Alternatives to the Income Tax: The Land Value Tax
In the spirit of the excellent post on national sales tax, let me present the land value tax. This tax is upon the value of the land itself. It differs from traditional property taxes in that it does not include any improvements upon the land (e.g., office buildings, homes, etc.). It is literally on the value of the tract of earth. It was first proposed by Henry George in the nineteenth century and attracted a number of admirers, including William F. Buckley. Although some socialists attempted to appropriate George, he was an anti-socialist and radical individualist – he was seeking an economic arrangement that cleared the path to rewarding people based on what they produced (which an income tax discourages) or the value they created through commerce (which a sales tax or VAT discourages).
- When one taxes, one gets less of the thing taxed. But God is neither creating nor destroying land, so we won't get less land. If we tax productive work through income tax, we will reduce productive work. If we tax sales, we will have less commerce. None of this seems beneficial to society. Local property taxes generally set perverse incentives for landowners to refrain from improving, hence the well known phenomenon of people working on their homes without required local permits in order to avoid. This tax would actually provide the opposite incentive, for Land Value Taxes do not increase with improvements upon the land. To make money, I would actually have to put the land to profitable use (e.g., build apartments or homes on them and rent them out).
- If I purchased land in a real estate hotspot and did nothing to improve it, and sold it a year later at substantial profit, it's clear that I benefited from externalities that had nothing to do with my capital. Namely, I purchased land in an area where others did things (e.g., built hospitals, schools, luxury homes, etc.), and I was, in effect, a free rider, a renter benefiting from inefficient economic rent.
- A land value tax would have the effect of inhibiting the growth of real estate bubbles, such as the one of the last decade.
Yes, it's radical, probably more than Cain's "9-9-9" plan. Yes, there would be a lot to work out, like how this tax would be collected. (Some proposals require either states or municipalities collect the tax and send a portion on to the federal government – this would leave municipalities with latitude in determining how to implement.)
I'm not intending to provide a concrete proposal, more to suggest another way to think about tax reform, one that preserves incentives and does as little as possible to slow economic growth.