The Single Tax Reconsidered

Frank D. Walker

[An unpublished manuscript, 1980]

At the time of this writing, Frank Walker was twenty-eight years old and a native of California. He became interested in the single tax as a senior in high school after reading a copy of Progress and Poverty given to him by Dr. Irene Hickman, who was then tax assessor for Sacramento County and an ardent advocate of land value taxation. In 1970 he attended the Centennial Conference [celebrating the 100th anniversary of the publication of Progress and Poverty in San Francisco.

Also, in 1979, he was a captain in the U.S. Air Force stationed at Norton AFB in Southern California where he flew worldwide as a navigator aboard the C-14.1 Starlifter, a four-engine jet transport.

As a remedy for the social ills attending modern civilization, 19th century political economist Henry George proposed to appropriate land rent by taxation. Since he also proposed to abolish all other methods of taxation, his remedy has come to be known as the single tax.[1]

In his remarkable book Progress and Poverty. Henry George was able to confidently state "In every civilized country, even the newest, the value of the land taken as a whole is sufficient to bear the entire expenses of government."[2] But in our day, this does not appear to be true, at least upon first examination. While many economists will agree that a tax on land values is preferable to other taxes which may be imposed, they will quickly point out that such a tax can meet only a small part of present public expenditures. In their view, land value taxation holds promise as only a minor reform - - certainly not as the sovereign remedy for social ills envisioned by Henry George.

But observe that behind this contemporary view there lies an unstated assumption -- that, as other taxes are abolished, land values will remain unchanged. Not considered is another possibility -- that land values will increase as taxes on labor and capital are eliminated. If land values do in fact increase so as to swallow up the tax relief afforded labor and capital, is it not obvious that a land value tax could then provide at least the revenue previously yielded by the abolished taxes? In this case, the single tax proposal of Henry George again looms as a practical measure and a real possibility rather than as an outdated, chimerical panacea.

But before a judgment can be made as to whether the elimination of taxes on the active factors of production (labor and capital) will or will not increase land values, we must first understand how it is that land values are determined. Now, it is a well established law of economics -- since the days of David Ricardo --that the rental value of land is determined by the excess in its yield over the yield of land at the margin of production. But, in having said this, we have not said enough. For what determines the margin of production? Well, the margin of production is simply the lowest point of return at which labor and capital deem it worthwhile to engage in productive effort. So, fundamentally, land values are determined by the lowest point of return at which labor and capital will freely engage in activity.[3] All lands above this point, which is the margin of production, will have a rental value while all lands below this point will remain unused.

Now we are ready to test the effect that a tax imposed upon labor and capital has upon land values. Let us suppose, in a hypothetical case, that labor and capital have carried the margin of production down to a point which we shall call 9. Thus 9 becomes the rent line and all natural opportunities (land) which, with the same application of labor and capital as at the margin, yield a return in excess of 9 will have a rental value. Now let us further suppose that government chooses to levy a 10% tax (which cannot be avoided) upon all incomes. Insofar as this income tax falls upon the owner of natural opportunities, there will be no effect upon production -- the government is simply collecting 10% of the owner's rent. But the effect upon labor and capital is far different. The immediate effect of the 10% income tax is to reduce the return to labor and capital from 9 to 8.1 [9 - (9 X .10) = 9 - .9 = 8.1] But if labor and capital were willing to engage in activity at this lower return of 8.1, the margin of production would have already been carried down to that point before the 10% income tax was imposed. That the margin of production is established at 9 is an indication that returns below that level are not considered acceptable by labor and capital. The imposition of a tax by government does not alter this fact.

Therefore, those elements of labor and capital which will not accept this lower return of 8.1 will drop out of the productive process. This cessation of production will continue until a net return of 9 is again achieved by labor and capital. In this case, it is clear that a new equilibrium will not be reached until the margin of production is established at 10. At this new and higher margin, the net return to labor and capital, after payment of the 10% income tax, is 9 [lO - (10 X .10) = 10 - 1 = 9].

