by Fred E. Foldvary

Advocates of land rent for public revenue correctly explain its superiority over taxes on labor and capital, as the tapping of rent has no deadweight loss, repays civic benefits capitalized into site value, and maximizes productivity. Not so often discussed is the issue of what the penalty should be for failure to pay.

In today’s real property tax, the usual practice is to first notify the land-title holder that his payment is delinquent. There are penalties for not paying on time, and the taxpayer is offered an installment plan if he does not have sufficient funds. If the property owner still has not paid, then the property becomes “tax defaulted.” The owner has to pay a redemption fee and additional penalties.

Taxes can usually remain unpaid for several years while the owner continues to have title to the real estate, as tax liabilities and penalties keep accumulating. After the time limit expires, the property becomes subject to the tax collector’s power of sale. The state then has a lien on the property. The real estate can be offered for sale at a public auction or it may be acquired by a government agency, and the residents expelled. Tax liens on real estate run with the land, so that if the property is sold, the new owner has the tax liability.

With a property tax, usually the worst that can happen if the owner does not pay the tax is that he will lose the property, and possibly lose the entire amount of his asset value. In contrast, with income or sales taxes, a refusal to pay taxes levied can result in criminal prosecution with a prison penalty. Thus, a significant advantage of real estate taxes over income, sales, and value-added taxes is that the penalty for nonpayment is much less severe.

Why do governments put people in prison for the failure or refusal to pay income taxes? Because the income tax has to rely on information provided by the taxpayer. The government has to scare the taxpayer into disclosing his income.

In contrast, if the public revenue is from land rent, there is no need to squeeze out any personal information from the title holder. Spatial land cannot be hidden, and its market value can be derived from actual sales and rentals, so there is no need for any inquisition.

There are two proper ways to handle the failure to pay land-value taxes or community site-service fees. First, as with real estate taxes today, the governing agency would place a lien on the property and then sell it. After collecting back taxes and penalties, the remaining funds would be paid to the delinquent title holder. The new owner could either rent the premises to the previous owner, or evict him.

The second way would be to declare the delinquent title holder to be outside the law, not subject to the protection of the governing agency, nor entitle to any of the agency’s services. The governing agency would not respond in the case of theft, trespass, fire, or assault. His outlaw status would be known to the public, and he would be prohibited from using civic services such as libraries, streets, schools, parks, and governmental public transit.

With a properly implemented system of rent-based public revenue, it should not be a crime to refuse to pay the community rent. Nobody would go to prison for not paying taxes.

In a morally proper legal system, the only crime should be coercive harm to others. The refusal to do something should not be a crime. Only those who actively commit harm to others would be treated as criminals who harm society in general as well as specific victims.

Some free-marketeers argue that, if taxes there must be, taxation should be on sales or imports. Some advocate simpler flat-rate income taxes. But they don’t take into account the penalties for nonpayment. If a seller and buyer trade without paying a sales tax, and refuse to do so, what is the response of the state? The sale has already taken place. Maybe the item has been consumed. The only effective penalty is prison. The same applies to income. The logic of taxing wages and consumption requires that the ultimate penalty be prison.

In contrast, the tapping of land value or site rental does not require a prison penalty, because the land is still there. It would be silly to put somebody in jail for not paying a land-value tax, because it is costly to keep people in prison. The government can simply take over the property, as it does today.

So, free-marketeers, which do you prefer: public revenue that has a prison penalty, or public revenue that at worst takes away the property or denies the title holder some services?

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.