This is a bit of a sleeper pick, as this is the smallest and least widely known of the picks. However, unlike several other OregonPEN picks, CGOW is focused not just on how much taxes are raised or how they are spent vs. wasted. Instead, CGOW focuses on a vastly important and understudied issue, the question of “How does the WAY we tax affect our well-being?”
The “radical” idea (in the sense of going to the root of the problem) at the heart of Common Ground’s program is that we can and should enlarge our conversation on taxes to include consideration of ways in which we can raise revenue while escaping from the zero-sum game of “Cut taxes!” vs. “We need more revenue!” that becomes so tiresome and poisonous.
It turns out that one of the many key ideas developed in the United States by Progressive reformers — this one credited primarily to a fellow named Henry George (who, if he didn’t originate it, is certainly responsible for its high profile in the Progressive Era) — was that it was possible to collect taxes in a way that more socially just than traditional taxes, which target earnings or spending.
By taxing land, the tax (called Land Rent) would be levied on something that the owners in no way created, and the value of land is created by society as a whole, not by the efforts of the owner.
This deeply “radical” idea is actually profoundly conservative, because raising revenue by collecting land rents means reducing or entirely eliminating taxes derived from income and investments (such as structures built on the land). In other words, the money needed to fund government programs is raised by taxing people not on the work that they do or the value they create, but rather by collecting a share of rent on the land that they own, which was not their creation. So the fruits of each persons efforts are freed from taxes or enjoy lower taxes, while the government is funded by taxing the share of the common inheritance that each individual controls exclusively (owns). This is deeply conservative because it encourages the fullest possible exploitation of natural resources with the highest possible efficiency where services are already provided (such as inside urban growth boundaries), which reduces any incentive to sprawl.
As Oregon prepares for another legislative siege in the same tiresome cacophony (“Cut taxes! No, cut pensions! No, Cut Schools! No, cut everything! No, Raise Wages! No, Support Veterans! No, . . . “) that we’ve heard for decades, it would be a blessing and a great step forward for more people to learn about the ideas and advantages offered by a Georgist approach.
There is a great metaphor of unknown origin that beautifully captures the whole Georgist idea — that HOW we tax is at least as important as HOW MUCH, if not more important. it’s the metaphor of the work horse. The work horse: Consider a mighty work horse that is easily capable of carrying the largest rider, even ones weighing over 300 pounds, for many miles at high speed. Now, consider: What happens to that horse if a weight of even half that size is, instead of being placed on the horse’s back, tied to the horse’s front foreleg? Before long, the horse can barely move, because — as with taxes — it’s not just the dead weight total, but how the weight is distributed that makes all the difference.
More from the Common Ground Oregon-Washington and Wikipedia websites:
Land Value Tax
Here we’re dedicated to reforming the local property tax in Oregon.
Taxes are not just public revenue.
Income from taxation not only funds government, it affects our economy.
Taxation effects people’s behavior. Taxes can have positive or adverse incentives.
Fundamentally there are only two sources of taxes: 1) Land 2) Labor and Capital.
Land rent (land value appreciation) is a social product, deriving from public amenities and location advantage.
Labor and capital’s product is individual, resulting from work and investment.
A basic principle of economic justice holds that legitimately created value belongs to the creator of that value.
Real estate is comprised of two components: land and improvements.
Local government in its role as the steward of socially created land value is justified in collecting most of what the community has given – land rent, or increases in land value. On the other hand, improvement value, the other component of property assessments, is attributable to an individual’s private capital investment. Owners have the legitimate right to retain most of the building value which they themselves have created.
Tax incentives work this way:
What society wants more of will be taxed less – job growth and investment,
What society wants less of will be taxed more – land and resource consumption.
Therefore, “Tax land rent, not production.”
The LAND VALUE TAX – shifts the tax rate off of improvements onto land.
The conventional property tax system applies the same tax rate to both land and buildings. This is arbitrary because these two components of real estate are fundamentally different, each with its own set of dynamics.
- Land or site values are experienced generally, that is, on all parcels with similar location attributes—independent of investments in building improvements that individual owners may undertake.
– Improvement values are site-specific and derive solely from an owner’s capital investments.
In contrast to the conventional equal rate system, the land value tax (LVT) is a split rate tax. Under the 2-rate property tax system, the tax rate on the assessed land values of all parcels in a taxing jurisdiction is higher than the rate on building assessments. This heavier tax on land taxes mainly the site value created by the community at large. The incentive effect is to invest in site improvements while conserving land. In the aggregate, this encourages local investment, creates jobs, dampens land price inflation, expands housing, and stems the tide of urban sprawl.
