Taxes on Land Compared to Wages and Interest

Of the total wealth that is created throughout our present economy (colored area ADEF), our current tax system collects, in fact, only a relatively small portion of the total wealth (red area AHGF). The reason tax revenue (AHGF) is a part of total “rent” (AHIF) is because most, but not all, tax revenue actually ends up removing “rent” from the economy in the end, even though government tax revenue generally consists of taxes on incomes and payroll. This, in turn, is because, on the one hand, taxes on incomes actually reduce the profits and benefits of land, and so reduce what people are willing to pay for it (hence reducing “rent”), and on the other hand generally also include incomes from land such as rental incomes or incomes from capital gains from land sales. And thirdly, private income from “land” is also used to pay for sales and value-added taxes, which further increases the share of “rent” governments take through taxation. Because our present tax system takes “rent” out of the economy but does so highly inefficiently, our system allows private parties to appropriate “rent” through their ownership of valuable land (green area GHI), but, at the same time, also reduces the overall amount of “rent” that could otherwise be had for the entire economy if less productive land were available. We can see this by extrapolating the dotted line GH further into the grey area ABCD. Because the dotted line GH would extend below the line IB and leave us with a negative “rent” amount, which is not possible, any land signified by the line HB becomes ‘marginal’ – that is, it yields no “rent” to its owners under our present tax system, which is why it is being withheld from use. It is simply more profitable for landowners in our present tax system to withhold that land from use and to then sell it at some other time for a profit. We can see by this illustration how our current tax system actually perpetuates our wasteful use of land and natural resources, marked by the line ED instead of EC, while it simultaneously encourages a small portion of our total population to reap vast profits through private land speculation, as shown in the green area GHI. Tax revenues, too, are relatively meager (AHGF). By shifting taxes from wages and interest on to land, we immediately notice that land is used far more efficiently – the colored area BCEI extends all the way to the right, leaving far more wealth over for both workers and owners of capital goods such as entrepreneurs. For our illustrative purposes above we are assuming a perfectly efficient use of land, but in practice only an approximation of that rate can be achieved. The next thing we notice is that government revenue is greater as well, because, on the one hand, government is now able to harness far larger amounts of “rent” more efficiently by directly taxing land instead of indirectly taxing it by taxing income, and, on the other hand, enormous amounts of new and taxable wealth is being created from less productive land that is no longer withheld from use. Text source: