A land tax could help reduce wealth inequality.
Economics

The Best Way to Reduce Wealth Inequality

July 14, 2019

Can you imagine if owning land was outlawed?  

What if the only taxes the government collected were taxes on land?  

What does a world like this look like?

Both sound pretty un-American, and pretty outlandish.

But these two ideas form the crux of Georgism, an economic ideology named after the late 19th century American political economist Henry George.  

Essentially, he argues: value derived from land should be shared by all members of society and rents from land ownership should not flow directly to individuals or corporations.  

He arrives at this conclusion from the powerful idea he explores in his book Progress and Poverty, that

The great cause of inequality in the distribution of wealth is inequality in the ownership of land.”  

Here, I’m going to discuss: 

1) Why Henry asserts that land ownership causes vast wealth inequality in America and then 

2) explain his ideas around a land tax and land ownership, and finally 

3) some ideas of why it hasn’t become widespread in the US

Wealth Inequality

First up: Land Ownership causing vast wealth inequality.  George published his magnum opus, Progress and Poverty, in 1879 when wealth inequality looked much different than it does today: industry titans and businesspeople prospering magnificently while hundreds of thousands (especially in cities) starved and lived in squalor.  However, his core ideas and principles hold true today.

George asserts that this problem affects developed countries with sophisticated means of production more so than impoverished countries (think the US vs. Nepal today).  He describes the poor in wealthy nations as recipients of “enforced idleness.” Not only does this vast wealth gap exist in developed nations (he even discusses Britain) but particularly in cities. You see the poorest of the poor living in squalor, dirty, and starving in New York or Boston; out in the country, the poor have it better (keep in mind the timeframe we’re looking at here is the late 1800’s).  Why in cities?

A key question we need to ask to further the conversation would be: what’s a fundamental element of cities lacking in the countryside? Simply: more people in less space.  The next question would be: what’s causing the value of the land in cities to increase? George’s fundamental argument says that the community around the land is the sole reason for the increase in the value of land. 

Think about New York City today and the astronomically high price tag of a plot of land.  What causes that small plot of land to be 100x more expensive than a similar plot of land in central Kansas with the same dirt and rock profile?  According to George: the people around that land. The land in cities becomes expensive because the communities in these areas build valuable things on top of the land – thus the land owes its value to the people creating, building, and working on or near the land.  

Here lies George’s key insight that

“advancing population tends to advance rent, so all the causes that in a progressive state of society operate to increase the productive power of labor tend, also, to advance rent, and not to advance wages.”

George does not morally accept the idea that an individual can profit off of plot of land where the increase in value is owed to the community around the land, and not to any wealth creation attributed to that land owner. 

To understand George’s core insight, and how the wealth gap attributed to land manifests itself under the current state of affairs, let’s look at a few of his assertions and come up with examples of how this plays out.  

The rent of land is determined by the excess of its produce over that which the same application can secure from the least productive land in use.  

This can be seen if you own two identical restaurants (let’s assume they are both diners): one in fancy SoHo in Manhattan (diner #1), and one on Main Street in a small, declining town in America (diner #2).  Your two diners sit on identical sized plots of land.  

Let’s assume you generate $100 in sales a month in your Manhattan location, and $50 in your small town location.  More people live in Manhattan so you have a larger base of paying customers. Because of the greater population density though, you get charged $70 in monthly rent in Manhattan, and only $10 in monthly rent in the small town.  This major difference in rent is attributed to the larger market; because of the immense population density, it’s simply easier to generate higher sales.      

But take a closer look at the numbers.  In Manhattan, even though you have 2x as high sales, you only generate $30 in profit because of the high rent, where in the small town you generate $40 in profit because of the “less desirable” and “less productive” land.  

While many profitable businesses exist in Manhattan and many unprofitable businesses exist in middle America, the core point remains: you owe higher rent to an individual for diner #1 only because of the value you have created and the thriving community around the restaurant, not because of anything your landlord did.   

If the value of land increases in greater ratio than productive power, rent will swallow up even more than the increase; and while the produce of labor and capital will be much larger, wages and interest will fall.  

So here’s the issue: even if you had a three Michelin star restaurant in Manhattan, the rent would continue to climb year after year because of the increasing desirability of the land.  You could hire the best chefs and invest in automation in your restaurant to double your sales again to $200 a month. In diner #2, you continue to refine the menu and plug away and get $60 in sales one month.  

However, the fact that you have such a successful restaurant in Manhattan actually continues to make the land it sits on even more desirable, thus continuing to drive up the rent.  Even if you invest in your workers and your restaurant in Manhattan, the rent continues to climb and more than doubles and goes to $160 a month now.  You’ve literally had to double your sales just to get a $10 increase in profit (now at $40) because the rent sucks away most of your hard earned sales.  You can’t afford to pay your incredible chefs more, and you have less money to invest back in your business to continue to improve your customer experience, and potentially even less money to put back into your own pocket.  

While back in small town America, diner #2 continues to hum along because of the relatively lower rent.  Even if the rent doubled again to $20 (unlikely), you’d still generate the same profit ($40) as the three Michelin star restaurant in Manhattan, but without all of the capital and labor investments.  

