A Land Value Tax? Evaluating Georgism

What is a Land value tax and what is Georgism?  In a nutshell a man named Henry George proposed replacing all other taxation with a tax on the value of land.  No income taxes, no excise taxes, no capital gains taxes, no sales taxes.  Only tax on the value of land.

On Principal:

From a natural rights perspective I am initially not a fan on this.  A tax on the ownership of property (and I classify land as property) effectively means that the individual does not actually own the land, that the government is the actual land owner.  What I am identifying as a massive philosophical flaw, was Henry’s main point.   On this principle I am vehemently against a land value tax.

The problem with principal’s is that a rigid application of them results in effectively gaining nothing you want because you refuse to budge.  Think of the Dr. Seuss story of the North going Zax and the South going Zax who stood for decades in the Prairie of Prax refusing to budge, until a whole town was built around them.

I’m not going to win on principal because we are already taxed on land at the local level, so we already don’t truly own it anyways.  If I need to choose between fully owning my land or fully owning my labor, I will certainly take fully owning my labor. I view a tax on income as much worse than a tax on land.

The general argument is that the land itself is God / nature given and all people who live on the land should own an equal amount of it.  Since it isn’t practical or mathematically possible to adjust this over time with actual land, a land tax with a Universal Basic Income is a way to administer this principal.  Essentially all land is taxed and people who own more land thus pay more in tax.  Those who own less land pay less in tax.  Every person though receives the same UBI from the land tax, so people who own more land than their theoretical share of the land will pay more than the UBI they receive, while people who own less land than their theoretical share will receive a higher UBI than what they pay in tax.

The Backdrop:

Henry George first floated this idea in the early 1880s. The setting of an idea is something that is often overlooked.  In the 1880s the federal government was extremely small and there was no federal income tax to speak of. Federal spending was about 10% of GDP, whereas today it is 34%.  The total population was around 50 million people vs 350 million people today.  There was also very recently millions of acres of land that came up for sale in a short period of time that was largely purchased by the wealthy and big corporations (or given to railroads to spur economic development).  The US opened up the Ohio territory in the early 1800s, followed shortly by the Louisiana purchase, and with Westward expansion and the Homestead Act of 1862 the US Government was giving away a ton of land.

When Henry George talks about a land value tax being able to provide for all of government spending, and even an effective Universal Basic Income system, he is not talking about a government like what we have today.  The US Federal government did not police the world, did not have a plethora of Alphabet Soup agencies, and did not provide Social Security or Medicaid spending.  He was talking about funding an extremely small government.  The fixed amount of land in the US, except for Alaska and Hawaii, was mostly set, the population was 1/6 of today and federal spending as a percent of GDP was less than a third of today.  Personal spending was also vastly less, so when we talk about a UBI covering basic living expenses, we are talking very different from basic living expenses today.  The average worker earned around $430 a year, which adjusted for inflation is roughly $13,000.  This is $13,000 for the median working person.  This also means that roughly half of workers earned less than this. There wasn’t electricity, running water, natural gas lines (in most places anyways), cars, or internet.  Most houses were what we would call sheds today.

The Effects of A Land Value Tax:

The land value tax provides some major benefits that are hard to ignore.

The land value tax encourages development of land, and discourages speculation or hoarding.  If an acre of land has a yearly tax of let’s say $2,000 regardless of any development, then having that land sit doing nothing creates a large cash flow drag on the property.  The same land is taxed at $2,000 regardless of if there is a house on it, an apartment building, a store, or a factory.  A significant tax on the land encourages use of the land to make the land pay for the property taxes.

This is bad news for Speculators.  If a 1,000 acre tract of land costs $5,000 an acre, then the acquisition is $5 million.  With no land tax it costs nothing to hold this land.  But with the $2,000 per acre tax, it costs $2 million a year to “hold” the land.  Land speculators hoping for an increase in value over a several decade period, as well as the wealthy who just want to own thousands of acres of land, would have a major disincentive to do so.

The net effect of this is that there would be downward pressure on land prices, as no one wants to hold onto unproductive land for a long period of time.  It also means that people are incentivized to make good use of the land through development.  Building houses and apartments will drive down the overall cost of housing for everyone.

Another net effect would be that local governments would be forced to get rid of NIMBY (“not in my back yard”) rules.  Local government couldn’t stop development because the incentives of the land owners would be for development.  The incentives of non land owners would also be for development.  There would be a large economic forcing function that would stop local governments from preventing the buildings of houses and apartments.

As more development occurs, the value of the land in the area increases, and thus the tax base.

The income generated from the land tax must be used to advance America’s interest.

