Land Value Taxation and the Issue of Confiscation

Nicolaus Tideman, Ph.D.

[A paper presented at the Joint Georgist Conference,
University of Pennsylvania, Philadelphia, Pennsylvania, 1989]

One reason why a society might want to tax land values is because it is efficient. The efficiency of taxing land values arises from the fact that a tax on land can be levied in such a way that no action by the holder of the land can affect the amount of the tax. When this is true, and the tax is not greater than the rental value of the land, then, unlike virtually all other taxes, a tax on land generates no "disincentive" effect, no discouragement of productive activities.

This efficiency argument might be offered as a reason for collecting the greatest possible proportion of a government's revenues from taxes on land. However, such a proposal seems to many people to be unjust. Such a tax system would bring land prices down to virtually zero, thereby substantially reducing the wealth of individuals whose financial assets contained disproportionately large amounts of land.

It is understandable that people would be concerned about the justice of such a proposal. One of the principles of limited government, enshrined in our Constitution and recognized around the world, is that the Government does not take the property of individuals unless it compensates them. The introduction of a tax system that produces a fall in the prices of a class of assets to virtually zero seems indistinguishable from a taking of those assets. To permit such a thing to occur, without compensation, seems to invite people to seek to use the political process to take whatever they can from others through legislation, thereby inducing anyone who has anything that might be taken to devote extraordinary amounts of resources to defending against political appropriations.

For this reason the efficiency argument is not an adequate justification for 100% land value taxation. Nevertheless, a concern for the confiscatory potential of land value taxation is not a valid reason for property tax reform that substitutes additional taxes on land for taxes on improvements. Because this measure leaves the total tax on an average site unchanged, while allowing additional improvements without additional taxes, it generally raises land values rather than lowering them. Thus confiscation should not be an issue when considering property tax reform of this sort.

If such a property tax reform is applied to rural land with little or no development potential, it is possible that its value will fall. Is this confiscation? If the tax reform does not take all or nearly all of the value of the land, it would generally be regarded not as confiscation, but only the kind of "accident" that people must tolerate for the sake of an efficient society. Nevertheless, it is sensible to seek boundaries of tax jurisdictions and variations in tax rates if necessary so that everyone receives at least as much in services (or potential services if land is undeveloped) as he pays in taxes.

Suppose that taxes on improvements have been entirely eliminated and additional taxes on land are considered, replacing sales taxes and income taxes. Is there a reasonable concern for confiscation? It should be noted first that again, the replacement of one tax by another leaves the average taxpayer paying the same total tax bill The fact that the tax on land has no disincentive effects would make the average taxpayer better off. Still, there would be some persons whose total tax bills rise. Have they experienced confiscation? Again, if the tax reform does not eliminate all or nearly all of the value of land, the generally accepted criterion for confiscation would not be met. Furthermore, to the extent that the taxes are used to pay for services that raise land rents, the taxpayers will only be paying for what they might reasonably have been charged.

But it is possible that a tax on land will be of sufficient magnitude that it will eliminate nearly all of the sale value of land. And it is possible that the revenue will be used not for services that will raise the value of land, but rather for something like a nationwide guaranteed income that cannot be expected to raise land rents. How then is the confiscation issue to be addressed?

To make such a change not a confiscation, it must be not ordinary legislation, where narrow interests so commonly prevail, but rather a process of changing our Constitution. A reconsideration of our Constitution is an activity we take up only rarely, and when we do so the whole society is engaged in a way that does not occur with ordinary legislation. Thus the gains and losses to individuals that occur through Constitutional changes do not set precedents for unconstrained majorities to take them from minorities. Thus it is in the process of Constitutional reconsideration that we would be able to say, "All these years we have been wrong. There is no just way in which individuals can appropriate disproportionate amounts of land to themselves in perpetuity. The land belongs to all, and the rent of land must be shared equally." This is not confiscation, but only the correction of a misperception.