This is an incredibly simplistic example, but the major consequence here should be clear: even if productive power increases and new technologies are developed, wages of normal workers don’t increase in step because of the rising rents.

The famous American novelist John Steinbeck shows these problems through the eyes of the Joad family in his masterpiece The Grapes of WrathEscaping poverty during the Great Depression in Oklahoma (60 years after Progress and Poverty), they journey to the fertile valleys of California in search of earning a living working the fields.  They quickly encounter a massive problem affecting thousands of other families migrating out West: land speculators purchased enormous swaths of land around San Francisco in anticipation of the City expanding outward.  The speculators refused to use the fertile land for productive purposes; less available land forced the migrants to work and live at the margins, driving wages down (due to enormous demand and limited supply) and unnecessarily exacerbating the pain of the Depression for thousands of families.  

In sum: an increase in land value increases rents, providing huge profits to land owners and suppressing wage growth for laborers.  The incentives to hold and not use productive land in hopes of increasing value also intensifies this problem. Even if, as a business owner, you create wealth and value on top of the land, rent will grow in lockstep, and remain a constant (or even increased!) percentage of your sales over time.

The Land Tax

Okay, so now we understand how private land ownership can cause wealth inequality and why cities are ground zero for this phenomenon.  What do we do about it?

Here is where George’s famous Land Tax comes in.  In his own words: 

“What I, therefore, propose, as the simple yet sovereign remedy, which will raise wages, increase the earnings of capital, extirpate pauperism, abolish poverty, give remunerative employment to whoever wishes it, afford free scope to human powers, lessen crime, elevate morals, and taste, and intelligence, purify government and carry civilization to yet nobler heights, is—to appropriate rent by taxation….It is not necessary to confiscate land; it is only necessary to confiscate rent.”

Appropriate rent by taxation.  What does this mean?  Further explanation:

“Consider what rent is. It does not arise spontaneously from land; it is due to nothing that the land owners have done. It represents a value created by the whole community. Let the land holders have, if you please, all that the possession of the land would give them in the absence of the rest of the community. But rent, the creation of the whole community, necessarily belongs to the whole community.”

So the value of the land itself, which cannot be owned by an individual nor is created by the individual, gets taxed, and that tax feeds back into the community (as a tax system should work).  You might think: how is that any different than a property tax? You can watch this video or look at the example below.

Vanderbilt owns a plot of land worth $1000 and believes the value will increase over time.  He holds it for now. Rockefeller owns an identical plot of land also worth $1000, but he builds a grocery store on his land, and an appraiser values the store itself at $2000 (so his total property value equals $3000).  Under a property tax, if the government taxes at 10%, Vanderbilt pays $100, whiles Rockefeller pays $300, literally 3x as much even though he has built something of value on his land.  

However, under a land tax, they only get taxed on the value of their land, so they pay equal amounts ($100); the total tax burden on Vanderbilt also shifts from 25% under a property tax ($100 out of $400 total collected by the government) to 50% ($100 out of $200 total collected by the government).  

Hopefully you can see the implications under the land tax: landowners are not penalized by a tax for developing useful assets, and landowners with idle property end up paying a higher percentage of the total tax bill (meaning their tax burden would likely increase).  This structure incentivizes people to actually produce something of value on their land. 

Note that the land tax replaces the property tax – in George’s perfect world it replaces ALL taxes.  We won’t go there, but let’s look at how this proposed land tax plays out in the real world. 

If land tax is so great, why hasn’t it been implemented 100 years ago??

Great question.  I have a few theories, but this question remains completely up for discussion.  First, at least in the US, some towns in Pennsylvania actually have tried to create a land tax.  Here’s a guess as to why it didn’t take off across the entire state: local residents and businesses did not like a fundamental change in the tax structure.  Difficult to understand and operate in. Just like any change. Other types of local and district taxes on property also created confusion and challenges. In George’s world, the land tax works best as the only tax.  Imagine paying a land tax, yet having other local property taxes enforced?  People probably became sick of dealing with the conflicting taxes and pressured their local representatives to axe it.  

Here’s another theory why land tax hasn’t taken off: it’s not really compatible with the early ideas of property ownership and property rights coupled with the foundation of capitalism.  George’s ideas around land as a common good that cannot collect rent by an individual clash directly with the ideas the Founding Fathers built the US on. Both agreed that you could (and should) own land and reap the fruits of your own labor or value creation; however, they diverge when our Founding Fathers and the aristocracy of 1776 believed land belonged to the individual, and an individual could collect rent for any activity on their land.  

Plus, for the aristocracy in the US and the UK, owning land continued to generate vast wealth and even was a prerequisite for voting.  Why would the Founding Fathers even want to consider a land tax and the idea of common ownership when they directly profited from owning enormous swaths of land and charging rent on what they didn’t use?  I’d imagine that this foundation in both our political and economic systems have made any transition to a land tax championed by George near impossible on a large scale in the US.  

Keep in mind these are just my theories.  Many other countries like Singapore, Australia and Denmark have toyed with some flavor of the land value tax – maybe one day we’ll see some country implementing it at scale and cutting back on other tax collection mechanisms.

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