9. Keep What You Earn, Pay for What You Use
It is better to pay a small amount of rent on your block of
land than to pay a large amount in income tax and indirect
Few people enjoy reading about taxes, and it’s probably
true that even fewer people enjoy paying them. Many
of us have good reasons for not wanting to pay taxes:
More often than not, taxes take significant portions of
the wealth that we’ve created through our own efforts.
For many of us, taxes limit our ability to make our best
contributions to society; they often seem to stifle our
material and intellectual aspirations. Tax systems are essentially the mechanisms by which societies decide what
people have to share with each other versus what they can keep for
themselves, and societies enforce these mechanisms on billions of people every day. Since tax systems play such an
important role in life, let’s look more closely at taxes and
see what alternatives exist.
As we’ll discover in this chapter, societies that share in
the gifts of nature don’t need to raise taxes. Contemporary societies are forced to tax people’s contributions to
their local communities because the ownership of land makes people extract resources from society on an ongoing basis—social resources that need to be periodically
replenished. If instead we shared the value of land with
one another, we would no longer require taxes to replenish those social resources.
Let’s look at several traits that all public revenue systems
need to embody in order to work harmoniously. In “The
Ultimate Tax Reform: Public Revenue from Land Rents
Foldvary recommends five such essential traits. According
to Foldvary, sources of public revenue have to be:
- Revenue sufficient
In this light, let’s examine whether land contributions have the potential to replace conventional taxes and see if they can meet all five requirements.
MEDIA 9-1: THE ULTIMATE TAX REFORM: PUBLIC REVENUE FROM LAND RENTIn this paper, economist Fred Foldvary takes a closer look at land contributions and their implications for society.http://unitism.co/ultimatereform
In order to be efficient (the first of our criteria), public revenue collection would affect production and consumption only minimally, if at all. The terms deadweight loss and excess burden are used in economics to describe the negative effects that taxes create on production and consumption activities: Because production and consumption taxes (such as income, payroll, and sales taxes) increase the prices of goods and services, we have to produce more goods and services overall, yet are enjoying fewer of them. These taxes drain resources from where they’re most needed, but don’t use them as efficiently elsewhere.
The payroll tax, for example, punishes businesses and entrepreneurs for creating jobs for the economy, while consumption taxes such as sales taxes discourage access to perhaps much-needed goods; capital gains taxes deter investments, while property taxes on buildings discourage the creation of affordable housing and inhibit the beautification of neighborhoods. In short, our current tax system is in most respects a lose-lose proposition.
But what would happen if we shared land instead? Community land contributions are payments for the use of land. A system based on land contributions wouldn’t harm production or consumption because people would continue to use land to produce and consume, except that now they would use only as much land as they actually needed. Since land contributions encourage people to use land efficiently, they don’t decrease the profitability of productive enterprise as long as land is used well; land contributions don’t cause any deadweight loss and are therefore highly efficient.
Let’s pause for a moment to imagine a world in which you and I didn’t have to pay taxes and instead simply paid a community contribution for our use of land:
- If you’re an employee, imagine what it might
be like if your final take-home salary were
exactly the gross amount that’s written on
your paycheck, not the net amount. Your
personal income would increase substantially without the payment of an income
tax. And with land no longer hoarded, in-
voluntary unemployment could mostly become a thing of the past.
- As a consumer, imagine a world in which you
no longer had to pay any sales or value-added taxes. You could buy more for less.
- If you’re a business owner, picture what life
might be like if your business didn’t have
to pay the payroll tax. Employees would
cost less, and you might even be able to hire
more employees and increase your profitability at the same time.
- If you’re a shareholder, think of how your
bottom line would increase with the re-
moval of the corporate income tax.
- If you’re an investor and own stocks, mutual
funds, or a retirement fund, consider the benefits of not having to pay taxes on your
capital gains. And because the companies
you own also wouldn’t have to pay payroll,
sales, capital gains, and corporate income
taxes, the value of your portfolio is likely
to grow significantly.
- If you’re a homeowner, imagine no longer having to pay a property tax. You would still
pay for the land you use, but that amount
would never be greater than what the land
is actually worth to you. In other words,
it would be as if you own your house but
lease the land at a discounted market rate.
The savings you’d incur from the removal
of all other taxes would more than likely
offset the periodic land contributions that
would be applied to your property’s location value. But what if the location value of
your home increases and you can no longer
afford to make a land contribution to your
local community as a result of that increase?
A location value increase means that your
community has more to offer, and you, as a
member of your local community, stand to
benefit. In the unlikely event that you don’t
benefit from the increased wealth present
in your local community and are unable to
make sufficient land contributions to your local community, you can accumulate liens
on the land until you transfer the property
or die, as is commonly done today with
real-estate taxes. The best way to prevent
this from happening would be for your
community to offer you a Universal Basic
Income. We’ll talk more about the Universal Basic Income in Chapter 11, Affordable
- If you’re a prospective homebuyer, you would
likely have more money to buy a property
(as a result of the aforementioned points),
and the property would likely be more affordable.
- If you’re a retired homeowner without any income except social security, you would still
be better off than the countless other retirees who have to rent land and homes during
their retirement years. Furthermore, food
and other goods would cost less because
they wouldn’t be burdened by taxes. And if
communities instituted a Universal Basic Income, retirees wouldn’t have to worry at all.
- If you’re a farmer, you’d pay a land contribution for the land in your care. Your farmland contribution would never be greater
than the land’s unimproved rental value, and if used both efficiently and productively, the land would always yield a surplus.
As the steward of this land, you would retain all the existing rights to use the land in
whatever ways permissible by law.
- The only people who would end up paying
more money are those who use land inefficiently or those who seek to profit from
it directly. Banks, real estate developers,
mining industries, and other extractive industries that generally take more than their
fair share would instead be forced to accept
more reasonable profit margins.
Do these points sound too good to be true? Of course they do. We’re so accustomed to our current reality that this potential reality sounds too unrealistic—but it only sounds that way because it doesn’t exist right now, not because it can’t be achieved. “It always seems impossible until it’s done,” Nelson Mandela once remarked. Right now, our economies are hugely inefficient and we’re destroying nature in the process, so the possibility of material abundance for everyone in a sustainable system sounds like a pipe dream. If, however, we stop treading water and allow constructive activities to occur in the proper context, our society can naturally experience this kind of abundance.
The excess burden that arises from our misallocation of resources created through our current tax system lies at the heart of many contemporary political debates; whenever people advocate for small government or a reformation of the tax system, the intent is usually to see a decrease in the economy’s deadweight loss in order to make the overall economy more efficient. The thinking goes that if government spends less, it won’t have to raise as much money through taxation, which, conventional experience tells us, tends to hold the economy back. And although a decrease in the economy’s deadweight loss can be achieved through a reduction in various taxes, it can be done far more effectively, at far higher gain and at much lower cost, through a simple shift away from taxes toward a system that allows us to share in the gifts of nature.
Foldvary recommends that land contributions make up about 80 percent of a land’s rental value; it’s generally good to leave some benefit to homeowners and other land users since this practice allows room for assessment errors and also allows the real-estate market to function more optimally. If a plot of land could be leased out for about $6,000 per year, the property would cost the land user about $4,800 per year to use ($4,800 is 80 percent of $6,000). The good news is that because this piece of land now has a cost of $4,800 per year, its sales price falls in relation to its leasing price. While the land might previously have sold for $150,000, it might now sell for only $40,000 (more information on how community land contributions influence property values will be provided in the Appendix). These land contributions apply only to land. Property taxes are not comparable to land contributions because a land contribution doesn’t apply to the total value of the property if the property has improvements such as buildings; it just applies to the value of the underlying land, which in this way is shared.
