An Analysis of the Effects of Land Value Taxation on Inequality, Instability, and Poverty By Jordan Kizer As the industrial revolution brought about massive increases in efficiency and productivity, many people expected the resulting increases in wealth to be distributed evenly throughout society.1 It was thought that the common laborer would work less and earn more, and poverty would be eliminated.2 However, this was not the case, and instead, poverty and inequality persisted through this period. Henry George, an American political economist, was preoccupied with reconciling the promise of the industrial revolution with the reality of the late nineteenth century. He realized that land rent imposes social costs that can destabilize economies and increase both poverty and inequality.3 However, taxes that governments use to ameliorate these problems inherently shrink the market, reducing economic growth.4 The implication is that governments must tolerate a certain amount of economic dampening to mitigate these negative externalities. States can encourage economic growth through the funding of welfare, public works, and land development, and through other economic tools.5 The question then becomes how to fund such projects. Many taxes that fund economic growth policies also impose further negative externalities by disincentivizing transactions. This creates a Catch-22: governments must tolerate certain negative externalities if they wish to stimulate economic growth. The land value tax that George proposed resolves both conundrums.6 It mitigates many of the social costs and negative externalities of rent by increasing economic stability while decreasing poverty and inequality. At the same time, it provides a stream of public revenue without the harmful distortions created by most forms of taxation. With land value taxes, governments can use the revenue from mitigating the negative externalities of rent to stimulate economic growth.
The Problem with Rent According to Henry George, rent is “the part of the produce that accrues to the owners of land (or other natural capabilities) by virtue of ownership.”7 In other words, rent is when a resource owner, such as a landowner, extracts value from
42
the resource that exceeds its initial cost. Because of this potential for profit, landowners often engage in rent-seeking behavior, where they charge tenants more over time than the purchase price or current resale value of the land. Because land rent is determined by the difference in productive value of two plots of land, a plot close to a community’s central business district will command higher rent due to a tenant’s shortened commute.8 Further, the proximity of schools, hospitals, parks, and other public amenities can also drive an increase in rent. For Georgists, this rent-seeking behavior can have a negative impact on broader society, increasing inequality, instability, and poverty.
Inequality: Land Rent as a Club Good
The fact that land increases in value is seen by many today as a given. However, land itself cannot become more productive without the application of labor or capital. This increase in value can largely be attributed to improvements to the community.9 When roads are built, schools erected, parks created, and police and fire departments funded, the land nearby increases in value relative to a similar piece of land that does not benefit from these community improvements. This concept is reflected in the oft-repeated real estate adage that the three most important factors in determining the value of a home are “location, location, location.” Thus, while all persons are the social beneficiaries of public goods within a given community, the economic benefits are generally limited to landowners in the form of rent. Land rent is a club good: it is non-rivalrous in that one plot of land increasing in value does not preclude another from doing the same, but it is excludable in that only landowners see the profits. This arrangement would be equitable if community development were funded entirely by landowners, but that is not the case. Taxpayer funding is responsible for a substantial portion of community development, but many taxpayers do not own land, so they do not receive the economic benefits of the resulting increases in land values. Likewise, some landowners may pay lower taxes due to being unemployed or consuming comparatively little, but they still receive the economic benefits of community development and increasing land values.10 This system, in which some people pay without benefit and others receive benefits without paying, con-
