Estonia Adopts Henry George's Tax Proposal


[Reprinted from The Economist, 28 February 1998]

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 expensive.

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.