Land value taxation (LVT) is based upon the principles advocated by 19th Century political economist Henry George.
The theory of land taxation holds that a property tax based upon site values provides an incentive to bring land into productive use, encouraging more efficient land use.
This theory was never applied in its pure form – the abolition of all taxes save the tax on land, yet the idea lived on and was subsequently incorporated into law in several British Commonwealth countries, as well as in Taiwan, Denmark, and Estonia. In the U.S., the state of Pennsylvania adopted LVT in 1911.
When converting from a conventional to a land value tax, it is prudent policy to begin with a revenue neutral tax rate. Gradually, over a period of several years, the tax rate differential is increased. The illustration below shows the tax rate splitting during the first stage to a 55 percent tax rate on land assessments. Over time the split rate reaches a point where 95 percent of the total tax rate is on land assessments.
We have drafted a proposal to adopt the land value taxation system. We’ve formatted it as an LVT primer. It shows the key provisions of any LVT statute. Here you can download the primer slide show.
Common Ground Membership & Donation link:
Excerpts From the Wikipedia page on Land-Value Tax:
The value of land (and many other macro-economic quantities) can be expressed in two ways. Land value is directly related to the value it can provide over a certain period of time, also known as ground rent. The capitalization of this ground-rent by the land market is what creates land prices, the other measure of land value. When ground-rent is redirected to the public, through LVT for example, the price of land will decrease, holding all else constant. The rent charged for land also decreases as a result of efficiency gains from the ad valorem aspect of LVT.
Land that is not desirable enough for use at a given time is called marginal land.
Land value tax causes the quality of marginal land to improve while also decreasing in rent, as explained by Ricardo in 1816.
Most taxes distort economic decisions and suppress beneficial economic activity. LVT is payable regardless of how well or poorly land is actually used. Because the supply of land is essentially fixed, land rents depend on what tenants are prepared to pay, rather than on landlord expenses, preventing landlords from passing LVT to tenants.
The direct beneficiaries of incremental improvements to the area surrounding a site are the land’s occupants. Such improvements shift tenants’ demand curve to the right. Landlords benefit from price competition among tenants; the only direct effect of LVT in this case is to reduce the amount of socially generated benefit that is privately captured (as an increase in the land price).
LVT is said to be justified for economic reasons because it does not deter production, distort markets, or otherwise create deadweight loss. Land value tax can even have negative deadweight loss (social benefits), particularly when land use improves.
Nobel Prize-winner William Vickrey believed that “removing almost all business taxes, including property taxes on improvements, excepting only taxes reflecting the marginal social cost of public services rendered to specific activities, and replacing them with taxes on site values, would substantially improve the economic efficiency of the jurisdiction.” A positive relationship of LVT and market efficiency is predicted by economic theory and has been observed in practice.
Fred Foldvary stated that the tax encourages landowners to develop vacant/ underused land or to sell it. He claimed that because LVT deters speculative land holding, dilapidated inner city areas return to productive use, reducing the pressure to build on undeveloped sites and so reducing urban sprawl.
For example, Harrisburg, Pennsylvania in the United States has taxed land at a rate six times that on improvements since 1975. This policy was credited by mayor Stephen R. Reed with reducing the number of vacant structures in downtown Harrisburg from around 4,200 in 1982 to fewer than 500. LVT is arguably an ecotax because it discourages the waste[clarification needed] of prime locations, which are a finite natural resource.
LVT is an efficient tax to collect because unlike labour and capital, land cannot move to escape tax.
Real estate values
Real estate bubbles direct savings towards rent seeking activities rather than other investments and can contribute to recessions. Advocates claim that it reduces the speculative element in land pricing, thereby leaving more money for productive capital investment.
At sufficiently high levels, land value tax would cause the real estate prices to fall by removing land rents that otherwise would become ‘capitalized” into the price of real estate. It also encourages landowners to sell or relinquish titles to locations that they are not using. This might cause some landowners, especially pure landowners, to resist high land value tax rates. Landowners often possess significant political influence, so this may explain the limited spread of land value taxes so far.
The owner of a vacant lot in a thriving city must still pay a tax and would rationally perceive the property as a financial liability, encouraging him/her to put the land to use in order to cover the tax. LVT removes financial incentives to hold unused land solely for price appreciation, making more land available for productive uses. Land value tax creates an incentive to convert these sites to more intensive private uses or into public purposes.
