The following essay was written by Dan Sullivan. I asked him to explain his position on a progressive land value tax as a means of financing government. There are important differences that exist between Dan’s and my opinions, but I wanted to give him an opportunity to make his own case. I may post a reply later, but it is in any case my hope to encourage a broader discussion of how a well-organized government should work.
Here then is Dan:
Land value tax is naturally progressive. So is property tax, despite the mythology to the contrary. This mythology was originally created by economics departments that were funded by railroad barons and other land monopolists. (See Gaffney, Mason, The Corruption of Economics)
Several ridiculous assumptions underlie efforts to show that real estate taxes are regressive. One is to assume that the tax is passed on in the form of higher rents and higher product prices. This assumption is made even for idle land that has no tenants and produces no product. As higher real estate taxes would bring such lands onto the market, the supply of land would be increased and the price would fall. The converse of this is most obvious when one looks at the dramatic rise in real estate prices in California and Massachusetts after property taxes were curtailed in those states.
Another ploy is to look only at residential land, again assuming that the tax is passed on to the renters, and ignore investment land. While the value of a wealthy person’s personal residence might not be a greater share of his income than the value of a poor person’s residence, one also has to look at the source of rich people’s incomes.
Generally, the moderately affluent derive incomes from additional real estate. Real estate taxes would come out of those incomes. The very affluent tend to derive their income from corporate stocks, but the corporations own real estate, and would have to pay taxes on that real estate before they would have income to pass on to their shareholders.
Again, a real estate tax is not passed on in the cost of production because the holder of the real estate tax must pay the same amount whether he produces or not. The only avoidance strategy for real estate tax is to produce more product using less real estate. This causes product prices to fall a bit, but it causes real estate prices to fall a great deal.
Land value tax is better than conventional property tax in two regards. It encourages productive, efficient land use, leading to more housing, more jobs and less sprawl, and it is more progressive.
Land prices are outrageously high in the “exclusive” neighborhoods and very low in poor neighborhoods. Shifting from property tax to land value tax saves money for homeowners in all but the richest neighborhoods. It also shifts the commercial tax burden from the neighborhood business districts, where small businesses tend to be located, to the central business districts and to the suburban shopping malls, where large corporations and chain retailers tend to be located.
Trying to make real estate taxes more progressive by artificial means is “gilding the lily,” and is problematic. It would lead to the artificial division of property, where large companies would set up dummy companies to hold individual parcels, or even allow individuals to hold title to those parcels. The titles would then be “liened” by the parent company, which would be the true owner.
We can see similar reactions to such arbitrary measures in our history. During the Great Depression, some states passed laws prohibiting corporations from owning land for more than six months. The corporations would sell their land to an individual for a price that individual could not afford, and would lease the land back with a “buyback” kicker at the end. This means that, at the end of the lease, the landholder must resell the land to the corporation. If the law were still in the place, the corporation would just repeat the process.
There is, however, a more natural way to improve the progressivity, even of the land value tax. That is to use a portion of the funds for a per capita grant to each citizen. Citizens who hold small amounts of real estate would get a net dividend with their taxes deducted, and those with large amounts of real estate would pay their taxes with the dividend deducted. Renters would get checks for the whole amount due them.
A variant of the dividend plan was originally proposed by Tom Paine as the first social security proposal. It was not based on attaining productivity per se, but on the idea that every citizen had an equal right of access to the earth. Those who gave up their rights (or had them taken away) were entitled to compensation in the form of dividends.
cannablog 