The Jerome Levy Economic Institute Conference: land, wealth and poverty

American Journal of Economics and Sociology, The,  July, 1996  by J. Ted Gwartney,  Nicolaus Tideman

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While Wicksell's insights are interesting, they do not fully solve the problem of moral taxation, because any departure from unanimity opens the door to exploitation of minorities, and the requirement of more-than-majority approval means that the costs of coalition-building will leave some worthwhile activities unapproved. Still, we would probably have a much more efficient public sector if every public expenditure required two-thirds approval in legislative bodies.

But to make taxation truly voluntary, the option to leave must be viable. If people could move costlessly from one jurisdiction to another, taking all of their belongings with them, then competition among jurisdictions would tend to eliminate oppressive taxation. This would leave only the fees that people were prepared to pay to have public services (Tiebout, 1956).

Of course, moving will always have some costs, so the ideal will not be attainable. But what can be imagined is a system in which all taxes were local taxes. Then people would not have to move nearly as far to escape from taxes that they regarded as oppressive. Higher levels of government would not need to disappear; if the services that they provide are desired, they could be financed by levies on lower levels of government.

Consider the economic equilibrium of such a system. What taxes should one expect to find? If it is very inexpensive to move from one place to another, then the utility that people achieve in any one community cannot be significantly lower that what they would achieve in any other community, and localities will only be able to tax people to the extent that their presence in the community generates net costs to the community. And there are some costs of added population - greater congestion, perhaps higher costs of fire and police protection, and perhaps other costs as well. But there are also benefits to a community of greater population, arising from the opportunity of all other residents to trade with the new residents. Thus communities would not be able to raise much revenue from income tax or taxes on capital before they would drive residents and investment away. It might seem that there would be no way that localities could finance themselves.

Such a conclusion would be unwarranted, because there is a very significant source of public revenue that can survive when localities compete for mobile residents. This source is land. When people are taxed in proportion to the land they possess, no land moves to another locality where taxes are lower. Thus two questions arise: Would taxes on land be sufficient to finance the public activities that ought to be undertaken, and would such a system be fair?

Consider first the question of adequacy of revenue. There is a theorem in economics, known as the Henry George Theorem, that addresses this question (Arnott and Stiglitz, 1979). One of the simpler versions of this theorem is: If the following three conditions are met:

1. Public expenditures provide benefits only over a limited area,