TP3. The tax that cannot be passed on
Virtually all taxes today are, to a greater or lesser extent, passed on that is, the burden of the tax is not carried by the person who initially pays it but by somebody else.
In many cases, this is quite intentional. When VAT is applied to goods or services, the tax is charged on the person providing those goods or services, but everybody expects that he will recover that cost by charging more. When taxes are imposed on drink or tobacco or petrol, or on goods imported from a foreign country, those taxes are automatically reflected in higher prices to the consumer.
To a considerable extent, ‘direct’ taxes are passed on as well. If income tax is increased, workers who are required to pay the extra tax soon demand more money from their employers in order to maintain their previous standard of living. The employer usually has to comply but he, in his turn, will usually increase the price of goods or services which he supplies.
Land Values
Unlike other taxes, a tax on land values cannot be passed on. It is important, however, to be quite clear what is meant by a ‘tax on land values’. ‘Land value’ means the value of a piece of land alone, without including the value of any improvements – like buildings or crops or machinery – which people have put on that land. A factory or a farm or even a domestic house really consists of two entirely different things: the site itself, and the improvements or developments which people have put on that site. Each of those things has a market value. A parcel of building land, or an uncultivated field, has a price; while building land with a house on it, or a field with crops on it, has a higher price – the difference being the value of the improvements.
The unimproved value can easily be assessed preferably as an ann ual rental value. This value is not created by the landowner and can be collected by an annual land value tax (LVT) based on the rent it would command.
Some Examples
A few examples will show why a tax on land values cannot be passed on by the taxpayer to anybody else.
1. The Shopkeepers
Consider two shopkeepers, both selling the same kind of goods in the same town. One has a shop in a side street where land values are low, and therefore his LVT is low. The other has a shop in the High Street where land values are high, and therefore his LVT is high. If the second shopkeeper tried to raise his prices to pay the LVT, his customers would go to the side street shop instead of his. The reason shopkeepers seek High Street sites is not that they expect to be able to charge more for their goods, but that they expect to sell more of them.
2. The Tenant Farmer
Consider a farm worked by a tenant farmer who hires it from a landowner on an annual tenancy. Suppose that the landowner is now charged LVT on the value of the site of the farm – not the buildings or other improvements, of course, but· the site alone. Could he demand more rent from the tenant farmer?
The tenant already pays as much rent as the landowner can make him pay. If the landowner tries to charge him any more, to pay the tax, the tenant will either move to a different landowner where the rent is lower, buy a freehold farm, or go out of business. The landowner knows this, and it is that knowledge which determines the rent. So the rent cannot be increased, and the landowner must pay the tax himself.
3. The Manufacturers
Consider two manufacturers making similar goods. One has a factory on an expensive site; the other owns a factory on a cheap site. Can the first manufacturer raise his prices to pay for LVT? Again, plainly not. What determines the price he can charge is the play of competition, not the value of the site from which he is producing goods.
The Economic Principles
These are but three of many possible examples which illustrate a very important economic rule enunciated by 19th century economists, and still as valid today as when it was written. In 1848, John Stuart Mill wrote:
”A tax on rent falls wholly on the landlord. There are no means by which he can shift the burden upon anyone else. It does not affect the value or price of agricultural produce, for this is determined by the cost of production in the most unfavourable circumstances those circumstances, as we have so often demonstrated, no rent is paid. A tax on rent, therefore, has no effect other than the obvious one. It merely takes so much from the landlord and transfers it to the State.” (*)
Mill was thinking mainly about agricultural tenancies, but the American economist and philosopher Henry George pointed out that one essential difference between land and other things is that the supply of land is fixed, while the supply of other things is variable within very broad limits.
This difference goes a long way towards explaining the different behaviour of land and other things in response to taxation. If, for example, more tax is put on tobacco, some people will probably reduce their consumption of tobacco, which will lead to a reduction in the amount of tobacco produced in the future. Alternatively, smokers may decide to smoke as much as before but to reduce their consumption of something else – which will reduce the demand for that other commodity, and therefore the amount of it which will be produced. Conversely, a reduction in taxation is likely to produce an increased supply of that commodity. The same thing is not true of land, because the supply cannot be altered.
Another relevant factor is that most taxes impose the same burden everywhere in the country. If cars, computers or cabbages are taxed, there will be no local differences in how much the taxpayer will be required to pay. With land, however, there will be very big differences because different sites are of such widely different value. People producing from cheap, lightly-taxed land, will be in competition with people producing from expensive, heavily-taxed, land.
Why is LVT a good tax?
Just a few taxes on commodities are good and necessary. To give two examples, taxes on tobacco discourage people from doing something which is likely to damage their health, while taxes on petrol are designed, in part, to reduce pollution of the environment. These taxes are good and necessary because governments wish to discourage consumption of the thing which they are taxing.
In most cases, however, taxes on commodities are not imposed with any object of discouraging production or sales, but in order to collect revenue. The effect of discouraging sales is an unintended byproduct of the tax. Similarly, direct taxes, like income tax and corporation tax, are not designed to raise prices of goods, although in practice they do. Nearly all existing taxes are, to a greater or lesser extent, brakes on production, largely because they are passed on. They also produce all kinds of indirect results which were unintended and often unforeseen.
By contrast, LVT in no way discourages production. Far from reducing the amount of land available, it actually tends to increase it, for people owning idle land are encouraged either to bring it into use themselves or to dispose of it to someone who will. So the results of a tax on land values are intended results, while the results of most other taxes are largely unintended.
Furthermore, LVT is a just tax. Taxes on goods, and direct taxes as well, are taxes which fall on something which the producer has done or made with his own efforts, or which the consumer requires in payment for the effort which he has made. A tax on land values, by contrast, falls exclusively on something from which the owner derives benefit, yet which neither he nor his predecessors in title have ever made. What could be fairer than that?
