Theoretical Basis of Land Value Taxation

• Published in: Land Value Taxation pp. 15 - 32
• Main Authors: McCluskey, William J., Franzsen, Riël C.D.
• Format: Book Chapter
• Language: English
• Published: United Kingdom Routledge 2005; Taylor & Francis Group
• Subjects: Labour economics; Taxable Object; Unimproved Land; Ad Valorem; Net Annual Rent; Site Value Tax; Vat; Transfer Earnings; Good Tax; Economic Rent; Good Tax System; Property Tax; Land Tax; Capital Transfer Taxes; Ad Valorem Tax; Land Value Taxation; Unlimited; USV; Single Tax; Supply Curve; Surplus Earnings; Unearned Increment; Subsequent Economists
• ISBN: 9780754614906; 0754614905
• DOI: 10.4324/9781315250946-9

The above conditions for a good tax system were meant to apply to taxes in general and therefore also with regard to property and land taxes.Although taxes could also be used as instruments of socio-economic leverage, or for achieving various other non-fiscal goals, due care should be taken not to deviate from the above-stated principles for a good tax. In this context it is noteworthy that land taxes are quite often suggested as useful instruments to assist with land redistribution and/or land reform programmes. The historical concept of land value taxation Put at its simplest the concept of land value taxation rests upon the premise that only land should be taxed. As Youngman (1993) puts it, even this simple idea can create major difficulties in political acceptability and administrative limitations. In any society, there are three classical factors of production, land, labour and capital. The latter two have their costs and therefore their prices in terms of wages and interest. On the other hand, land has no cost of production, and if land was in unlimited supply people would pay little or indeed nothing for its use. However, land is not unlimited in supply, it is quite the opposite being fixed in supply. This fact creates demand for land in particular locations and therefore a value of land. Whilst land is generally accepted to be fixed in supply, the concept of alternative uses can create a supply shift, in that, supply for one kind of use rather than other kinds follows its own supply versus rent curve to the point where supply and demand equalise. The rent for land is said to constitute two components, firstly, its transfer or opportunity cost, which is the rent ofthe land in its next best use. Secondly, an amount attributable to scarcity or inelasticity of supply for a use in a particular location. It has been recognised that land was a free good as opposed to labour and capital that are never free. Therefore the market price of the products of land is determined by the cost of labour used in their production and capital equipment. On this basis the amount remaining for distribution as land rent is an excess (Lindholm, 1965; Douglas, 1961)The history and economic foundations of land taxation are firmly rooted in the early 18th and 19th centuries. The Physiocrats argued that a particularly unique way to raise revenue was through the taxing of land (Quesnay, 1963 (1756)). Their belief in the sterility doctrine gave rise to the theory of ‘impost unique’. Taxation of land was justified because of the productivity of land. From a social standpoint, therefore, the taxation of land had positive benefits. This group of economists tended to the view that since all taxes had to be paid out of rent, it would be sensible to replace all other taxes by a single tax on rent. In many respects the work of the Physiocrats laid the theoretical foundations that subsequent economists would construct their theories of land taxation. Smith (1776) famous for his canons of taxation made a number of important contributions to the land tax debate differentiating the land tax between a tax on agricultural land and a tax on ground rent to cover developed land. He found land to be suitable for taxation, since the tax would fall on the economic surplus and as such could not be passed onto consumers in the price of goods.