published: June 1, 2020, 10:50 p.m.
In the late 1800s Henry George, a Philadelphian who dropped out of school at 14, wrote a book about land taxes that became the second best selling book in the country at the time behind only the bible and started the worldwide movement of Georgism. The board game Monopoly was originally designed by a Georgist to teach their values. In his book, Progress and Poverty, George proposed that a solution to poverty was to replace all taxes with a single land value tax. A land value tax is different then a property tax in that a property tax takes into account the total value that is associated with everything on the property, whereas a land value tax only accounts for the raw land that the property is on. Building a gazebo in the backyard might increase the property taxes but the land value tax would remain the same. The land value tax is inherently progressive since the taxes that people pay would be proportional to the amount of land they own, and the amount of land people own is proportional to how much wealth they have. Tax evasion is also much more difficult with a land value tax because while some type of assets can be moved offshore, the land will always stay in the nation. Using shell corporations to separate one's self from the assets owned won't work with land either. It doesn't matter who owns the land they would still need to pay the tax if they wanted to remain in possession of it.
A land value tax is widely viewed as an efficient tax. Milton Freidman, the famous conservative economist who guided Ronald Reagan, referred to it as the "the least bad tax". With inefficient taxes, the extra cost on what is being taxed will cause the amount of the taxed item being consumed to fall below the amount demanded. It can negatively affect people's behavior as they can act in ways they normally wouldn't to try and avoid the tax. But with land people will always need to use it and there is a fixed supply, so no matter how much cost a tax adds it will still be consumed. The only behavior change that it will induce is to make people more conscious of their land use and try to do more with less land. This reduces things like vacant lots and urban sprawl. A common moral argument against taxes is that they are a form of theft, where the government is involuntarily seizing assets or income from citizens. To George though the only reason that land has value in the first place is due to the community around it, not just the owner. The extra value associated with a one-bedroom apartment in New York City compared to one in the middle of Utah is due to all of the infrastructure, shops, opportunities and other positive externalities around it provided by the city. Both properties would also be worthless if it wasn't for a military defending them from invaders and firemen/police force available to provide protection. Because the nation provides this value to land in the first place it seems reasonable that they have a claim to it through a tax.
What's so special about this? If Georgism is just about adding a tax, isn't that just a policy change? Why does it merit an "-ism"? Adding this tax to some goods is meant to subtly introduce social ownership of those goods where there was private ownership before. The reason George thought this was necessary because in his mind there is some behavior in the economy that is beneficial and some that make people worse off. We can reference these types of behaviors as profit-seeking vs rent-seeking. The core belief behind Georgism is that by utilizing social ownership through a tax, it is possible to turn the net negatives caused by rent-seeking into net positives that benefit everyone.
Profit-seeking vs Rent-seeking:
One of Adam Smith's (AKA the Scottish guy who founded capitalism) big insight was saying that capitalism isn't a zero-sum game. In the Mercantile world that he lived in, all of the nations looked at transactions as either them extracting wealth from someone, or someone was extracting it from them. It seemed only natural to them that the point of their colonies should be to bring in as much gold and material to the homeland as possible and that you should only ever have trade surpluses. Smith's insight was that even though two parties can be acting in their self-interest, the transaction can still benefit both parties. There doesn't have to be a winner and loser, there can just be winners. When you buy a crunch wrap supreme, Taco Bell is better off because they valued the money in your wallet more than the capital they invested into making the wrap, you're better off (well debatable it is still Taco Bell after all) because the food was at a price you were willing to pay and even the guy at the registers better off because the store keeps making money and he can stay employed. In a capitalist market society, there are millions and millions of mutually beneficial transactions like this every day were everyone is little better off then they were before and overtime this leads to the economic growth that we know and love. Engaging in these types of transactions is profit-seeking behavior.
But while this sounds nice and we can point to plenty of examples where this is true, some transactions are zero-sum. Sometimes nothing is created, wealth that already existed just changes hands. This is referred to as economic rent. People who pursue these kinds of transactions where there is nothing created are engaging in rent-seeking behavior. Wikipedia gave the following example for someone who benefits from economic rent:
"[Imagine a ] feudal lord who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. There is nothing productive about the chain or the collector. The lord has made no improvements to the river and is not adding value in any way, directly or indirectly, except for himself. All he is doing is finding a way to make money from something that used to be free".
The interaction between the lord and a boat is a transaction between two consenting parties just like the Taco Bell example, but there has been a shift. Now instead of pricing a product they created at what the buyer is willing to pay, they set the price at what they can extract. The price that Taco Bell sells its soggy snacks is set by the market interaction of demand for fast food and the supply of it. Because of the competition between fast food joints if they raise the price of a Crunchwrap Supreme too much above this market price then customers can just as easily go buy a Big Mac. To increase its revenue Taco Bell must produce Crunchwrap's as efficiently as possible. However, the Lord is not bound by the market price. His ownership of the river gives him something like a monopoly over it since there is little to no competition or alternatives customers can take. The lord is free to set a price higher than the market price and make more revenue. That extra revenue that he can get just by owning the river and restricting access to it is the economic rent the lord collects. The overall economy is composed of a mix of transactions where something is created, and ones were rent is extracted. Economic Rent-seeking doesn't have to do with literal rent being paid to a landlord even though this is where it got the name, it occurs anytime where restricting access to something allows for more profit than the effort and capital that was put in. Taxi medallions are an example of rent-seeking. Although the people driving taxis work hard, there is a portion of the money they make that is more than they would if anyone could drive a taxi all because they happen to own this government-created medallion that artificially restricts this market. Through rent-seeking people can make money not by doing anything but just by owning something.