Let us now review the long term effects of the imposition of the tax. Labor and capital receive a higher gross return while the net return to those factors has not changed. But less labor and capital are now engaged in production (by which means the margin of production was raised) and thus the total production of wealth is less within the community affected by the tax. This reduction in the production of wealth is a measure of the economic burden or penalty caused by the tax. And note that income accruing to owners of natural opportunities in the form of rent has been twice reduced -- once by the immediate effect of the tax and again by the long term effect of the rise in the margin of production. Thus, landowners are actually paying the full amount of the tax -- directly in the 10% collection of their income and indirectly in the reduction of rent which results from the higher gross returns to labor and capital necessary to enable those factors of production to pay the 10% tax and still receive their former net return (which is the lowest return acceptable).

To digress for a moment, the astute reader will perhaps have observed that the cessation of production by labor and capital here described is of a voluntary nature while much of the unemployment we actually observe in the world around us is involuntary. But it is a fact, in view of the highly subdivided and specialized methods of production which characterize the modern economic community, that the voluntary cessation of production by labor and capital in one sector of the community may lead to the involuntary unemployment of labor and capital in another sector of the community. For example, a farmer decides -- due to increased rent or tax demands -- that it is no longer worthwhile to cultivate the least productive portion of the acreage which he has been farming. Because his crop production will now be less than it otherwise would have been, he will have less wealth to exchange for the goods and services that he and his family desire. So he decides to forego buying a new coat, a new truck, a new set of encyclopedias, or any of a host of other articles which he would have purchased had he the wealth to offer in exchange.

As only one consumer, his reduced consumption would have little effect. But when his reduced consumption is matched by the reduced consumption of a great many others who have made similar cutbacks in production, then the effect can be very great. As consumer purchases from retailers slacken, orders to suppliers are slashed. Soon workers are being laid off and factories are operating at reduced capacity, if not completely idled. Thus, a voluntary cessation of production by labor and capital in one sector of the economic community, caused when the net return to those factors slipped below an acceptable level (the margin of production), leads to involuntary unemployment of labor and capital in another sector.

Now let us return to our hypothetical case and consider the effect of removing the 10% income tax. The net return to labor and capital will immediately increase from 9 to 10. However, this higher rate of return will attract additional elements of labor and capital into productive activity. This process will continue until a net return of 9 is once again established. In the absence of any taxes, this will of course occur when the margin of production drops back to 9.

At this point, labor and capital receive a lower gross return than before the tax was removed, but the net return has not changed. More labor and capital are now engaged in production (by which means the margin of production was lowered) and thus the total production of wealth within the community is greater. This increase in the production of wealth is a measure of the economic stimulus created by removing the tax. And, finally, note that income accruing to owners of natural opportunities in the form of rent has been twice increased -- once by the immediate effect of removing the tax and again by the increase in rent resulting from the drop in the margin of production. Thus, landowners ultimately receive the entire benefit from the reduction in taxation.

Henry George understood this point. While he did not work through the problem as we have done, he did realize that a reduction in taxation in England (the case that he used) "... would be only such an addition [to the wealth of the community] as improvement in the arts has been for a long time constantly making, and not so great an addition as steam and machinery have made within the last twenty or thirty years. And as these additions have not alleviated pauperism, but have only increased rent, so would this. English landowners would reap the whole benefit."[4]

Our analysis shows that Henry Georges's single tax proposal is indeed worthy of serious consideration since land values will increase as taxes on labor and capital are eliminated, thus vastly increasing the revenue base for a land value tax.[5] The present level of land values is not important as we consider substituting a land value tax for any or all other taxes. What is important is the level of land values which will result as these other taxes are eliminated.

We have already seen how land values increase so as to entirely swallow up any tax relief afforded to labor and capital. So it follows that if all of the taxes with which we presently finance government in this country were to be abolished, land values would quickly advance to a level such that a land value tax could then yield at least equal revenue,(in reality, greater revenue, as earlier explained). Those economists who believe that a land value tax cannot adequately support even local government, let alone the state or federal governments, simply do not understand the economic forces which govern the distribution of wealth among the three factors of production (land, labor, and capital).

