A recent article in the Financial Times argues for the extension of a land value tax to replace less efficient taxes. The concept of a tax on the unimproved value of land has a lot of merit; it is probably the most efficient of all taxes. It has long been considered (if properly applied and without significant exemptions) as an ideal tax by both the right and the left.
For example, the Henry Tax Review stated:
Land has the potential to be an efficient tax base for the States capable of delivering significant and sustainable revenues. Land is an efficient tax base because it is immobile; unlike labour or capital, it cannot move to escape tax. This means that economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases. However, this efficiency is harmed if there are significant exemptions from land tax that encourage people to change how they use land.
While Milton Friedman said in 1978:
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.
Friedman was of course referring to Henry George’s proposal to replace all taxation with a land value tax (in his 1879 book Progress and Poverty).
The article’s author, Webb, also elicits support from Winston Churchill
It was a hobbyhorse of Winston Churchill’s. He was convinced that “land differs from all other sorts of property” and put the LVT case like this: “Unearned increments in land are not the only form of unearned or undeserved profit, but they are the principal form of unearned increment, and they are derived from processes which are not merely not beneficial, but positively detrimental to the general public.” He also offered a fabulous example of unearned betterment. A parish church started to give out free food to poor people living in a particular area. Demand to live in the area rose. The main beneficiaries of this surge in community spending? Local landowners. Their rents and hence the value of their land rose in response to the free bread. And the effect on the poor? Entirely neutral: they paid less for their food but more for their shelter.
A comparison of Texas and California provides further support for land value taxation. Property taxes are negligible in California (at least since 1979), with the burden of taxation principally falling on income tax. By comparison, Texas relies extensively on property taxes (although not strictly LVTs) – it is the principal tax in Texas.
Over the past 20 years, the economy of Texas has been far stronger than California, with higher economic growth rates, less volatility and lower unemployment. In California real estate prices have surged and collapsed – a classic boom and bust real estate cycle. In Texas, property prices have remained fairly stable.
While there are likely to be many factors contributing to the differences observed between Texas and California, a relatively high reliance on property tax has not harmed the Texas economy.
I think it would be a useful reform in Australia to increase the reliance on LVTs at the expense of other far less efficient taxes. I doubt we could ever achieve a 100% reliance on LVTs as proposed by George. But there is significant scope to shift the burden away from income taxes and stamp duties among other forms of tax in Australia.
But let me be clear: my support for such a tax regime is on the basis of a net fall in the size and burden of government. I am a strong supporter of smaller and more efficient government.
Finally, the article mentions that the unimproved value of land is more or less valued because of government infrastructure. This is overegging the argument. While infrastructure (roads, sewerage, electricity, water etc) is important to the value of the land, so too are private amenities, the beauty of the location, the quality of one’s neighbours and so forth. Government can influence the value by the type of title which is granted and the caveats on the freehold title. Two identical pieces of land will vary in price (other things being equal) by the restrictions placed on the title deed. A title which has fewer restrictions would normally be expected to be more valuable (as it confers additional rights and options).