The ideas of rent-seekers are sort of in our social mythos, it is why we regard someone who got rich through starting a company or an inventor like Elon Musk in high regards, and then someone like Mr. Burns who is born rich (I'm not too sure if this is true I don't know my Simpsons lore too well) and does nothing but sit back and collects profits from owning the only power plant in town. Our economic system makes no distinction between money made by the Elon Musk's of the world and the Mr. Burns of the world. But to Henry George, this was a key distinction. He viewed the entrepreneurial Elon Musks as a positive to society but thought that the Mr. Burns of the world was the reason why even as technology kept improving income inequality kept increasing. to George, the rent-seeking that effects us the most comes through land ownership. With land, there is only a fixed amount available (excluding America for its first couple hundred years while the frontier was being explored) but the demand is not fixed, it keeps increasing. This leads to the price of land increasing and the owners becoming better and better off.
Over the last couple of decades, technology has been improved no place quite like San Fransico. The Bay Area and Silicon Valley have been a hub for the best engineers in the world and a lot of our modern-day tech comes out of there. Entrepreneurs from all over flock there and have created some of today's largest businesses and Mr. Musk's SpaceX and Tesla. Thousands of jobs created are created there. But the valley is only so big. Even with all of the jobs created there and millions of dollars made by investors, homelessness keeps rising. All of the improvements and opportunity in San Fransico just means that the demand to live there goes up but the supply of housing is fixed because there is only so much available space. This results in an ever-increasing cost of rent that leads to people being cast onto the street as well as tension with native residents who are being driven out of there neighborhoods by the increased cost. If a few decades ago you were able to buy an empty lot of land in San Fransico and hold onto it until today it would be worth a fortune. Through not doing an ounce of work or creating anything useful, you would have been able to make a ton of money. And this opportunity for easy money brings in people with excess capital to come in and use it to buy up land so that in a couple of years when it is worth more they can make a ton of money. When more of these buyers come in then the price of land goes up and rents go up further.
Social Ownership
From the Georgist mindset ownership of goods that cause rent-seeking like land gives the holder an advantage at everyone else's expense. When these goods are owned by private hands this leads to a few individuals getting richer and richer without contributing anything to society and inequality increasing. The Georgist solution to this problem is to move these goods from private ownership to social ownership. In a Georgist society, all citizens would be the owners of all the land in the nation, and a land tax could be thought of as a user fee being paid by the current holder of the land for exclusive access to it. These user fees could then be redistributed back to all the citizens in the form of a dividend.
Looking back at the Lord and the river rent-seeking example, imagine the river between two towns. If both towns suddenly become bustling tech hubs a la San Fransico then the trade between them over the river will increase. This will cause the Lord who's property on the river he owns to bring in more revenue as he can more boats that are delivering goods to each town. But he had no hand in in the improved trade. The citizens of the towns are the ones who cause an increase in the value of the river. Now imagine instead of the Lord having sole ownership of this river-side property it is owned by the community, and the Lord pays a fee to possess it in the form of a land value tax. As trade becomes more popular land on the river will become more also valuable as potential land buyers find out you can make easy cash of it is just put up a chain across the river. But with land value tax, as the value of this land increases the tax increases proportionally. This acts as a mechanism to offset the accumulation of wealth in the hands of a few property owners and redistributes it back out to the community. If the Lord never had any intention in investing in the riverside property any more then just putting up a chain to restrict boats, the extra burden of a higher fee on land close to the river might sway him to sell it to a potential buyer who is interested in buying river specific property, maybe because they want to open up a boat repair business or something. This could potentially lead to land being more efficiently allocated.
Social ownership of the means of production in this manner is textbook socialism. However because Georgism socializes only things that involve economic rent, it seems more like Socialism Lite. Most goods in a Georgist society would be owned privately just like they are today. A lot of the criticisms of socialism comes from the idea that big government can not efficiently allocate resources through centralized planning as market forces can. But in the Georgist system, the possessors of land is not centrally planned, land deeds are still bought and sold on the market. Although a plot of land would be owned collectively by society at large, the current possessor of it would be allocated by the market just like it is today.
Ultimately the political parties created in the Georgist fervor all faded away. The board game Monopoly was bought by Hasbro and became more synonymous with family arguments than Georgist ideals. Taxation is such a hot button political issue and with the tax system being so complicated it seems unlikely that any major land value tax-related reforms will happen any time soon. I think we hold a few black and white views about economic ideology. These are commonly things like taxation is bad, socialism is inefficient, and on the other side that capitalism is evil, the market is unfair. Georgism doesn't align with these notions, taxes are used to encourage efficiency, its a little socialist but completely market-oriented. George was from the time of the industrial revolution and gilded age when the technological advancements were changing the world rapidly. Now with the internet George's ideas came out of his response to the rapid technological changes caused by the industrial revolution. Now that we seem to be in the midst of a digital revolution, maybe a black and white viewpoint might not be something to take for granted, and it could be useful to remember the ideas of Henry George.