusion. My guess is that much of
the explanation lies in lack of active, focused support from those who
would have benefited.
Most businesses, I believe, would have profited; but some, at least,
were doubtless repelled by his opposition to protective tariffs and
his antagonism to monopoly. His sympathy for labor unions probably
aroused opposition. So did his belief that the land owned by churches
should not be tax exempt.
There may have been no concentration of prospective benefits to
create a "fighting" impulse in this state or that, this
community or that, to mobilize decisive political pressure. Benefits
would have been diffused widely -- large in total but small for each
voter as an individual. But even for individuals, they would have been
very large over time.
Another guess is that an unduly large amount of attention was
directed to the "anti-landowner" aspect and not enough to
the pro-production (pro-business) aspects. And at the time other
issues, e.g., gold and silver (money), monopoly, and the tariff,
The great potentials were those of public policy as against interests
of individuals. Mobilization of support for public policy takes
considerable devotion and, in a sense, self-sacrifice.
VIII -- Thoughts on Conditions of Today
AS ONE THINKS of the enormous rise in land prices (after allowing for
inflation) since Henry George's time, and dreams of the benefits for
local government finance if much more of the rise had gone to paying
for education, policing, and other local services, might one not say,
"Let us stop the loss of opportunity?"
Alas, good ideas are not self-fulfilling. Someone must act. Human
beings must make efforts. And the rewards to individuals will be
overwhelmingly a sense of satisfaction, not economic benefits that
help the family finances.
A major shift of emphasis should be away from talking about the land
tax aspects -- higher burdens on land values -- and toward reducing
tax burdens on man-made capital. George himself spoke eloquently of
lifting crushing burdens on business. Such is a positive goal. I
suggest that we make more of this. Some years ago advocates of "supply
side" economics did focus on the good results to be expected from
reducing taxes on income. Rates were reduced. The 1980s witnessed
widespread prosperity. Today at least some of the public may have
considerable receptivity for the notion that human beings can, and
some will, react positively to tax rate reductions. And, of course,
react negatively to tax rate increases, except in the case of land,
the supply of which is fixed since a tax increase on it will tend to
induce "higher and better" use.
Who would benefit from the reforms here advocated? Everyone, almost.
A warning, however! One can "promise" too much. The chief
transmission of forces for general public benefit would be an
improvement in the supply and allocation of man-made capital. There is
evidence of such positive results in the Pennsylvania communities that
have adopted two-rate taxation. But the results depend upon the
attraction of more capital. From where? For individual communities the
clear opportunity is that of attracting capital funds in the market.
If a large number of localities moved at the same time, the increased
demand for savings would raise interest rates and create adjustment
problems. Such is not a prospect for the foreseeable future.
One can think of groups likely to witness more benefit than the
average. Business managers, would, I submit, find doing a good job
easier as property taxes on buildings and machinery decline. All of us
in our capacities as consumers would gain but usually in no
identifiable way, except perhaps in housing. Modernization and new
construction might well change enough for their beneficiaries to see a
Groups that might see some early connection would be workers in
construction, architects, producers of machinery, and doubtless
Who would suffer? Although there would be net benefits, there would
be some losers, and fears on the part of others. The results would
depend upon the change in demand for land due to an increase in the
potential profitability of new and better buildings and use of
machinery. Owners of essentially vacant and substantially underused
land would face new conditions.
It seems to me that large changes, while desirable, ought to be made
more gradually rather than suddenly.
Resistance may arise from skepticism among voters. Would tax rates on
man-made capital really go down enough to match increases in rates on
land? Somehow assurance should be provided. My proposal involves
revenue neutrality. Voters could choose something else.
IX -- Concluding Comments
PROPERTY TAXATION plays a crucial role in financing the supply of
local government functions. In many places the rates are already high
enough to have non-revenue effects of significance. Much of the
adverse force of these effects can be mitigated. Indeed, incentives to
improve land use can be part of the program. The tax can be related to
capital value as in the United States and Canada, or to annual yield.
The latter avoids the problem of the effects of rising tax rates on
the size of the base. The choice should rest upon conditions of time
One might well support greater change. For example, I believe that
eventually the allocation of much, but not all, pure land rent to pay
for (local) government would be to "our" benefit -- a
condition to be achieved gradually.
But Henry George's insights can serve us well today.