fra Samuelson: Economics, Tenth Edition, p.564 ff

Henry George’s  Single-Tax Movement: Taxing Land’s Surplus
In the last part of the nineteenth century, a western frontier still existed in this country. As more and more people came here from Europe, each acre of land had more and more people to work with. In a sense, therefore, the land became more prodictive. In any case, its competitive rent value certainly tended to rise. This created handsome profits for some of those who were lucky or farsighted enough to get in on the groundfloor and buy land early. As Will Rogers put it, “Land is a good investment. They ain’t making no more.”

Nor was this true only in agriculture. Men still alive in the Middle West can remember when towns first began. They will tell you how they might have been rich if their fathers had recognized 100 years ago that the corner of State and Madison would eventually become the center of town and grow tremendously in value as a result of the great increase in urban population. Urban sites with good location earn rents in the same sense that fertile areas do. Many people began to wonder why lucky landowners should be permitted to receive these so-called “unearned land increments.”8

Henry George, a printer who thought much about economics, crystallized these sentiments in the single-tax movement. This movement had a considerable following a century ago, and there are still some adherents to it; but it is not likely that running on the single-tax ticket will again come so close to being elected mayor in New York City as George did in 1896, nor is it likely that anyone will soon come along and write so persuasive a bible for the movement as Henry George did in his Progress and Poverty, a hook which sold millions of copies.

Taxing land’s unearned surplus
This is not the place to attempt any assessment of the merits and demerits of George’ political movement. But one important principle of distribution and taxation can be illustrated by his valid central tenet:

Pure land rent is in the nature of a “surplus” which can be taxed heavily without distorting production incentives or efficiency.

Let us see why. Suppose that supply and demand create an equilibrium land rent, as in Fig. 28-3 at E. Now what would happen if we were to introduce a 50 per cent tax on all land rents? Mind you, we are not taxing buildings or improvements; for that certainly would affect the volume of construction activity. All we are supposed to be taxing is the yield of the naturally fixed supply of agricultural and urban land sites, assuming that this can somehow be identified.

There has been no shift in the total demand curve for land; firms are still willing to pay the same amount as before for the same amount of land. Hence, with land fixed in supply, the market price that they pay must still be at the old intersection E. Why? Because supply to users has not changed and neither has demand. Because at any higher price than before, some land would have to go without any demanders. Hence, competitive rents could not permanently be raised to land users.

Of course, what the farmer pays and what the landlord receives are now two quite different things. As far as the landlords are concerned, once the government steps in to take its cut of 50 per cent, the effect is just the same as if the net demand to the owners had shifted down from dd to d’d’. Landowners’ equilibrium return after taxes is now only as high as E’, or only half as high as E. The whole of the tax has been shifted backward onto the owners of the factor in inelastic supply! The landowners will not like this. But under competition there is nothing they can do about it, since they cannot alter the total supply and the land must work for whatever it can get. Half a loaf is better than none, or even than one-fourth of a loaf.

Ethical Issues
Whether or not it is a fair thing to take away part of the return of those who own land is quite another question. Perhaps many voters will feel that such owners are not less deserving than are investors who have put their money into other things; perhaps many will feel that no one should have the right to benefit from Nature’s windfall gifts of oil, minerals, or soil fertility.[1] But these are political questions that must be brought out at the polls. What is relevant is to point out that a similar 50 per cent tax put upon a different factor of production whose total supply is not completely inelastic would certainly produce definite effects on the factor­prices charged in a competitive market. To some extent this tax would distort the pattern of production, and it would shift part of the burden forward onto the users of the factor and onto consumers. Thus, if the same acre of land were to be taxed differently when used for wheat rather than corn production, this would certainly have distorting effects on the price of wheat relative to that of corn.

Since statistics quoted in the last chapter show pure land rent today is barely 5 per cent of the total GNP, if Henry George were alive today and facing the need of government for more than 25 per cent of GNP, he would perhaps change his movement’s name from “the single tax” to “the useful tax on unearned land surplus”.

[1] As the Organization of Petroleum Exporting Countries (OPEC) accumulates fantastic wealth from the sale of oil, for example, the question of OPEC’s “right” to this wealth may come into question.