Our second criterion is simplicity. Public revenue systems need to be simple
if they’re to be beneficial. How can we expect people to live abundant lives when much of their time is spent preparing tax returns that eat into the time they may have set aside for work, family, and leisure activities? U.S. tax returns, for example, are anything but simple: The Taxpayer Advocate Service, a branch of the U.S. Internal Revenue Service (IRS), estimates in its 2010 Annual Report to Congress that U.S. taxpayers and businesses spend about 6.1 billion hours filing their taxes each year
. If all of these hours were outsourced, it could provide year-round, full-time employment to about three million workers
. In addition, the cost of tax compliance in the U.S. is estimated at $163 billion, which is 11 percent of total income tax receipts. If tax compliance were an industry, it would be one of the largest industries in the United States
. The IRS tax code itself has grown so long that its length can’t even be determined uniformly. In its 2010 Annual Report, the Taxpayer Advocate Service estimates that the tax code contains about 3.8 million words; if printed on U.S. letter-sized paper, it would require about 15,200 pages. Complexity in a tax system unnecessarily wastes wealth without providing any offsetting benefits to either the taxpayer or the government. Once more we realize that our present tax system falls woefully short: It is not only inefficient but also needlessly complex.
But what about community land contributions? Land contributions are relatively simple for the obvious reason that they’re somewhat fixed in value; they’re based on the market rental value of land, which ought to be assessed at least once a year. They also have no deductibles and little bureaucracy attached. In his work “The Ultimate Tax Reform
,” Foldvary writes that with land contributions “there would no longer be any tax audits. There would be no record-keeping for taxes. You would instead get a monthly bill, like you get for utilities. You would simply pay the bill or have it automatically deducted from some financial account. At the same time, government would avoid the high cost of processing complex accounts and keeping individual tax records. It would only need to keep real estate records and assess the land values, both of which it already does for property tax purposes.”
Although critics sometimes claim that an accurate assessment of land values is difficult, there are several effective standard methods. Professional real-estate appraisers routinely separate land values from building values for fire-insurance purposes, among other reasons. In contrast to property tax assessments, where the assessor needs to enter the property to inspect the various buildings and determine their value, land-value assessments are non-intrusive since generally no on-the-ground inspection is necessary. Figures garnered from property sales—together with vacant-land sales data and commercial real-estate leasing figures—can be put into computerized models through which assessors can determine land values for each general location; contrary to property values, which are heavily influenced by the value of individual buildings, land values usually vary only slightly from one neighboring plot to another. Foldvary recommends that the computerized mapping service be implemented in such a way as to “emphasize long-term trends rather than year-by-year fluctuations in land values.”
MEDIA 9-2: A COMPUTERIZED MODEL OF LAND VALUES
In this video, Gabriel Ahlfeldt, lecturer at the London School of Economics, presents a unique spatiotemporal dataset of Chicago’s historical land values, providing insights into changes in the spatial structure of the city.
Any effective public revenue system also needs to be transparent
—our third criterion—in order to make it innately safe from abuse, corruption, and unwarranted government interference. Since income tax records reveal personal financial information, any income tax system can potentially lead to unwarranted public exposure or government abuse. Land deeds, on the other hand, don’t need to be hidden from public view since they don’t reveal any private financial information; land contributions will be based entirely on property records, which are already publicly available.
Furthermore, because land-value data will be publicly available, land users will be able to compare their land’s assessed rental value with the assessed rental values of their neighbors’; this practice effectively minimizes the potential for abuse and government corruption. Should land users feel that the assessed rental value of the land they use is too great, they can appeal to a local land-value assessment board, as property owners today can appeal their real-estate taxes to property tax assessment boards.
In addition to efficient
, and transparent
, a public revenue system also needs to be fair
in order to be truly effective. If the system isn’t innately fair and just, it will inevitably create a wide variety of problems that are difficult to address and cost society enormous amounts of wasted resources. One of the most prevalent forms of taxation in effect today is the so-called progressive income tax
—a tax by which the wealthy are taxed on their income at a greater percentage rate than the less affluent. Although such a tax perhaps appears fair, especially from the perspective of those who live on a lower income, the progressive income tax isn’t a fair tax at all.
Public revenues pay for a wide variety of public services, including infrastructure, police and fire protection, and public schooling. Public services provide real and tangible benefits to society, benefits that are local to the areas that they service; in other words, many public services add value to neighborhoods, which is really just another way of saying that they add value to land. For example, realtors know that properties in neighborhoods with good public school systems and better public transportation options tend to be more expensive than properties in neighborhoods with lower-quality schools or that don’t have good access to public transportation. And since public revenues pay for these public services, they ultimately end up increasing land values and thus reward those who own property
(the wealthy) to the detriment of those who do not (the less affluent). Any tax that pays for public services without obtaining revenue from resulting land-value increases is fundamentally unjust.
