The Single Tax Idea, 130 Years Later

In 1880, Henry George proposed that all taxes be replaced by a single tax on the unimproved value of land. While his tax idea never caught on, the economic benefits of a tax policy based on the idea have found a new life and are being advocated by Walter Rybeck at the consulting firm Just Economics (www.justeconomicsllc.com).

The rationale behind George's single tax idea is that virtually all taxes on economic activity create a disincentive to economic production. The lost productive value caused by a tax is called a deadweight loss by economists. The only taxes that do not create such a loss are taxes on resources where supply is perfectly inelastic. Perfectly inelastic supply means that whatever the cost of using the resource, the quantity of it used remains the same. One of the few resources with a perfectly inelastic supply is land. Certainly, if the tax on land exceeds its rental value, then it will be abandoned, but so long as the tax stays below that threshold, it will be used productively. Because overall government expenditure was so modist in 1880 when George proposed the idea, it would have been possible to replace all other taxes with a single land tax on the value of unimproved land (hense the "single tax" moniker). Today, a single land tax would not be enough to fully fund all government.

For local governments however, the idea holds some promise. Today, property tax policy genrally taxes both the unimproved land value and the value of improvements at the same rate. While the tax on the land itself does nothing to affect its use, taxing improvements creates a disincentive to improve land. What Rybeck advocates is shifting the tax burden towards the unimproved land value and away from the value of improvements (see Retooling Property Taxes ). Say in a city 2/3 of the total value of property is in the improvements while only 1/3 is the unimproved land value. Say the tax rate is originally X. Cutting the rate to 1/2X on the improved value and raising it to 2X on the land value, total property tax revenue is the same, but the economic incentives to use land are dramatically different. The cost of leaving land unimproved rises and the cost of improving it (via lower taxes) falls. Such a move is a win-win situation for cities as less land is left vacant and there is an incentive to use land more intensively.

The only caution is that such a policy will certanly lower the value of unimproved land. If the tax gets so high that the value of unimproved land falls too low, then it becomes hard to detemine how it should be used and the likelihood of abandonment rises. But a shift similar to my example above would not come close to creating these adverse effects.