Unproductive Land:

A few years ago my parents joined an RV community in Arizona.  This community is just outside of Benson, AZ and is surrounded by large tracts of vacant land.  Several of the tracts are owned by the State or the Federal Government.  There are several owned by Speculators and one tract owned by someone who has been dead for several decades.  What do you think the property taxes are on 318 acres?  If you guests $25 a year you would be correct!  There is certainly no incentive for this property to be developed.  It costs nothing for the current owners to sit on it in their portfolio.

How I Would Be In Favor of A Land Tax:

Step 1: Reduce the US Federal budget as a percent of GDP to what it was in 1880; roughly 10%.  This means that total federal spending for 2022 would be reduced to roughly $2.5 Trillion vs, the current $6.1 Trillion.  The US Federal budget is constrained to a maximum of 10% of GDP through constitutional amendment, with the exception that this spending cap does not apply to defense spending If the country is in a war declared by Congress. I know this isn’t going to happen, however this is the only way to get to step 3 which is paramount to this overhaul of our tax code.  Spending cuts to this level would cause a default on the national debt, so perhaps we arrive at 10% of GDP on a glide path starting at 20% and reducing by 1% a year.  Massive fiscal restraint is a necessary step 1.

Step 2:  The Federal government sells ALL federal lands that are not currently National forests or military bases. These sales could not be made to any foreign nationals or foreign companies. The federal government still owns 80% of Nevada, 63% of Utah, 61% of Idaho, 61% of Alaska, and even 45% of California.  If the goal is to make unproductive land productive, Getting it out of the hands of the Federal Government is a very important step.  These sales will also raise funds that will pay down the national debt. There are some back of the envelope calculations that estimate the land held by the Federal government is worth around $1.8 Trillion.

Step 3: With local property taxes, at least in Michigan, non homesteaded properties (meaning commercial properties, vacant land, rental properties, and 2nd homes) are taxed at a higher property tax rate.  Any foreign owned land, either by corporations, governments, or non US citizens, gets taxed at a higher rate,  something like 4X what citizens are taxed.

Step 4: The 16th Amendment authorizing Congress to levy an income tax is repealed. By transferring our tax system to being based on land tax vs. income tax we become the tax haven of the world.  People are no longer punished for being productive and our economy grows like crazy.  This could get interesting.  Would all savings in Roth accounts and 401K accounts be treated the same? I would think the Feds should have the ability to still tax all currently tax deferred asset accounts.  Perhaps requiring a conversion at a blended 15% total tax rate. While we are at it, repeal the estate tax as well.

Step 5: The Federal land tax would be in addition to current property tax structures.  A limit similar to Michigan’s limit is put in place limiting the increase in taxable value per year to 5% or the rate of inflation, whichever is lower.  This provides certainty to what the future cost increases will be.

Step 6: Land appraisals are evaluated by 3rd parties and are routinely checked for fairness relative to other similar parcels and the actual market value of the land itself. Here’s a good example.  My municipality just sent out the yearly notices of property tax assessments.  They tripled the assessments for all vacant residential lots in the township.  They are saying that a vacant 1 acre lot is worth around $50,000, despite none every having sold for anything near this.

The US has roughly 2.4 Billion acres, this tax if applied evenly to every parcel would be $1,000 an acre.  Obviously some land is more valuable than other land:  An empty 100 X 100 lot in Manhattan is likely worth more than 1,000 acres of land in the middle of Nevada, so there will be an appraisal mechanism for land.

Step 7: With economic growth fueling an increase in GDP and thus taxes collected, the additional funds over the initial baseline would then go towards paying down the national debt.

Step 8: Once the national debt is paid off, the funding of the US government is swapped to only the revenue from tariffs and the land value tax becomes a UBI for US citizens.  The idea here is that we all own the US land itself with an equal share.  For people who hold more land, they will effectively be compensating those who choose not to own land.  If the $2.4 Trillion tax is spread across 345 million people it is $7,000 per person. If the land dividend only went to citizens over 18, then the $2.4 Trillion across 262 million adults would be $9,160 per year.   Since we want to encourage people to have children I would be in favor of the first option. The land value tax is still capped at 10% of GDP.  As the US GDP increases, the total tax will also increase, which will then make this dividend larger.

Step 9: The Land Dividend replaces ALL means tested programs.  Our means tested programs provide terrible incentives for people to earn less and not save money.  They are a complicated bureaucracy and do not improve the long term health of our nation. Citizens who do not want or need their land dividend are able to easily opt out on a year by year basis and return the money to the Treasury.

What do you think of a national land tax, Georgism, and this option to eliminate the income tax?