Land Rent, Taxation and Public Policy

MANY, IF NOT ALL economists now agree that the fisc may tax away rent without impairing any economic function. It is only necessary that the tax be independent of landowner behavior. What is less widely understood is that not taxing rent obstructs its proper functioning. Untaxed landowners through the centuries have manifested a propensity for passive withdrawal that is simply too widespread to overlook and too well proven to redocument. Some who have advocated (or opposed) "taxing land into use," while correct in their prediction of results, have basically miscontrued the nature of the policy: they see the tax as being piled on top of market rent, and amending the market. This is to be innocent of the basic process of land tax capitalization, briefly summarized by Jensen (1931)t (and curiously missing from the literature since). The costs of carrying or holding land each year are interest and property taxes, each being a percentage (respectively i and t) of selling price (P). If tax rate (t) rises, P falls, reducing the interest burden (P x i) by the same amount that taxes rise. Taxes and interest between them always just exhaust the total rent (a) (1). t i The public share of rent is t; the private share is i. +i +i Those who do understand tax capitalization sometimes note that land taxes are not necessary to make landowners economize, but simply substitute a tax cost for an interest cost. They are right in a limited way. But the naive fellow who thinks taxes force land into use is right, too.