But instead of taxing values of land-like assets, governments — including conservative governments — impose punitive taxes on everything that they pretend to encourage, such as work, employment, consumption (which creates demand), saving (which allows investment), and of course investment in house-like assets. Some of these taxes directly impede production. Some of them directly increase the cost of hiring a worker at a given standard of living. But one way or the other, all such taxes feed inflation. Because of this additional upward pressure on inflation, it takes more unemployment to supply the compensating downward pressure; in other words, inflationary taxes raise the natural rate of unemployment.
So the key to reducing the natural rate of unemployment — the key to the Promised Land — is to reduce or eliminate income tax, payroll tax, sales tax, property taxes on values of buildings, and death taxes on house-like assets, and to replace the revenue, as far as that's necessary, with taxes on values of land-like assets. Those taxes can take the form of capital gains taxes, or property taxes on land values only (not including values of buildings), or holding taxes of so many tenths of a percent per year on values of other land-like assets. These land-value taxes and other holding taxes can have tax-free thresholds, so that only the portion of the value above the threshold is taxable. For taxpayers who are asset-rich but income-poor, the holding taxes can be deferred until the assets are sold or bequeathed, in which case the taxes may superficially resemble estate taxes on land-like assets only. It's even possible to set the thresholds on a case-by-case basis so that individual taxpayers are no worse off under the new system than under the old.
Which brings us to the question of political feasibility: Does the Promised Land have to come at the expense of the landowners? Paradoxically, the answer is "No," and not only because the increase in taxes on land-like assets would be offset by reductions in other taxes. Paradoxically, landowners as a class actually stand to gain by shifting the present tax burden off desirable activities and onto land values. To see why, we must revisit another old piece of economic theory.
The overall supply of land is fixed. From the viewpoint of the taxpayer, the supply of land legally usable for any particular purpose is also fixed, as is the supply of land within acceptable distance of any particular services, infrastructure, or markets. Yet access to suitably located land is essential to life and livelihood. Therefore land rents and land prices are bid upward until they absorb the economy's capacity to pay. All taxes are deductions from the capacity to pay for land. If a tax is only a deduction from that capacity, it will take as much from landowners as it delivers to the Treasury. But most taxes do more than that; most taxes (more precisely, all taxes except those on values of land-like assets) target productive transactions, causing otherwise viable transactions and enterprises to become unviable, thus reducing the capacity to pay for land even before the tax is taken out. This is called the deadweight effect. So under most taxes, the returns on land-like assets fall by more than the tax paid: the landowners are overcharged! But direct taxation of land values avoids the overcharge because there's no deadweight: the tax doesn't deter any productive transactions. Even if someone sells land to avoid the tax, the incentive to use the land is not reduced, but is merely transferred to the buyer.
The same logic applies even to landowners who are about to sell. Anticipated liability for land-value tax reduces buyers' capacity to pay and therefore reduces sale prices. But so does anticipated liability for any other tax — with the usual overcharge.
So, while land-value taxation takes only as much from landowners as it delivers to the Treasury, almost every other tax takes more from landowners than it delivers to the Treasury. Therefore, under land-value taxation, landowners as a class would be better off.
Does that mean everybody else would be worse off? No, because the landowners' gain would be funded by overall economic growth, not by anyone else's loss. Furthermore, not all of the benefit of that growth would go to landowners. (In other words, not all of the deadweight of existing taxes is converted into an overcharge on landowners.) A holding tax on land induces the landowner to cover the tax liability by attracting rent-paying tenants, or avoid the tax by selling the land. Thus it strengthens the bargaining positions of renters and prospective buyers. A capital gains tax on land increases the attractiveness of rental income relative to capital gains, giving more bargaining power to renters, and discourages speculative hoarding of land, giving more bargaining power to prospective buyers. In short, both kinds of tax ensure that non-landowners get a slice of the growth.
By the way, the idea that all taxes fall on landowners is indeed very old. In 1691, one of the great philosophers of freedom wrote, in part: "It is in vain in a country whose great fund is land to hope to lay the publick charge of the Government on anything else; there at last it will terminate. The merchant (do what you can) will not bear it, the labourer cannot, and therefore the landholder must: and whether he were best to do it by laying it directly where it will at last settle, or by letting it come to him by the sinking of his rents,... let him consider." That was John Locke. And in 1787, one of America's founding fathers wrote: "Our Legislators are all Landholders; and they are not yet persuaded that all Taxes are finally paid by the Land..." That was Benjamin Franklin, writing to Alexander Small eleven days after the signing of the Constitution.
