by Fred E. Foldvary
The ultimate tax reform is public revenue from land rent. Tapping site values and land rent for public revenue is ultimate, because this source of civic revenue is the ultimate in efficiency and equity. Other tax reforms such as a flat-rate income tax, a value-added tax, or a consumption or sales tax, still leave us with skewed prices, crunched profits, depressed wages, and what economists call a “drag” or “excess burden” or deadweight loss” on the economy. Other taxes also violate our natural right to self-ownership. The American 19-century economist Henry George distinguished between taxes in form and taxes in substance. In substance, a tax is a forced payment to government, or a cost imposed by government, which is not related to any benefit or to any harmful act done by the taxpayer. In contrast, a payment to government which is a payment for causing damage, or is offset by a benefit, appears like a tax in form, but is not a tax in substance.
A “tax” on pollution is an example of a tax in form, but not in substance. In form, a pollution tax is a payment to a government. In substance, the payment is compensation to society for damaging soil, water, and air that do not belong to the polluter, thus violating the property rights of others. Likewise, a “tax” on land value appears like a tax in form, but in substance is a payment either for natural features not created by the title holder, or for site values generated by the civic works, commerce, and population, factors also not provided by the title holder.
There are three vital constituents who drive the economy. First are entrepreneurs, who are alert to untapped gains from trade, who bring wanted innovation to society, and who create and produce greater wealth and utility to society. An tax that hampers entrepreneurship harms all society. Taxes on profits and interest skew these prices from true costs and distort the structure and timing of production. Only payments on harmful activity such as pollution, or on land rent and land value, which would be paid to the landowner anyway, do not infringe on the entrepreneur.
Second are consumers, or buyers of goods. In a free society, consumers are economically sovereign, as they decide what goods will be produced. Successful entrepreneurs are those who best satisfy consumer demand, or who can best stimulate consumer demand. It is an insult to the human spirit to accuse acting man of being a robot salivating to the latest ad. Human action is purposeful and seeks the best means to achieve one’s highest ends. Any tax on sales or consumption violates consumer sovereignty and decreases social well being.
Third are the hired workers. Labor is human action that produces wealth with market value. In a free market, labor tends to be paid its discounted marginal product, the value of the extra output produced by the extra workers, taking into account the time investors must wait before the final product is sold. In a free society, workers have labor sovereignty, being able to choose their employment, choose whether to engage in labor or leisure, and choose how much human capital (training and education) to invest in. Any tax on wages distorts these choices and makes labor more expensive to employers, reducing employment while creating poverty.
Land means natural resources. The supply of spatial land is fixed, as the space around the earth can neither be produced nor destroyed. There is no such thing as land development, since improvements are capital goods. With a fixed supply of space, a tax on site values or rent cannot reduce the supply of land, and therefore has no social burden. Land having no cost of production, the price of land tapped for public revenue has nowhere to go but down, so that the after-tax return on land is the same as on any other financial asset, adjusted for risk.
The supply of labor and capital goods can increase, and these factors are mobile. Greater wages and profits induce greater supplies, reducing gains to normal. Civil improvements therefore leave wages and returns to capital unchanged, while they boost up the rent and price of land. Civic works and services get capitalized into higher site values and rents. Tapping these rents equitably gets the title holders to pay back value received. The failure to tap site values gives land title holders an implicit subsidy, and shifts public revue to taxes in substance on wages, making the tenant worker pay twice for civic goods, in tax and in rent.
Private communities such as condominiums, homeowner associations, hotels, and shopping centers use rentals to finance their public goods. I’ve never heard of a hotel inquiring about my income when I rent a room. Hotels also don’t charge a sales tax to use the elevator. Private communities use site rentals because that is the efficient thing to do.
Much more can be said about tapping rent. I have written a policy study on “The Ultimate Tax Reform.” You may read the four-page summary or the entire 36-page policy study on these links. Printed copies are also available from the Civil Society Institute.
There is really no reason to tax wages, sales, consumption, business profits, or transactions other than ignorance, greed, or masochism. When you hear people advocate a flatter or simpler income tax or a shift to taxing when we spend, ask them, why not go all the way to the ultimate tax reform?
This article first appeared in the Progress Report, www.progress.org. Reprinted with permission.
Dr. Fred Foldvary teaches economics at Santa Clara University and is the author of several books: The Soul of Liberty, Public Goods and Private Communities, and the Dictionary of Free-Market Economics.