Reducing tax obstacles to economic progress: an address

American Journal of Economics and Sociology, The, July, 1994 by C. Lowell Harriss

I

The Vision of Henry George

NO TAX ON LABOR. No tax on man-made capital. Government to be financed from the fruits of land--land, the product of nature, not of human effort or thrift! Land which will continue to serve no matter how much of the production attributable to it is taken by government.

Such was the vision of Henry George (1839-1897). A century ago his proposals had wide public support--The Single Tax on land "and the abolition of all taxes upon industry and the products of industry" (George, The Standard, Aug. 3, 1889). Let me repeat: No tax on labor or man-made capital.

At that time a tax on pure land rents (in the classical economic sense) might well have paid for all of American government. (I assume some way around Constitutional restrictions.) The national government and the states did very little by present standards. Government was local.

Looking at the figures, one must be cautious if only because of changes in the purchasing power of the dollar (inflation). Yet a few numbers may be helpful. We have the findings of the first Census of Governments (1902, not long after George's active life). They cover all three levels of government--local, state, and national. The Census found that taxes for all units of government combined were $1,373,000,000 in 1902. Property taxes were $706,000,000, over half of the total. A near doubling of the property tax (to pay for total spending) with all revenue coming from land while removing all taxes on buildings and personal property would have involved considerable shifts away from man-made capital and onto land. But such a change--to a Single Tax--would, I believe, have been economically possible. (The two largest non-property taxes were $243,000,000 from the tariff and $187,000,000 from taxes on alcoholic beverages.) Per capita taxes for all levels of government were about $18.60. Total taxes were slightly less than seven percent of personal income.

Such figures help us to understand that Henry George was not the impractical dreamer sometimes apparently assumed by persons who dismiss his views as too unrealistic to deserve respectful attention.

Government services were chiefly local, paid for almost entirely by property taxes. A portion came from land. Enough more might have come from the land portion to permit a relatively large drop in, even the elimination of, property tax on man-made capital. Our choices today do not include a single tax to replace taxes on labor and capital. However, our choices do include the opportunity to reduce burdens on man-made instruments of production--factories, houses, utility plants, computers, transportation facilities, commercial buildings, business inventories, and so on.

II

Total Land Values in the United States

HOW FAR COULD LAND VALUE TAXES GO toward reducing today the burdens on industry, on production, and on persons as consumers? Significantly, but far from completely!

For the purposes of this paper I shall exclude oil and other minerals. The principles involved would call for inclusion of the natural resource value of minerals extracted. It would be appropriate to include the value of air rights as an element of location to the extent not included in land values. Land values depend on current and prospective benefits--economic rents--capitalized at some rate of interest. The Federal Reserve BALANCE SHEETS FOR THE U.S. ECONOMY 1945-92 shows "land at market prices" at the end of 1992 as $4,289 billion, around $16,000 per capita. (Governmentally owned land is excluded; it would not, one assumes, constitute part of a base for taxation.) The 1989 figure had been larger by one and a quarter trillion dollars--$1,265 billion; land values dropped by one third in three years. The 1977 total is shown as smaller by two and a half trillion dollars--$2,460 billion. The changes in 15 years were indeed large.

Land made up an estimated 23.4 percent of domestic wealth in 1992. The degree of error in these figures must be large. But, in any case, land totals are substantial.

An additional tax of one percentage point on land value apparently would yield somewhat under $40 billion a year. This amount would be more than one-fifth of the $174 billion total property tax revenue in 1992. In most localities an annual tax of five to eight percent on full value of land would probably finance the complete elimination of property taxes on man-made capital. Obviously, any such estimate is subject to a wide range of uncertainty if only because we cannot know how the shift would affect land prices. Nor do we know how much of the land included in the total would be exempt on the basis of its ownership by religious and other tax exempt institutions.

No immediate, abrupt freeing of buildings, machinery, and inventories from property tax lies in the realm of probability. But over the years, not necessarily many, the phasing out of tax on man-made capital does seem possible--economically. Legally, and politically, change presents a variety of problems. Many state constitutions would have to be modified. Leaders, and then the public, would have to be instructed and convinced, community by community, state by state.