Now, it may be asked, if landowners ultimately pay all taxes levied on labor and capital, and if the returns to those factors are the same -- in the long run -- under any system of taxation, then of what advantage is land value taxation? Well, the great advantage of land value taxation, other than ease of administration, is that it is neutral with respect to the production of wealth. Both the land value tax and the income tax operate to reduce the amount of rent collected by individuals -- the land value tax does so directly by appropriating rent while the income tax does so indirectly by inducing a rise in the margin of production as elements of labor and capital withdraw from the productive process. While the net returns to labor and capital will be equal with either the land value tax or the income tax, under the land value tax more labor and capital will be engaged in activity and therefore the total production of wealth will be greater. The land value tax collects only the rent which would otherwise be collected by the owners of natural opportunities and in no way operates to penalize labor and capital.

The beneficial effect of land value taxation can be illustrated by using the municipal property tax as an example. If that component of the tax which falls upon improvements were to be eliminated, the short term effect would be to raise the return to capital Invested in the form of commercial buildings, apartments, and so on. A building boom would occur as labor and capital are engaged by investors who hope to realize these higher returns. All those industries which supply materials to the construction industry would benefit as well. This increased activity would continue until the return to capital in the form of improvements was once again equal to the normal rate of return for all capital. Equilibrium would be achieved as land suitable for building is bid up in price by the increased demand for building sites. At this new equilibrium, more capital would exist in the form of improvements than before the tax reduction while the rate of return to that capital would be the same. More labor would have been engaged to build and maintain these improvements. And land values would be higher. From this higher base of land values, a land value tax could then raise as much revenue as did the former property tax.

When one considers the enormous amount of taxation levied on productive enterprise in the United States today, it is evident that the production of wealth is much less than it would be under a system of land value taxation. Eliminating the taxes which now apply to labor and capital would bring the forces of production powerfully to life. Economic activity would increase tremendously and this country would experience an unparalleled prosperity. How this would occur may be seen through an example similar to one used earlier.

Let us take the case of a farmer cultivating only a portion of the land available to him. The farmer does not bring the less productive land under cultivation because, in his calculation, the net crop return -- after paying tax on the produce -- does not justify his expenditure of effort. But suddenly the substantial income tax he pays -- equivalent to a heavy tax on his produce -- is abolished. Now his calculations are altered. The potential net return from the uncultivated land now justifies the expenditure of labor necessary to bring it into production.

So the farmer undertakes to plant a crop on the previously unused land and hires an unemployed laborer to help with the work. He orders additional machinery -- purchased on credit extended because of the expectation of his increased crop production -- necessary to farm the land. If not able to pay the hired laborer out of current cash flow, the farmer is able to borrow money from his banker on the same expectation. The additional production of wealth by the farmer and the hired laborer permits increased consumption as each is able to exchange his produce for the goods which he and his family desire -- goods which they would not have been able to pay for without the increase in production stimulated by the tax cut.

Taken by themselves, their increased consumption would have little effect. But when their increased consumption is matched by that of a great many other primary producers -- farmers, ranchers, miners, loggers, fishermen, and so on -- who have also experienced an increase in production for similar reasons, then the effect is great indeed. As retail distributors find their sales picking up, orders to their suppliers begin to multiply. Soon factories are humming along at full capacity and plant expansions are underway. Hiring surges as employers scramble to build up their work forces and anyone who is willing to work can find a job. Railroad, barge, and trucking firms strain to handle the extra shipments -- raw materials and produce moving from outlying areas to the centers of production, goods and finished products moving in the opposite direction. Trade picks up in the secondary and service industries as prosperity percolates up from below. The restaurants, hotels, and theaters are full as people enjoy the results of their labor. Construction booms as demand for new houses, offices, and factories skyrockets. New vitality courses through the entire economic community.

Involuntary unemployment would be only an unpleasant memory of the past as employers sought workers to keep pace with the increasing demand for goods and services. Massive government "make work" employment programs would no longer be needed (or demanded). Persons entering the United States to seek work would no longer be viewed as interlopers taking jobs from American citizens -- not when job openings outnumbered job applicants. Rather, such newcomers would be seen as a gain for our country since part of the wealth their labor would create would be distributed in the form of rent, thus enriching the entire community. And those immigrants who eventually returned to their native lands would be our most effective missionaries for social justice.

