Why A Tax on Land Values Will Not Raise Land Rent
[Reprinted from the Henry George News, July,
I find many opportunities to discuss land value taxation in the
American history classes I teach, but one of the difficult concepts to
explain quickly and clearly is why a tax on land values must be paid
by die landowner, who cannot shift the tax to the land user in the
form of a higher rent. The non-shiftability of the LVT is a key issue,
since if the tax could be shifted it would have no beneficial economic
The superficial common-sense view is that the LVT is not different
from other taxes: "Why shouldn't the landowner increase his rent
to cover the increased tax just as the gas companies pass on the gas
tax in the form of higher gas prices to the consumer?"
Over the years I've developed an explanation for this difficult point
which others might find useful. I find it effective to appeal first to
authority: "All the textbooks agree on the non-shiftability of
the LVT!" This stops the superficial observers, puts them on the
defensive, and they are now more likely to pay attention to the basic
reasons why this tax is non-shiftable (but stay clear of the technical
jargon offered by the textbooks).
The best explanation, of course, is found in Ricardo's Law of Rent,
so describing it is the next step I find most useful. This law states
that "the rent of any piece of land is determined by the excess
of its produce over that which the same application of labor and
capital can secure from the least productive land in use." Since
LVT cannot possibly increase this differential in production, it
cannot increase either the annual rent of land or its sale price.
Unfortunately, many modern minds find this law to be too speculative
and abstract to be convincing, and so I have prepared this next
explanation of LVT non-shiftability which some of my listeners have
found more understandable because it fits in with the concrete
If a land value tax is imposed, it is quite conceivable that
landowners would try to maintain their accustomed income by passing on
the tax increase in the form of a higher rent to their tenants. If
they should try to do this, however, some of their tenants will
endeavor to economize in their use of land, either by postponing their
expansion plans or by using their land more intensely (e.g., by
building higher skyscrapers, etc.); marginal land users will go out of
business altogether and marginal builders would postpone new
construction. The more the landowners try to pass on the tax, the more
resistance they will meet on the part of their tenants. The demand for
land will decrease thus eventually reducing land rent to the old
As demand drops, so does price. In this case, the price we are
talking about is the annual rent a landowner can charge his tenant.
There is only one way by which the LVT could increase the land rent
price, and that is by decreasing the supply of land (when supply
decreases, prices rise); but the tax can have no such effect because
the supply of land is constant and unchangeable.
The result, then, of LVT is that now both the landowner and the
government will be sharing the former rent -- the landowner getting a
reduced rental income and the government getting an increased share of
the rent in the form of a tax.
It is instructive to compare a tax on land values to a tax on
improvements. The latter tax can be passed on to the user. The
owners would attempt to raise their building rents, the users would
economize (e.g., by living in more crowded quarters, etc.), demand
would be reduced but so also would supply!
Here is the nub of the difference between a land tax and a building
tax. If a tax causes the demand for building to fall off, fewer
buildings will be built and the decreased supply will boost prices.
The effect of the decreased demand will be negated by the effect of
the decreased supply, and so the rental return to the building owner
will remain the same. But since a tax cannot cause a decrease in the
supply of land - it is fixed - such a tax can only cause a decrease in
demand, then a decrease in the landowner's return from his land -
Actually, since a land value tax will force landowners to more fully
utilize those land parcels which are now only partially improved or
perhaps vacant altogether, this tax would increase the effective
available supply of land on the market and therefore further
reduce the land rent collected by the landowner. Instead of increasing
land rent, this tax would eventually decrease it!
Good luck with these explanations. If your prospect is still not
completely convinced, then it might help to explain this interesting
idea advanced by Lawrence Abbott in his Economics and the Modern
World (1960, p. 654):
Instead of having to pay $10,000 for land with a $600 rental value,
the 'buyer' would pay nothing, invest the $10,000 in securities, and
use the dividends to pay the $600 tax!