Today's Taxes Harness the Profit Motive Backward;
They Abet Speculation, but Penalize Development

Perry Prentice

[Reprinted from a special 84-page booklet on land,
House & Home Magazine, August, 1960]

Today's taxes often make it more profitable to misuse and underuse land than to develop it and use it properly.

They penalize land development, land improvement, and homebuilding by 1) multiplying the local taxes the owner must pay as soon as new houses are built on his land or existing buildings are improved and by 2) taxing away most of the profit from land development and homebuilding at ordinary income tax rates.

But they subsidize land speculation by 1) undertaxing the land as long as it is left idle or underused, and 2) taxing the profits of land speculation less than half as heavily as the profits of land development and homebuilding are taxed.

"The only cure for land speculation is to eliminate the extraordinarily favorable tax treatment now accorded the land speculator," says Professor John Henry Denton, in charge of real estate studies at the University of Arizona. "No justification for this can be found in economic theory. Unlike speculation in commodity futures or common stocks, land speculation does not support a market or provide a stimulus to production. In fact, it has just the opposite effect. It destroys the marketability of large areas of land by pricing them out of the reach of immediate users. It deprives our communities of many facilities needed for good living (such as parks and playgrounds) by driving the price of land beyond what communities can afford. It limits competition by holding a large part of the land supply off the current market. It channels capital funds away from productive investment into sterile adventures and may be responsible for the present day dearth of private risk capital.

"But our tax system grants this nonproductive and destructive activity the most favorable tax treatment of all.

"There is no way to outlaw land speculation in a free economy, but … the principle of public intervention to raise the yields on desirable uses of capital and lower them on undesirable uses is well established by our countless subsidies and tax preferences. The capital gains tax is in itself one of those preferences, but its application to the profits and recouped expenses of buying and selling vacant land is clearly in support of a most undesirable economic activity. Preferential taxation should be reserved for activities that aid the growth and development of a free enterprise system and not for those that are destructive of it."

Says Professor Fisher: "The plain fact is that our present system of real estate taxation, like the whole system of local government finance of which it is the chief part, is obsolete, inadequate, and unsuited to present-day political, social, and economic conditions.

"The need to re-examine and overhaul this whole complex is urgent and imperative, not only for the sake of real estate and housing, but also and a fortiori to save our local governments from bankruptcy -- if possible."