Estonia Adopts Henry George's Tax Proposal
[Reprinted from The Economist, 28 February
EASTERN EUROPE one might think, has good reason to steer clear of
19th-century economic cranks. But decades of forced experimentation
with the ideas of Karl Marx seem not to have killed its interest in
the species. As they struggle to adapt to freer markets, some East
Europeans are embracing the unorthodox ideas of Henry George, an
American economist who lived from 1839 to 1897.
Mr George is probably the only tax theorist in history whose beliefs
have become an object of cult devotion. He believed that taxes should
be levied only on the value of land, not on labour or capital. This "single
tax", he asserted in his book "Progress and Poverty",
would end unemployment, poverty, inflation and inequality. Hard-core
Georgists, who are not beyond passing out leaflets on street corners
to propagate the master's ideas, think this will be just the start.
The single tax has never been fully implemented, and the political
obstacles are obvious. In the post-communist countries, however, where
landowners' lobbies are weak or non-existent, the practical virtues of
a land tax are striking: it is simple and cheap to levy; evasion is
all but impossible; and leaving land derelict becomes prohibitively
Estonia first discovered Henry George in 1991 and introduced a tax on
site values two years later. This is now one of the most important
sources of revenue for rural local authorities, whose administrative
talents would be overstretched by more complicated taxes on income,
sales or profits, most of which are collected instead by the central
government. Land valuations are posted on maps in town halls. Those
who wish to appeal may, but few do so. According to Tambet Tiits, an
expert on land use, the collection rate in 1996 was 95.5%.
The tax also helps to counteract a side-effect of the country's
restitution law, which aims, where practical, to hand physical
property back to its pre-Soviet owners. This has created a new class
of inactive landlords, often elderly or living abroad, who tend to
leave their property idle. The land tax, even at a modest 2% of the
site value, encourages them to develop the property or sell it.
Government waste of land is penalised too: public-sector owners must
also pay the tax.
Other countries are following Estonia down the Georgist path.
Slovenia has a land tax already, and Latvia and the Czech Republic are
both planning one. But none of them is embracing George with
unequivocal enthusiasm. Suggestions of really steep land taxes as a
replacement for all other levies have been politely declined. Fully
implemented, Mr. Tiits fears, Georgist theory might drive land prices
so low that the market would stop allocating land use efficiently - as
in the days of Marxist central planning.