Why Taxes Ultimately Fall on Rental Income
[Reprinted from Land & Liberty, May-June,
Tax has been defined as the appropriation by State coercion of the
citizen's property. Those who escape the tax net through exemptions
are not privileged, according to this view. Rather, it is those who
bear taxes who are losing their proprietary rights: all taxation is
True reform, to restore justice, would extend not abolish
-exemptions. And governments should cut their expenditures accordingly
instead of wasting the millions they bully Out of us".
Let us agree, however, that there is some minimum level of necessary
government expenditure that requires financing. We must then ask not
only which incomes or products deserve relief from tax, but also what
alternative source of income would best substitute for existing taxes
to finance the minimum level of spending.
In my view, the answer lies in a closer examination of the nature of
different forms of property over which individuals claim rights. The
most fundamental property right, one that should be accepted by all
who reject slavery, is the right to oneself, to be a free man; to own
A corollary of this premise would appear to be that whatever an
individual produces should be his property. The labourer produces
wealth, and so earns the right to own that wealth, or the wealth
received in fair exchange with other producers, including producers of
There is, however, one class of asset which is owned by individuals
who have themselves neither produced it nor bought it from anyone else
who has produced it.
That asset is land in the broad sense defined by economists to
include all of nature's free gifts: soil, space and minerals.
None of this was created by man and so it is impossible to justify
individual rights over the gifts that nature once bestowed on all.
Land that was once communal property has passed, through force or
fraud, into the hands of individuals who thereafter bequeathed or sold
it to others.
When a common thief passes on or sells stolen property, the receivers
do not have a legal title to the goods. They are required to return
the property to the rightful owners, no matter how innocent or
ignorant they mayhave been of the original crime.
Should we not apply the same principle to the greatest theft of all,
the theft of common property from the community?
The return to the community of the gifts of nature could be
accomplished by requiring that those who use these re~ources should
pay the community for the privilege. Those who, for example, wish to
use valuable space in central London would pay rents to the state
instead of to private landowners.
Rebates could be conceded to landowners for a limited number of years
to avoid excessive hardship to those who have been heavily dependent
on such incomes, or who have only recentiy bought private property
rights in such land for enormous sums.
Landlords who also own buildings or other improvements would rightly
keep the income associated with these man-made assets. Separate
assessments for unimproved site values and the value of improvements
are made routinely, with few major difficulties, in many countries.
Similar principles can apply to the division of incomes from North
Sea oil operations: one part is economic rent, and other parts are
payments of wages and interest for the labour and man-made capital
When taxes are imposed on labour, capital and production, the supply
of each is discouraged. The supply of each is elastic.
There is, however, a natural floor to the after4ax level of wages and
interest, and as taxes are imposed the pre-tax level of wages and
interest rates rise.
The supply of land and natural resources being fixed, however, rents
can and do fall.
In this way, the ultimate incidence of all taxation falls on land
As a result, official statistics that purport to show the share of
land rents in national income reveal a quite low share in many
advanced, highly taxed economies (about 10% in the UK).
If the tax system were reformed by removing taxes from labour,
capital and commodities, however, the share of rents in national
income would automatically rise. For pre-tax wages and interest would
fall to give the same or higher post-tax incomes for workers and
The owners of land and natural resources could then be asked to hand
over the rising rents to the state. The payment would not be a "tax",
hut a payment for the privilege of using assets that are naturally
common property, whose value is created not by individuals but by the
community. It would provide the state with a narural source of income
which, unlike taxes on labour and capital, is paid in return for
benefits directly received.
Unlike taxes on labour and capital, the payment of rents to the state
is not an "invasion of proprietary rights". It is the
restoration of proprietary rights to the Community.
Accompanied by the reduction or abolition of income taxes and VAT it
would also be a restoration of true freedom from State coercion and