Thoughts on the Property Tax
C. Lowell Harriss
[Reprinted from Fragments, April-June, 1981]
What is a property tax? It is a tax on land and its buildings, plus
machinery, equipment, and inventories of business. In the United
States, it yields close to $70 billion a year. It is a tax designed to
permit the residents of a community to finance services for
themselves. It has its "merits" and its "demerits."
One of the demerits is that the tax, falling on man-made products,
invariably discourages production. Another point, rarely noted, is
that the tax, as a cost of occupancy and construction, tends to induce
smaller-size rooms. It results in the loss of potential benefits from
the "law of the cube." Human well-being can generally be
served better by the construction of rooms, houses, and buildings of
larger, as opposed to smaller, size.
Still another flaw in the tax is that well-constructed, high-quality
buildings are now taxed more heavily per unit of space .than are slums
and "junk." In many areas, new machines are taxed more
heavily than old. Is it not stupid to decree that if a family or a
company supplies more and better capital facilities, it must also pay
more toward the costs of government?
The tax on buildings discourages maintenance and modernization.
Cities which need to replace obsolete, decayed, destroyed buildings,
nevertheless put tax impediments in the way of progress. Is this not
both irrational and self-defeating?
One of the merits of the property tax, on the other hand, is that it
also falls on land values, thus compelling, rather than discouraging,
the use of land. Therefore, a change in the structure of property
taxation which would cause only land, rather than improvements, to be
taxed, would spur production in two ways. Land, which is often held
idle for speculation, would have to be employed or given up. At the
same time, the removal of taxation on improvements would create the
incentive to produce all materials needed to satisfy the demands of
Raising taxes on the value of land would temporarily work against the
owners of land, but, in the long run, would benefit everybody. Many
landowners have unrealized capital gain accrued since the land was
purchased; and some land, especially that which is largely vacant or
under-utilized, is relatively under-assessed. Five years of transition
would permit gradual adjustment; and all people, including landowners
would gain by the change. The community would capture in taxes some of
the value which it has created, and spend it on schools, streets, and
If the full tax on land value were collected, the tax would be almost
burdensomeless (except that the owners of land and their heirs would
lose their "unearned increment"). The necessity of paying
tax on the full market value of land would intensify the pressure to
get the best income possible, and thus cause the owners to make more
effective use of land. The "speculators" would practically
Today, keeping urban and suburban land idle, or nearly so, while
waiting for prices to go up, may cost the owners rather little. Their
ability to deduct property tax in computing taxable income reduces the
net cost to them (but not to society) of holding land largely idle
while waiting for the price to rise. If land value taxation were
adopted, the landowners would be unable to continue their current
Predictions of some tendencies seem rather safe. The new tax would
weaken the power of some landowners to "force" people in a
growing community to settle farther out than otherwise. The effective
supply of land would rise, especially where market prices are high.
New possibilities of, and incentives for, compactness would appear in
urban areas. More intensive use of the higher-priced, central areas of
cities, of "close in" rather than "farther out"
sections, would result. The filling in of the idle spots would be
accompanied by more vertical development, which would, in turn, result
in the saving of transportation costs. Horizontal expansion would be
somewhat less attractive compared with the more intensive (vertical)
use of land.
As a concluding thought, the following words, penned a century ago by
a famous economist, seem to be pertinent in guiding our thinking on
"The present method of taxation . . . operates upon
energy, and industry, and skill, and thrift, like a fine upon these
qualities. If I have worked harder and built myself a good house
while you have been contented to live in a hovel, the tax-gatherer
now comes annually to make me pay a penalty for my energy and
Industry, by taxing me more than you. If I have saved while you
wasted, I am mulct, while you are exempt. . . We punish with a tax
the man who covers barren fields with ripening grain; we fine him
who puts up machinery, and him who drains a swamp."
The economist who wrote those words was Henry George.