* Principles of Political Economy S.2, chap. 3, book 5
Book list
George, Henry: Progress and Poverty. This is available in many editions. A recent edition, edited and abridged by Bob Darke, Robert Schalkenbach Foundation, New York 1920.
George, Henry: Science of Political Economy (abridged) Robert Schalkenbach Foundation, New York 2004
Harrison, Fred: The silver bullet. International Union for Land Value Taxation, London 2008
Tideman, Nicolaus (ed.): Land and Taxation. Shepheard-Walwyn, London 1994
Articles
Land Value Tax Links
The Tax Burden
Article List
- Welcome
- SA 88. Is there another way? by Tommas Graves
- SA 87. Time for a look at Rent by Tommas Graves
- SA 86. It’s rather Odd………….. By Tommas Graves
- SA85. Born to become a Georgist by Ole Lefmann
- SA84. Happy Nation by Lasse Anderson
- SA83. Ulm is buying up land, sent by Dirk Lohr
- SA82. Radical Tax Reform by Duncan Pickard
- SA 81. All taxes come out of Rents, by Rumplestatskin.
- SA 80. The Housing Crisis and the Common Good, by Joseph Milne
- SA 79. The “housing crisis” is no such thing, by Mark Wadsworth
- SA78. The Inquisitive Boy by “Spokeshave”
- SA 75. A Note on Swedish Taxes, by Tony Vickers MScIS MRICS
- SA 74. Homes Vic by Emily Sims
- SA73 Public Revenue Without Taxation by Peter Bowman
- SA71. Two presentations by Ed Dodson
- Short Sighted Benevolence
- SA 72. CAN YOU SEE THE CAT?
- SA70. Dissertation on Land Rental by Marion Ray
- Verses on the theme
- SA69. Argentina by Fernando Scornic Gerstein
- SA68. The Right to Work, by Leslie Blake
- SA66. The Most Wonderful Manuscript by Ivy Akeroyd 1932
- SA65. Housing Crisis? What Housing Crisis? by Mark Wadsworth
- SA64. Making Use of History by Roy Douglas
- SA63. The Fairhope Single Tax Colony – from their website
- TP35. What to do about “The just about managing” by Tommas Graves
- SA62. A Huge Extra Resource, by Ed Dodson
- SA61. Foundations of Earth Sharing Why It Matters: By Lawrence Bosek
- SA60. How to Restore Economic Growth, by Fred Foldvary, Ph.D.
- Two cartoons by Andrew MacLaren MP
- SA59. The Meaning of Work, by Joseph Milne
- SA 58. THE FUNCTION OF ECONOMICS, by Leon Maclaren
- SA 57. CONFUSIONS CONCERNING MONEY AND LAND by Shirley-Anne Hardy
- SA 56. AN INTRODUCTION TO CRAZY TAXATION – by Tommas Graves
- SA 55. LAND REFORM IN TAIWAN by Chen Cheng (preface) 1961
- SA54. Saving the Commons in an age of Plunder – by Bill Batt
- SA53.- Eurofail – VAT, by Henry Law
- SA52. Low Hanging Fruit – by Henry Law
- SA51. Location Theory and the European Union, – by Peter Holland
- SA50. Finland’s Basic Income – why it matters by Fred Foldvary, Ph.D.
- SA 29. A New Model of the Economy, by Brian Hodgkinson, as reviewed by Martin Adams of Progress.org
- Economics Explained (In 1 Simple Cartoon)
- SA 48. LANDED (Freeman’s Wood) by John Angus-StoreyG2
- SA 47. Justice and the Common Good by Joseph Milne
- SA 49.Prosper Australia – Vacancies Report
- SA39. A lesson from Alaska: further thoughts? By Alanna Hartzog
- SA23. Taxation: a brief history by Roy Douglas
- SA45. Of course, it wouldn’t solve all problems………by Tommas Graves
- SA43. TIME TO CALL THE LANDOWNERS’ BLUFF by Duncan Pickard
- SA44. Answering questions to UN Habitat 3 Financing Urban Development by Alanna Hartzog
- SA15. Why we don’t have a Housing Shortage, by Ben Weenen
- SA27. Money and Natural Law, By Tommas Graves
- SA42. NO DEBT, HIGH GROWTH, LOW TAX By Andrew Purves
- SA40. High Land Prices and Rural Unemployment, by Duncan Pickard
- SA28. Economics is a Natural Science by Duncan Pickard
- SA34. Economic Answers to Ecological Problems by Seymour Rauch
- SA22. Public Revenue without Taxation by David Triggs
- SA41. WHAT FAMOUS PEOPLE SAID ABOUT LAND contributed by Frank de Jong
- SA36. TAX THE RICH? Pikety and all that……..by Tommas Graves
- SA46. LAND VALUE TAX: A VIABLE ALTERNATIVE By Henry Law
- SA35. HOW CAN THE ECONOMY WORK FOR THE BENEFIT OF ALL? By Peter Bowman, lecture given at the School of Economic Science.
- SA38. WHO CARES ABOUT THE FAMILY by Ann Fennell.
- SA30. The Turning Tide: The Beginning of Monetary Trade in Anglo-Saxon England by Raymond Makewell
- SA31. FAULTS IN THE UK TAX SYSTEM
- SA33. HISTORY OF PUBLIC REVENUE WITHOUT TAXATION by John de Val
- SA32. Denmark By Ole Lefman
- SA25. Anglo-Saxon Land Tenure by Raymond Makewell
- SA21. China – Four Thousand Years of Taxing the Land by Peter Bowman
- SA26. The Economic Philosophy of Georgism, by Emma Crosby