With governments at all levels in fiscal distress, I just want to describe a solution which would be effective, would save money for most taxpayers, and would encourage productive enterprise. Georgists will already be familiar with everything below.
The main problem is that Chicago (and Evanston, for that matter), Cook County, the State of Illinois, and the Federal government have spent more than they’ve taken in over recent years, are currently in serious debt, especially when future benefit obligations are taken into account. There has been waste, corruption, excessive salaries and pensions, and lack of sound financial (and other) planning. I would like these problems rectified, and taxes on income and sales to be lowered. But THAT IS NOT GOING TO SOLVE OUR PROBLEM. We need more revenue, and less expenditures, and the only way I know of to do that, without ruinous tax increases or increasing civil unrest, is a Georgist approach.
That has been summarized as “tax privilege, not production.” Not taxing production means we reduce, or if possible eliminate, taxes on earned income, retail sales, and other productive economic activity. You decide for yourself whether gambling, smoking, professional sports, etc. are productive economic activity, and tax accordingly.
Privilege means, simply, the exclusive or limited right to do something. A Chicago cab medallion is a privilege because you need one in order to operate a cab, only a limited number are available, and as a result they have a considerable market value. A Chicago City Sticker is not a privilege because, even tho you (supposedly) need one to own a car in the City, the number isn’t limited. You can buy all you want from the City, and there’s no market value (you can’t sell one at a profit).
At the local level, the most important privilege is ownership of land, ownership meaning the right to exclude everyone else from your land. Now, many of us find it convenient to own land, since we can build a house on it or use it in some other way, without worrying (in most situatinos) that what we build will be confiscated.
So in proposing to tax privilege, I am proposing among other things a tax on land ownersihp according to its value. Or, to put it another way, I am proposing a simplification and increase in the real estate tax, and the exclusion of improvements (buildings) from the tax base. That means that those of us who own land will pay more taxes.
Why is an increase in the land tax a good thing? From governments’ point of view if you tax economic activity– jobs, sales, construction– then you will get less of it. We want more jobs, more sales, and, well, maybe not more construction right now, but at least the maintenance of existing structures, and eventually in a growing community more construction will be needed. And as economic activity increases, land value tends to rise with it. Thus the land value tax is the only major tax which tends to increase, rather than reduce, its base.
How about from the taxpayers’ point of view? As a taxpayer, I don’t want to see my taxes increased, but that goes for all my taxes. Something over 1/3 of Illinois taxpayers don’t own any land, so they won’t be directly affected by any tax increase. These generally are in the lower-income groups. Altho I’ve seen no detailed tallies, it makes sense to estimate that the people who own valuable land are generally the higher-income folks. Land in Lincoln Park might be worth $100/square foot, or more, whereas in less prosperous areas it might go for only 1/10th or 1/50th as much. So the burden is very roughly proportional to affluence, and much less subject to hiding and manipulation (with very few exceptions).
A tax on land actually tends to increase jobs. How so? Consider the owner of a business (owning the business, the building, and the land under it) who receives a much-increased real estate tax bill. She thinks about moving the business, which we will suppose employs 25 people, to another state, or perhaps shutting down entirely. Suppose she does shut down. What will happen to the land?
Since the land is heavily taxed, she will want to sell it. Probably for less than it was worth a year before, due to higher taxes as well as the decline in the general economy. Who will buy it?
The only person who will buy the land is someone who wants to put it to productive use, such as opening a more productive business. Maybe one that employs 50 people, rather than 25. Because it is a bigger business, the increased tax bill is not such a burden.
In any case, if the assessment has been competently done, the land won’t sit idle for long, because the owner will want to sell it and someone will want to use it, and be willing to pay to do so.
One more point. Government services, if competently provided, tend to increase land value. For example, if CTA trains could be made faster, more reliable, more comfortable, and more frequent, what would be the effect on land values near ‘L’ stations? Conversely, if CTA service is drastically cut, what will be the effect? So in taxing land value to pay for public service, we approximate a user fee.
Please comment if anything here appears unclear or unworkable.
[update July 3]: Some of the details of a land tax are specific to each time and place, but a good and reasonably current description and analysis was published in 2006 by Fred Foldvary and is posted here
Hey–
Thank you for this. If you could explain the phrase ‘the right to exlude’ i’d appreciate it.
Thanks for raising that question, Kirk. “Right to exclude” is the main thing you get when you buy title to land. Ideally, I can do anything I want anywhere I want, except that all the land around here is owned by somebody, and each owner has the right to keep me off her land. If I own some land, my “right to exclude” means I can keep everyone else off my land, so I can be confident that anything I plant or build there will be for my benefit. Now of course, in the real world there are other restrictions, for example zoning to control externalities, also there are tax laws and other laws which limit what I can do on land I own.