As the production of wealth soared, public revenues would increase greatly over their present levels. This surplus would allow government to undertake new measures for the public welfare. The present ridiculous, unorganized jumble of health care delivery systems could be replaced by a single national system providing free medical services to all Americans. Similarly, our absurd patchwork quilt of retirement income programs could be replaced by a standard, equitable pension paid to all elderly persons (and we might well consider an outright distribution of rent to every member of the community, thus eliminating the need for welfare and special assistance programs, with their heavy administrative costs and huge potential for fraud). A first rate public broadcasting network could be established. The aging transport and utility infrastructure of this country could be rebuilt. The list of possibilities is endless -- each reader can develop his or her own national agenda.

Consider also the effect of land value taxation upon urban development. Taxes could no longer be reduced or avoided by hiring lawyers and accountants, but only by using less land. This incentive would bring urban sprawl to a halt. A heavy premium would be placed upon the high intensity use of land. Development would be compactly upward (and downward) rather than sprawlingly outward. Instead of low density subdivisions and shopping centers springing up on fertile land at the urban fringe, the decaying city core areas would be redeveloped. Our cities Would likely come to resemble what may already be seen on a limited scale in San Francisco and elsewhere -- block after block of towering structures of striking architectural design surrounded by elevated plazas landscaped with gardens, fountains, sculptured art, outdoor cafes and each block linked by walkways over the busy streets.

Such high density land use would make energy-efficient public transit systems: truly practical in a way that they cannot be in today's low population density environment. Satellite communities and neighboring metropolitan areas would be linked to the city center by high-speed, underground (at least in the city itself) trains. Passengers and freight would then transfer to surface level transportation such as buses, trucks, and conveyor systems for the journey to their final destination. Energy use, pollution, and commuting time would diminish as public transit replaced the automobile as the preferred form of transportation in this more compact urban environment.

But the most important result the single tax would bring has yet to be noted. As the barriers to productive effort fell, a vast storehouse of human potential now lying dormant would be unleashed. New mental power -- the real motor of progress -- would be directed toward the satisfaction of human need and desire. Technology and the productive arts would leap forward with the effect, in time, that the same application of labor to the same land would yield an ever increasing measure of wealth. Both wages and rent would grow. Rapidly accelerating material progress would elevate the position of each member of the community.

Judging from the untapped human potential we see all around us, per capita production of wealth could readily multiply many times over existing levels -- probably to an extent we cannot really grasp. The life style now enjoyed by only the most affluent members of our society would become common-place. Each could enjoy a luxurious dwelling, fine food and clothes, with ample leisure time for recreation, travel, study, and hobbies. With the underlying causes of poverty and hopelessness removed, such social problems as crime, suicide, alcoholism, and drug addiction would tend to disappear. Life would be a joy for all.

Imagine such a society existing today somewhere on this globe. Would we not wholeheartedly strive to persuade everyone we could that our own country should follow the example provided? Well, we can be assured that such a perfect society does exist in the contemplation of God and that it is our great task in this life to bring such a world into being on earth. There is no higher calling. The whole organization of this world shows that rent -- the value created by the community -- is the fund which ought to provide for the needs of the community. Any violation of this precept is a violation of justice and, in the natural order of things, must bring harmful results.

To become aware of the divine plan for the society of man -- of that which was intended from the beginning of creation -- is to be born again in the spirit of truth. And as we grow in the truth, we move away from the mortal nature of flesh which is our first birth and move toward the eternal nature of spirit which must be our second birth. For the flesh is like chaff and the spirit like kernels of grain; and when the wind blows, the chaff is scattered and destroyed while the grain remains and has life.

FOOTNOTES AND REFERENCES

1. Some observers claim that the collection of land rent for public rather than private uses is not actually in the nature of a tax. However, we may define a tax as the compulsory collection of wealth for the support of government. Since the rent collection advocated by George is both compulsory and for the support of government, it is correct to describe his proposal as a tax.
2. Progress and Poverty (Robert Schalkenbach Foundation, 1962) p. 406.
3. And, as Henry George states, the effect of competition is to make the lowest reward for which labor and capital will engage in production the highest that they can claim.
4. Progress and Poverty (Robert Schalkenbach Foundation, 1962) p. 301.
5. In fact, it is easy to see that the increase in land values will always be greater than the sum of taxes remitted on labor and capitals This is so because a portion of the additional wealth produced as a result of eliminating such taxation will be distributed as rent, thus increasing land values.