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12. The Economics of Violent Intervention in the... > 8. Binary Intervention: Taxation
E. A Tax on Land Values
Wherever taxes fall, they blight, hamper, and distort the productive activity of the market. Clearly, a tax on wages will distort the allocation of labor effort, a tax on profits will cripple the profit-and-loss motor of the economy, a tax on interest will tend to consume capital, etc. One commonly conceded exception to this rule is the doctrine of Henry George that ground-landowners perform no productive function and that therefore the government may safely tax site value without reducing the supply of productive services on the market. This is the economic, as distinguished from the moral, rationale for the famous “single tax.” Unhappily, very few economists have challenged this basic assumption, the single-tax proposal being generally rejected on grounds purely pragmatic (“there is no way in practice of distinguishing site from improvement value of land”) or conservative (“too much has been invested in land to expropriate the landowners now”).48
Yet this central Georgist contention is completely fallacious. The owner of ground land performs a very important productive service. He finds, brings into use, and then allocates, land sites to the most value-productive bidders. We must not be misled by the fact that the physical stock of land is fixed at any given time. In the case of land, as of other material goods, it is not just the physical good that is being sold, but a whole bundle of services along with it—among which is the service of transferring ownership from seller to buyer, and doing so efficiently. Ground land does not simply exist; it must be served to the user by the owner (one man, of course, can perform both functions when the land is “vertically integrated”).49 The landowner earns the highest ground rents by allocating land sites to their most value-productive uses, i.e., to those uses most desired by consumers. In particular, we must not overlook the importance of location and the productive service of the site-owner in assuring the most productive locations for each particular use.
The view that bringing sites into use and deciding upon their location is not really “productive” is a vestige from the old classical view that a service which does not tangibly “create” something physical is not “really” productive.50 Actually, this function is just as productive as any other, and a particularly vital function it is. To hamper and destroy this function would wreck the market economy.51
- 48. Thus, even so eminent an economist as F.A. Hayek has recently written:
This scheme [the single tax] for the socialization of land is, in its logic, probably the most seductive and plausible of all socialist schemes. If the factual assumptions on which it is based were correct, i.e., if it were possible to distinguish clearly between the value of the “permanent and indestructible powers” of the soil ... and ... the value due to ... improvement ... the argument for its adoption would be very strong. (F.A. Hayek, The Constitution of Liberty [Chicago: University of Chicago Press, 1960], pp. 352–53) Also see a somewhat similar concession by the Austrian economist von Wieser. Friedrich Freiherr von Wieser, “The Theory of Urban Ground Rent” in Louise Sommer, ed., Essays in European Economic Thought (Princeton, N.J.: D. Van Nostrand, 1960), pp. 78 ff.
- 49. I do not know anyone who has brought out the productivity of landowners as clearly as Mr. Spencer Heath, an ex-Georgist. See Spencer Heath, How Come That We Finance World Communism? (mimeographed MS., New York: Science of Society Foundation, 1953); idem, Rejoinder to ‘Vituperation Well Answered’ by Mr. Mason Gaffney (New York: Science of Society Foundation, 1953); idem, Progress and Poverty Reviewed (New York: The Freeman, 1952).
- 50. Spencer Heath comments on Henry George as follows:
Wherever the services of land owners are concerned he is firm in his dictum that all values are physical. ... In the exchange services performed by [landowners], their social distribution of sites and resources, no physical production is involved; hence he is unable to see that they are entitled to any share in the distribution of physical things and that the rent they receive ... is but recompense for their non-coercive distributive or exchange services. ... He rules out all creation of values by the services performed in [land] distribution by free contract and exchange, which is the sole alternative to either a violent and disorderly or an arbitrary and tyrannical distribution of land. (Heath, Progress and Poverty Reviewed, pp. 9–10)
- 51. For the effects of the “single tax” and for other criticisms, see Murray N. Rothbard, The Single Tax: Economic and Moral Implications (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1957); Rothbard, “A Reply to Georgist Criticisms” (mimeographed MS., Foundation for Economic Education, 1957); and Frank H. Knight, “The Fallacies in the ‘Single Tax,’" The Freeman, August 10, 1953, pp. 810–11. One of the more amusing objections is that of the dean of Georgist economists, Dr. Harry Gunnison Brown. Although the Georgists base much of their economic case on a sharp distinction between ownership of land and ownership of improvements on that land, Brown tries to refute the disruptive economic effects of the single tax by implicitly assuming that land and improvements are owned by the same people anyway! Actually, of course, the disruptive effects remain; vertical integration by individuals or firms does not remove the economic principle from either of the integrated stages of production. See Harry Gunnison Brown, “Foundations, Professors and ‘Economic Education,’” The American Journal of Economics and Sociology, January, 1958, pp. 150–52.