Libertarians support low taxation as a core principle because it frees people and thus the economy from the burden of the State. All but the most rabid Anarcho Capitalists though concede that the State needs some revenues with which to perform the very few necessary functions of government (I think this is probably just Courts (as any lawyer would, ahem) but I am in a minority of crazy extremists apparently).
If you do concede that the State has a role to play and that the State is going to need money to do it then, according to the thinking of the likes of Adam Smith[i], Thomas Paine[ii] and Milton Friedman[iii], land taxation is not just a necessary evil, it is a positive good in that it tackles monopolies and should ensure efficient use of land.
First, to clear things up, a definition, a land value tax (or site valuation tax) is a levy on the unimproved value of land only. It is an ad valorem tax on land that disregards the value of buildings, personal property and other improvements. A land value tax (LVT) is different from other property taxes, which are taxes on the whole value of real estate: the combination of land, buildings, and improvements to the site.
It would appear clear that a common social resource, i.e. the land, a resource that naturally exists, is not the product of investment or the application of human skill and is generally not something that more can be produced of, has become monopolised by a few. This does not change the fact that land ownership can only ultimately be vested in society as a whole and that that land has to be the source of revenue for the upkeep of society.
We can broaden this out to other common resources. In addition to the land, there are minerals, forest resources, fishery resources, and even the electromagnetic spectrum, all of which are valuable economic resources, but all of which are grounded in an original gift of nature. There is nothing unusual about the fact that mineral extraction rights and rights to the use of the electromagnetic spectrum are controlled by licences from the state that aim to create revenue as ownership of these rights creates an advantage for the holder, when in fact none of these things was created by human agency in the first place.
It is right therefore that the state attempt to extract as large a proportion as possible of the economic rent derived from possession of land, minerals, forestry and fishery resources, and the electromagnetic spectrum, and land taxation should be seen in this light. Given the fact that land is a common social resource, it is doubtful whether the word “taxation” is correctly applied to a land levy. What we are talking about here is not taxation of income or profits or the restriction of economic activity, but a levy that is based on the fact that no original ownership of the common resources ever existed.
Benefits of a land tax
Libertarians have always supported land assessments rather than other forms of taxation for a number of other reasons. The most important of these is that other forms of taxation impose deadweight economic losses. Income taxes and profit taxes deter economic activity and can lead to the flight of labour and capital overseas to less greedy jurisdictions. If there were no income taxes or corporation tax, then it is undoubtedly the case that the economy would be much larger.
A key advantage of the land value tax is its encouragement of efficient use of land and its discouragement of speculation in land. Applying an annual charge to all land holdings, based on the unimproved value of the land, would impose higher levies on prime land sites, for example, those in central London, thus encouraging development elsewhere where land values are cheaper, with positive results in terms of regional development. Property developers would be incentivised not to hold onto large land banks without building on them, and land, as a scarce social resource, could not be hoarded or put to inefficient use without incurring regular annual levies.
Furthermore, exponential increases in land values would attract higher annual levies, helping to restrain soaraway property bubbles in the same way that higher interest rates bear down on inflation; in the case of inflation, the imposition of higher interest rates depends on good central banking practice, whereas an annual land value levy based on a percentage of land values would be a market mechanism to ward off bubbles and speculation.
Land values would be discounted owing to the prospect of paying annual levies. In the initial period, this ought to lead to a fall in property values, although it needs to be emphasised that in the long run land values could also be enhanced, as in Hong Kong, by low income and profit taxes, creating a virtuous scenario where economic activity was not deterred by deadweight losses, and rapid economic growth still allowed freeholders to benefit from rising demand for their land. This would help to keep revenues from land value taxes high, continuing to support the few government services that are needed.
It is important to emphasise that the land value tax cannot be shifted to tenants in a way that would add to business costs. Classical economists argue that rent is not a real cost of production, but merely a price determined by demand for the land, as shown by the fact that commercial rents fall in a recession. Rent does not independently affect the cost of products produced by industry, but rather amounts to the capturing of part of the value of the output created by the outlay of capital and labour by the landowners.
Attempts by landowners to capture a larger part of their commercial tenants’ revenues by requiring tenants to cover all taxes and charges incurred by the landowner would, over the long run, not push up business costs, but reduce the profitability of using the land, causing tenants to go elsewhere where site valuations were lower.
This reflects the fact that landowners cannot go elsewhere, the locations of their land sites are fixed, whereas their tenants can move their businesses out of prime location sites. Excessive demand for prime land would fall, and less favoured locations, in the North of England and elsewhere, would attract more investment, with positive social repercussions.
The confusion between passive gains and gains that are the result of initiative and investment is found all the way through our current taxation system. Income tax and corporation tax are assessed on all income and profits, without attempting to break out the proportion of the earnings that relate to the three factors of production: land, labour and capital. Some income is passively gained, and some profits are passively made on the back of misguided central banking policy to promote property bubbles. By contrast, a great deal of income and profits is the result of hard work and initiative, and by obscuring the difference between the gains from land, labour and capital, three categories kept quite distinct in the analysis of the classical economists, we are unable to promote investment and hard work and deter speculation in property.
Land value taxation allows for a reduction in income and profit taxes, which currently restrict economic activity. It also allows for the abolition of stamp duty, capital gains taxes and inheritance taxes. This promotes the productive use of the land by not impeding property transactions. The key to this is to establish an annual land value tax on the unimproved value of land sites. This would hold property values down over the long term, allowing the young to buy properties, allowing banks to extend mortgages without a constant cycle of property boom and bust, and this would also allow more of people’s incomes to be devoted to consumption, instead of spending the majority of their incomes on taxes and mortgages to finance an economic model based on public debt and property bubbles. Genuine hard work would not be penalised as it is at present; passive profiteering would become more difficult, although some increase in land values based on strong demand in a low-tax economy could still take place
As long as taxation is geared towards repression of incomes and profits, economic activity in this country will be held back. Financial services, property and the public sector are keeping our economy sluggish. Libertarians who support low taxation, and in particular, forms of taxation with low or zero deadweight effects, should support land taxation as a way of moving to a more sustainable model of economic growth.
[i] Smith, Adam (1776). The Wealth of Nations, Book V, Chapter 2, Article I: Taxes upon the Rent of Houses. "Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground."
[ii] Thomas Paine contended in his Agrarian Justice pamphlet that all citizens should be paid 15 pounds at age 21 "as a compensation in part for the loss of his or her natural inheritance by the introduction of the system of landed property." "Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
[iii] Milton Friedman stated: "There's a sense in which all taxes are antagonistic to free enterprise – and yet we need taxes. ...So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago."