In 2006, Fred Harrison—the aforementioned economist who wrote about the eighteen-year real-estate cycle—claimed in his book Ricardo’s Law: House Prices and the Great Tax Clawback Scam
that property owners (taken together as a whole) are generally able to recoup their cumulative income tax payments through gains made from land values, while renters are financially penalized through their income taxes. Harrison goes on to claim that even the progressive income tax is therefore a great orchestrated tax scam by which the poor are effectively forced to subsidize the lifestyles of the rich.
Whether we consider our current income tax system to have been intentionally implemented to serve the interests of the wealthy at the expense of the poor, or whether we attribute our present-day situation to mere ignorance on part of those who institute and perpetuate the system, it’s clear that our current tax system is inherently unfair.
MEDIA 9-3: RICARDO’S LAW: HOUSE PRICES AND THE GREAT TAX CLAWBACK SCAMVideo introduction to the book Ricardo’s Law: House Prices and the Great Tax Clawback Scam by Fred Harrison. Ricardo’s Law points lawmakers, policy analysts, and social reformers toward a model of public finances that’s fair and able to deliver prosperity to everyone.http://unitism.co/clawbackscam
Community land contributions are economically fair because they simply reclaim what never exclusively belonged to individuals to begin with. They’re based on the benefit principle, according to Foldvary, since they reimburse communities for the benefits land users receive from using land in certain locations. Since public services provide benefits over a given area, community land contributions in effect recycle the value of these benefits back into the public purse. In other words, with community land contributions we pay for what we receive.
Community land contributions have other benefits that make them a truly fair source of public revenue. In “The Ultimate Tax Reform,” Foldvary states that if land users can’t pay their land contributions in full for whatever reason, they can defer their land contributions by accumulating liens on the land until they die or transfer the property, as is commonly done today with real-estate taxes. Land contributions, furthermore, are also immune to the practice of tax evasion: Foldvary explains that “nobody would be sent to prison for tax evasion, because there would be no tax evasion. A nonpayer would lose title to his land or lose the protective services of government, depending on the local enforcement practice. Without audits, bank account seizures, and fear-inspiring letters from the IRS requesting information or additional payments or imposing interest and penalties, the opportunity for tyranny would greatly diminish, if not entirely disappear. Evasion being impossible, there would be no need or excuse for any inquisitive state investigators of fraud.” Unwarranted government intrusion is a danger to be reckoned with: Tax-collection agencies have the power to freeze bank accounts, garnish wages, and impose steep penalties and high interest rates (whether justified or not), among other powers. Due to their simplicity and transparency, community land contributions, on the other hand, don’t offer opportunities for unwarranted government intrusion upon civil liberties.
But most of all, community land contributions are both ethical and economically fair because they allow people to keep the fruits of their labor. Land contributions charge people for what they take away from other human beings, not for the value they provide through their labor and their provisioning of capital goods. Since land contributions pay for the benefits we receive from society, and since communities give land its value, revenues from land contributions are the most logical primary income stream for any community.
And finally, let’s consider whether land contributions provide sufficient revenue. Nature can abundantly provide for all of our needs. To realize this, we only need to observe the simple fact that all material wealth can only come about because of nature in the first place. The scarcity we’ve created only exists because we are monopolizing nature, and this scarcity requires governments to impose taxes.
The United States has a landmass of approximately 2.3 billion acres, of which nearly 60 percent, or 1.35 billion acres, is privately owned. The sheer value of this land is nearly incomprehensible: Economist Mason Gaffney estimates the annual revenue that could be had from land in the United States at approximately $5.3 trillion dollars, which is what the United States collected in taxes in 2013. And considering the inefficiencies that our current tax system creates, a shift away from taxes would increase revenues from land even more. If we also collected oil, gas, and mineral rents in addition to land values, these combined revenues could provide substantial, if not sufficient, revenue streams for the entire nation. Even if we begin by reclaiming greater amounts of land values while decreasing taxes on production and consumption, the efficiency gains of our economy could diminish, if not eliminate, our need for taxes altogether.
