Tax Policy for Optimum Production
Harry Gunnison Brown
[Reprinted from the American Journal of Economics
and Sociology,
Vol. 24, No. 1 (January, 1965), pp. 7-8]
WHEN THE ADVANTAGES are pointed out of exempting from taxation
buildings and other man-made capital, and getting the necessary
revenue by increasing the rate of taxation on land values, the
objection is sometimes raised that such land value taxation violates
the principle of taxing on the basis of "ability to pay."
How can one get such an objector to consider any other principle
relevant to tax policy? Perhaps the most effective way is to show him
that our present tax system certainly does not conform to the
principle of "ability to pay" for which he is arguing.
To illustrate clearly both why such an objector insists that land
value taxation fails to conform to the ability theory and also wherein
our present real estate tax policy fails to conform to it, we shall
assume that each of four owners of real estate owns a building lot of
equal size and the same shape as the other three, and on the same side
of the same street. None of the lots is a corner lot or has any other
advantage (or disadvantage) as compared to the other three. And each
lot, we shall suppose, is worth $20,000. The four owners are John Doe,
Richard Roe, Paxton Poe and Mortimer Moe. However, John Doe's lot is
vacant; Richard Roe's lot contains a one-story building worth $20,000;
Paxton Poe's lot contains a three-story building worth $60,000, and
Mortimer Moe's lot contains a four-story building worth $80,000. The
objector to a land value tax policy contends that Moe has the greatest
ability to pay (having the most valuable building, which yields the
largest rentals), that Poe has the next greatest ability to pay, that
Roe has the third greatest ability to pay and that John Doe has the
least ability. And since land value taxation would tax each of the
four owners the same amount, our objector calls it "unjust";
whereas our present real estate tax system taxes our four owners in
due proportion-or so he assumes!-to their respective tax-paying
abilities and hence is "just."
But Mortimer Moe's property is mortgaged to a lender for $90,000, and
under our present real estate tax system, Moe, whose net ownership is
the least, has to pay the most in taxes. How, therefore, can anyone
who objects to land value taxation as not being in proportion to "ability,"
consistently defend our present real estate tax system?
Suppose now that in the city or town where these four men own this
property, buildings and other man-made capital are exempted from
taxation and a land value tax system is adopted. In that case the net
yield of capital to the investor would certainly be greater. Hence, if
John Doe were thereafter to borrow $80,000 and use the sum to
construct an $80,000 building on his vacant lot, he would receive a
higher net yield from the building than would previously have been
possible. And since he would have had to borrow, to be able to have
the building, not more than $80,000, he would clearly now be better
off than Moe, who was -- and is -- in debt $90,000. Likewise, Richard
Roe (for example) might borrow in order to add another story to his
one-story building.
When such facts are thoroughly understood by the objector who has so
emphasized the idea of "ability to pay," he will perhaps be
willing to admit that a really good tax policy must give attention to
incentive. Our present local tax policy, which encourages speculative
holding of good and needed land out of use, which discourages
building, keeps rents high, breeds slums, increases the cost of
acquiring ownership of a home, discourages establishment of industries
in a community, and keeps down the productivity and the earning power
of labor, is definitely not a good tax policy.
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