The economic effects of taxes on land: they depend neither on non pecuniary returns nor on capital market imperfections - neutrality

American Journal of Economics and Sociology, The,  July, 1997  by Brian L. Bentick

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This result of non neutrality is quite specific to a special case where the uses of land are mutually exclusive rather than sequential. While it might be validly argued that this result is also specific to a particular and controversial definition of land value, this only underlines the fact that this special case cannot be taken to upset the concensus that land taxation is generally neutral, and does not require the existence of non pecuniary returns and imperfections "distorting" land uses.

In summary, where the development decision depends on a simple comparison of current rentals from existing and alternative current uses, a tax on land ownership is always neutral, whether or not rentals have a non pecuniary component and whether or not there are capital market imperfections. On the other hand, in the special case where the development decision depends on a comparison of current rentals and the present value of future rentals which are not immediately available, the holding costs of a land tax are not neutral since they fall more heavily, like a capital market imperfection which raises interest rates, on future land uses which involve waiting. The pioneer of economic thought on this subject, Henry George (1879), was well aware of this case (although I cannot tell whether or not he regarded it as a special one) when he wrote, "Taxes on the value of land not only do not check production, as do most other taxes, but they tend to increase production, by destroying speculative rent.... if land were taxed to anything near its rental value, no one could afford to hold land that he was not using; and, consequently, land not in use would be thrown open to those who would use it." (Book VIII, Chapter II, 293 in the Everyman edition).

References

Bentick, Brian L., "The Impact of Taxation and Valuation Practices on the Timing and Efficiency of Land Use," The Journal of Political Economy, (87), 1979, 859-68.

Bentick, Brian L., and Thomas F. Pogue, "The Impact on Development Timing of Property and Profit Taxation," Land Economics, (64), 1989, 317-24.

Bourassa, Steven C., "Economic Effects of Taxes on Land," The American Journal of Economics and Sociology, (51), 1992, 109-13.

George, Henry, Progress and Poverty, New York: E. P. Dutton, (Everyman Edition), 1900.

Historical Notes on the Foundations of Land Economics in Ireland: The Case of William Edward Hearn

Australia's First Professor of economics, William Edward Hearn (1826-1888), emigrated from Ireland to take up his post at the University of Melbourne in 1856. Hearn is rightly considered to be the most accomplished of Australia's nineteenth-century economists. In 1851, while still a student at Trinity College, Dublin, Hearn won the Cassell Prize Essay on the Condition of Ireland contest with his pamphlet "On Cottier Rents." It is in memory of this interesting essay and the victims of the horrible famines that Hearn witnessed in his youth that I dedicate this note.

Hearn demonstrated how the institutional assumptions of the differential theory of land rent needed to be modified when that analysis was applied to a less developed agricultural community such as Ireland. He began by asserting that the rental payment is made to the monopolist owner of an essential agent of production - land. Since the supply of land cannot be increased except by reclaiming wastelands at an enormous marginal expense, the rental price of land is largely dependent on the demand for the land. Ireland, unlike England and the rest of Britain, was without a manufacturing sector. The implications of this fact were alarming.