The selling price of a good that is in fixed supply, such as land, decreases if it is taxed. By contrast, the price of manufactured goods can rise in response to increased taxes, because the higher price reduces the number of units that are made. The price increase is how the maker passes along some part of the tax to consumers. However, if the revenue from LVT is used to reduce other taxes or to provide valuable public investment, it can cause land prices to rise as a result of higher productivity, by more than the amount that LVT removed.
Land Tax incidence rests completely upon landlords, although business sectors that provide services to landlords are indirectly impacted. In some economies, 80 percent of bank lending finances real estate, with a large portion of that for land. Reduced demand for land speculation might reduce the amount of circulating bank credit.
While owners cannot charge higher rent to compensate for LVT, removing other taxes may increase rents.
Assuming constant demand, an increase in constructed space decreases the cost of improvements to land such as houses. Shifting property taxes from improvements to land encourages development. Such infill of underutilized urban space also combats sprawl.
LVT is less vulnerable to tax evasion, since land cannot be moved overseas and titles are easily identified, as they are registered with the public. Land value assessments are usually considered public information, which is available upon request. Transparency reduces tax evasion.
LVT considers the effect on land value of location, and of improvements made to neighboring land, such as proximity to roads and public works. LVT is the purest implementation of the public finance principle known as value capture.
A public works project can increase land values and thus increase LVT revenues. Arguably, public improvements should be paid for by the landowners who benefit from them. Thus, LVT captures the value of socially created wealth, allowing a reduction in tax on privately created (non-land) wealth.
LVT generally is a progressive tax, with those of greater means paying more, in that land ownership is correlated to incomes and landlords cannot shift the tax burden onto tenants. LVT generally reduces economic inequality, removes incentives to misuse real estate, and reduces the vulnerability of economies to property bubbles and their collapse.
Adam Smith, in his 1776 book The Wealth of Nations, first rigorously analyzed the effects of a land value tax, pointing out how it would not hurt economic activity, and how it would not raise land rents.
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. More or less can be got for it according as the competitors happen to be richer or poorer, or can afford to gratify their fancy for a particular spot of ground at a greater or smaller expense. In every country the greatest number of rich competitors is in the capital, and it is there accordingly that the highest ground-rents are always to be found. As the wealth of those competitors would in no respect be increased by a tax upon ground-rents, they would not probably be disposed to pay more for the use of the ground. Whether the tax was to be advanced by the inhabitant, or by the owner of the ground, would be of little importance. The more the inhabitant was obliged to pay for the tax, the less he would incline to pay for the ground; so that the final payment of the tax would fall altogether upon the owner of the ground-rent.
— Adam Smith, The Wealth of Nations, Book V, Chapter 2, Article I: Taxes upon the Rent of Houses
Alfred Marshall argued in favour of a “fresh air rate”, a tax to be charged to urban landowners and ‘‘levied on that value of urban land that is caused by the concentration of population’’. That ‘‘general rate’’ should have ‘‘to be spent on breaking out small green spots in the midst of dense industrial districts, and on the preservation of large green areas between different towns and between different suburbs which are tending to coalesce’’. This idea influenced Marshall’s pupil Arthur Pigou‘s ideas on taxing negative externalities.
Paul Samuelson supported a land value tax. “Our ideal society finds it essential to put a rent on land as a way of maximizing the total consumption available to the society. …Pure land rent is in the nature of a ‘surplus’ which can be taxed heavily without distorting production incentives or efficiency. A land value tax can be called ‘the useful tax on measured land surplus’.”
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.”
Michael Hudson was a proponent for taxing rent, especially land rent.”…. politically, taxing economic rent has become the bête noir of neoliberal globalism. It is what property owners and rentiers fear most of all, as land, subsoil resources and natural monopolies far exceed industrial capital in magnitude. What appears in the statistics at first glance as “profit” turns out upon examination to be Ricardian or “economic” rent.”
Paul Krugman agreed that a land value tax is efficient, however he disputed whether it should be considered a single tax, as he believed it would not be enough alone, excluding taxes on natural resource rents and other Georgist taxes, to fund a welfare state. “Believe it or not, urban economics models actually do suggest that Georgist taxation would be the right approach at least to finance city growth. But I would just say: I don’t think you can raise nearly enough money to run a modern welfare state by taxing land [only].”
Nobelist Joseph Stiglitz wrote, “Not only was Henry George correct that a tax on land is non-distortionary, but in an equilibrium society … tax on land raises just enough revenue to finance the (optimally chosen) level of government expenditure.”