So far, in explaining the advantages of moving the tax burden onto land values, I've only considered what happens when the taxes are collected — not what happens when they're spent. A core spending responsibility is infrastructure, including network infrastructure such as transport, waste disposal, water, sewerage, and drainage, and community infrastructure such a schools, libraries, and emergency services.
The benefit of an infrastructure project (net of user charges such as fares and tolls) is location-specific, and therefore is reflected as an uplift in land values in the serviced locations — not an uplift in building values, because the value of a building is limited by construction costs, but an uplift in land values, because land has location, and therefore locational value, even if no buildings yet stand on it.
So, if the tax system claws back x% of every uplift in land value, any public infrastructure project with a cost/benefit ratio of x% is self-funding, and any public infrastructure project with a lower cost/benefit ratio is better than self-funding, yielding a revenue surplus that can be used for other purposes. If you wish, those other purposes can include tax cuts. That should please conservatives. Moreover, the untaxed portion of the uplift — the other (100−x)% — is a net windfall for the landowners, who therefore should enthusiastically support the tax because it would finance projects that would not otherwise proceed, yielding windfalls that the owners would not otherwise get. That should please conservatives even more.
Financing infrastructure out of income tax, sales tax, property taxes on buildings, or death taxes on house-like assets, is socialism for landowners — welfare for landowners. Financing infrastructure out of uplifts in land values is self-help for landowners. Which is more conservative?
I should note, for the sake of precision, that costs and benefits may have capitalized and annualized components, while uplifts in land values may be expressed in terms of (capitalized) sale prices or (annualized) rents. So for the purpose of the foregoing argument, all terms must be converted to the same basis: either capitalized or annualized. I should also note that an annual tax on the capitalized value of land, with or without a threshold, automatically takes less than 100% of the benefit of an infrastructure project, leaving a net windfall for the landowner, because your tax bill doesn't go up unless your land value does, and your land value doesn't go up unless, in the judgment of the market, you are better off in spite of the tax implication. And conservatives respect the judgment of the market, don't they?
Better infrastructure, especially better public education, has been a touchstone of progressive politics. Unfortunately it's also been a point of vulnerability, because it invites the question "Where's the money going to come from?" which conservatives have answered by accusing progressives of being taxaholics. But financing infrastructure out of uplifts in land values does not mean raising taxes in order to pay for infrastructure. It means redesigning the tax system so that future expenditure on infrastructure automatically pays for itself by expanding the tax base without any increase in tax rates. In other words, it means financing infrastructure out of the growth dividend — not the mythical growth dividend that supposedly comes from cutting taxes on the rich, although the tax cuts aren't conditional on the growth or on any behavior that contributes to it, but the real growth dividend that follows when the revenue of a government is conditional on spending decisions that add value to land. Mark my words: Progressives will never shake off the "taxaholic" label until they move some of the present tax burden off productive activities and onto land values, so that a subsequent increase in infrastructure investment doesn't require an increase in tax rates.
Now what about those crumbling public schools left over from the segregation era? Empirical studies have found that a satisfactory public school adds value to land within walking distance of the school, while a highly desirable public school adds value to land within its entire catchment area. (The effect of a merely "satisfactory" public school on land values within driving distance, as opposed to walking distance, would be hard to determine empirically because the presence of the school would be correlated with numerous other influences.) So a public school, like any other piece of infrastructure, raises land values in the serviced area. This implies that so-called "free" schools aren't free at all; the admission charge is hidden in prices and rents of land in locations serviced by the schools, and is payable to the incumbent landowners. The argument that property taxes shouldn't pay for schools, because schools aren't services to property, is baloney; public schools are services to property because they add value to property, and the property owners get the benefit whether they send their kids to those schools or not.
So land-value taxation is good for landowners, as well as the rest of us, because it induces investment in infrastructure that adds value to land, and because landowners don't pay back any part of their windfall unless and until they actually get it. Logically, landowners ought to support this policy. But I know from experience that logic isn't their strong suit. Some of them reject the argument not because they find any fault with it, but because they simply refuse to engage with it — they just don't want to know. Others point to infrastructure projects that allegedly didn't raise land values. Well, if a project didn't raise land values by at least the cost of the project, it failed the cost-benefit test and therefore shouldn't have gone ahead. If a funding method isn't capable of funding projects that shouldn't go ahead, that's not an argument against the method; that's an argument in its favor.
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