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The Key to Promoting Prosperity by Reducing Taxes on Labor and Capital

Humans must look to the earth itself for their food, clothing, shelter, tools for earning a livelihood, and, ultimately, as the source of all wealth.

Wealth in all forms is the product of labor applied to land or the products of land. Historically, most great fortunes have been based on monopoly ownership of land sites or natural resources.

The production of wealth requires three factors: (1) Land (includes the electromagnetic spectrum, i.e., broadcast channels), (2) labor (human exertion by brain or brawn), and (3) capital (includes buildings, tools and machinery, computer hardware and software, communications equipment, and goods which, in the process of production or distribution, produce new goods.)

The impact of tax levies on land, labor, and capital was fully explored by Henry George in his worldwide best seller, Progress and Poverty.

The economic return to each of the three factors of production are defined as: (1) wages or salaries paid for labor; (2) interest paid for the use of capital (which is created by the application of labor and knowledge to land and natural resources); and (3) rent which is paid for the use of land. These economic definitions are mutually exclusive. Because wages and interest are attributable to human effort, the laborer is properly entitled to his/her wages or salary and the producer or owner of capital is properly entitled to his/her interest for the use of capital. But land differs from the above in that the possessor of land did not create that land or even create its value. The value of land is due to its native fertility or mineral content, its site or location relative to population aggregations and its proximity to roads, schools, fire and police protection, places of employment and other public and commercial facilities and services. Since the value of any parcel of land is mostly created by the community and not the individual holder of the land, the rental value of that land should then be paid to the community that produced that value.

A tax or "rental charge" levied by the community on the market value of that land would stimulate the highest and best use of that site and promote productive employment. Such a tax increases, rather than diminishes the incentive to produce. Tax labor and people are less inclined to work. Tax savings and people are less inclined to save. But a tax on land does not diminish the quantity of land; it discourages the hoarding of that land for speculative gain and increases the supply of land in the marketplace because it induces holders to use that land efficiently or sell to those who would put that land to higher and better use--use it or lose it. Increasing the supply of land in the marketplace by increasing the tax load on land value would cause the price of that land to fall and thus become more affordable.

The conventional property tax is actually two taxes--a tax on land and another tax on improvements. A tax on the location value of sites would return to the government the increased value created by the community's investment in infrastructure, government services, public amenities, and the growing populations' greater need for land. If government collected this publicly created value, it would not be necessary to tax income or consumption (sales) or employ the myriad of nuisance taxes which impede the operation of the economy and distort the efficiency of the marketplace.

Levying higher taxes on land and lower taxes or removal of taxes on improvements within cities would discourage the development of slums in that maintenance, preservation, rehabilitation, improvement of property and new building would not be penalized with higher taxes. Also, the recycling of underutilized lots, already served with municipal services and infrastructure, for more socially worthy purposes, would be stimulated.

In summary, Levying higher taxes on land values and lower taxes on improvements would discourage urban sprawl and instead foster more intensive and efficient use of land within cities, where required infrastructure already exists. Infill of vacant land and vertical growth in metropolitan areas, would occur spontaneously, and prevent sprawl into endless suburbs far removed from city centers. The expense of extending roads, utilities, schools and other required infrastructure would be greatly diminished and open space, greenbelts and wildlife habitats outside cities could be preserved, protecting the environment and greatly improving the quality of life for all.

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