- An exception is taxes on wasteful consumption, which help to
preserve the environment, not taxes on consumption in general.
Food, for example, is a consumable we most certainly do not wish
to tax, while we’re wise to tax pollution.
- “Idle Land, Unemployed Workers Caused by Incorrect Taxation,”
This graph uses the term land value tax in lieu of community land contributions; while these terms have different meanings, they have similar implications. The colored areas of this interactive graph (see link above) represent the total wealth created throughout our present economy. Our current taxes on wages, sales, and capital gains collect only a relatively small portion of the total wealth (red area), and the more wealth these taxes try to collect, the more they disrupt the economy. Because our present tax system takes rent out of the economy highly inefficiently, our system allows private parties to profit from land through seizing rent (green area), but at the same time also reduces the overall amount of wealth that could otherwise be had for the entire economy if less productive land were available to the economy (gray area). It’s simply more profitable for property owners and associated financial institutions in our present tax system to withhold land from use and to then sell it at some other time for a profit. We can see in this interactive graph that our current tax system actually perpetuates wasteful use of land, while simultaneously encouraging a small portion of our total population to reap vast profits through private land speculation (green area). Furthermore, tax revenues on wages, sales, and capital gains are relatively meager (red area) compared to the public revenues that could be had from land contributions (orange area).
In addition to showing us some of the general principles of land contributions, this interactive graph also allows us to look at how some economic scenarios play out in theory:
- The Law of Rent: Set all taxes to a minimum, set population to low, then gradually increase population—observe rents rise and wages fall.
- The destructive effect of taxes on wages and capital gains: Gradually increase taxes on wages—observe unemployment and disused buildings increase.
- The fallacy of Malthusian ideas: Set community land contributions to a maximum and taxes on wages to a minimum, then gradually increase population—observe revenue for public services increase.
- The false appearance of the truth of Malthusian ideas under the current tax system: Set community land contributions to a minimum, set some taxes on wages, and gradually increase population—observe either wages or public revenues decrease.
- The futility of taxing land and labor together: Set community land contributions to a maximum, set taxes on wages to a minimum, set population to be so high that the margin of production is below subsistence level, and gradually increase taxes on wages— observe revenue for public services decrease.
- The applicability of the Laffer curve to taxes on wages: Set all taxes to a minimum, then gradually increase taxes on wages—observe public revenues increase at first, then decrease. (The Laffer curve is a representation of how most tax rates correlate to government revenue: The graph starts with a 0 percent tax rate and no government revenue, then rises to a maximum level of government revenue at an intermediate tax rate, and then falls again to zero revenue at a 100 percent tax rate.)
- The nonapplicability of the Laffer curve to community land contributions: Set all taxes to a minimum, then gradually increase community land contributions—observe public revenues increase.
- The potential usefulness of minimum wage laws in the absence of community land contributions: Set population to high, set some taxes on wages, set community land contributions to a minimum, set the minimum wage to low, and gradually increase the minimum wage—observe that a small increase in the minimum wage can raise the wages of a majority of the population with a relatively small cost in terms of unemployment, with landowners bearing most of the expense.
- The uselessness of minimum wage laws in the presence of community land contributions: Set population to high, set taxes on wages to a minimum, set community land contributions to a maximum, set the minimum wage to low, and gradually increase the minimum wage—observe that any increase in the minimum wage comes at the expense of public revenues.
- Based on a forty-hour work week per employee and 2,080 hours
- Taxpayer Advocate Service, “The Time for Tax Reform Is
Now” MSP no. 1 (2011).
- J. Scott Moody et al., “The Rising Cost of Complying with the
Federal Income Tax,” Tax Foundation Report 138, 2005.
- Fred Harrison, Ricardo’s Law: House Prices and the Great Tax
Clawback Scam (London: Shepheard-Walwyn, 2006).
- Cynthia Nickerson et al.,“Major Uses of Land in the United
States, 2007” U.S. Department of Agriculture Economic Re-
search Service Bulletin 89, December 2011.
- Mason Gaffney, “$5.3 Trillion Rent of the USA,” YouTube
video interview, published November 14, 2013, accessed March