One of the less-reported suggestions from Andy Burnham in his recently successful bid for a parliamentary seat (and the Labour leadership) is a Land Value Tax (LVT). While the precise details of his proposal remain unclear – and would, in any case, have to form part of a future Labour election manifesto if put forward seriously – it is worth considering the economic effects of the LVT in full. This is especially so because one of its guises, the so-called single tax, has a habit of bewitching not only leftists keen to stick it to rich landlords, but also libertarians and free marketers searching for the “least intrusive” tax on economic prosperity.

We’ll have more to say about the the latter at the end. To start with, the supposed “economic efficiency” of the LVT rests on a combination of at least four factors which have led economists to over-treat land as a unique class:

1. Although bits occasionally drop into the sea, land is essentially permanent, providing its benefits forever.
2. Land is not produced; it is a free gift of nature.
3. Land is fixed in supply – that is, in most circumstances, one cannot manufacture any more of it.
4. Land is immovable, which exacerbates the restriction of people’s alternatives.

Individually, none of these features is especially unique.

As to the first, land may be permanent, but so is a lump of gold. As to the second, the same is true of every virgin resource. Crude oil, aluminium, copper – all of it was provided by Mother Earth. What is produced is not the original material itself, but the things we make by combining such materials with labour and with each other. No one stares at an aeroplane and thinks, “The aluminium in that fuselage was not produced, we can tax it” because, quite clearly, the original aluminium loses economic significance once it is transformed into the plane. Yet, there is a tendency to take a different attitude towards land: that productive transformation is something which is done on the land instead of in combination with it.[1]

The third point is also true, but hardly special. Except in rare circumstances, we cannot manufacture virgin materials (and when we can, we have to do so from other virgin materials). There is a finite amount of gold, a finite amount of aluminium, and a finite amount of copper. We can dig more aluminium out of the ground just as we can settle more land, but the quantity provided to us by nature does not go on forever.

Finally, while the fourth point is physically true of land, the same consideration applies to much of what can be built upon it. It is not exactly easy to move a steel mill, airport, railway line, oil refinery, port, mine, power station, factory complex, or skyscraper. Moreover, physical movability in principle matters far less than economic dependence upon location. A shipyard, for instance, has little choice but to be sited on the coast, just as a mine must be located where the relevant mineral deposit is found. In practice, many capital goods are tied to place almost as tightly as the land itself.[2]

In spite of their individual banality, these factors, when bundled together in the form of land, have encouraged the conclusion that a landowner effectively bears no costs in bringing the land to market. The first two factors suggest that the owner incurs no burden of production or ongoing replenishment: the land simply exists, perpetually offering its productive service. The latter two suggest that users of the land often have no practical alternative, so there is nothing the landowner must “do” in order to keep his tenants paying him.

In other words, with neither the burden of production nor the threat of competition, the landowner gets all of his rental income for free. As such, he contributes nothing vital to the productive economy that would be discouraged if that rent were taxed. This is contrasted with returns from improvements – cultivation, buildings, drainage, fencing, irrigation, and so on – or from labour applied to the land, which do involve continuing productive effort, and which would be deterred if taxed. Therefore, so the argument goes, if the LVT taxes the land while exempting the value of improvements, productive use proceeds undisturbed.

The result is that the economy apparently enjoys a magical free lunch: a pool of pure, “unearned” cash sitting in the hands of freeloading landlords, waiting to be harvested by the state. Hence the siren song of the single tax: we could abolish all other taxes – the bad kinds that destroy growth – and fund public spending from an LVT without disturbing investment, production, or prosperity.

These economic arguments are usually dressed up with a handful of ethical justifications peppered with land’s unique historical circumstances. Until the Industrial Revolution, land – as the engine of food production – was the economic resource. Physiocracy and classical economic thinking towards land developed out of this context, and their categories still haunt modern discussions. Moreover, in contrast to the more recent and transactionally fluid creations of industrial capital, many land holdings are very old, and derived from the spoils of conquest. This naturally encourages the notion that a small class of rich aristocrats is profiting from increases in land value generated by economic development in general rather than by anything they themselves have done. This, in turn, motivates a wider objection that land, and other naturally produced resources, should belong “to everyone” – a stance which underpins the Georgist school of thought, which has perhaps been the most influential advocate for the single tax.

A particular obsession among proponents of the LVT – and one that seems to be a preoccupation in the Burnham proposal – is with the landowner who “withholds” land from development in favour of speculative gain. In other words, sitting on it to profit from rising capital values rather than putting it to productive use. This behaviour is cast as inherently parasitic, with supposedly “odd” uses – like a single-storey parking lot in downtown Manhattan – trotted out as damning exhibits.

We’ll come back to this phenomenon later. While it may well be the case that, from an ethical point of view, specific instances of land ownership are historically unjust, the core economic mistake is the notion that a landowner bears no opportunity cost – a mistake derived from a misunderstanding of what is truly “earned” when a resource is put to use and/or when its value rises.[3]

Opportunity cost exists not when a good has to be produced or replenished, but when it is scarce, and must therefore be allocated to one of any number of competing uses. The cost to the landlord is not the burden of production, but the opportunity foregone when he allocates land to one use ahead of another. Rewards from that allocation – i.e. the surplus of benefit over cost – therefore come from the decision to allocate a good to a more highly desirable use than a less desirable one, not from the underlying properties of the good itself.

Profits and Entrepreneurship

Suppose you have an apple sitting in front of you. That apple is a free gift of nature – you’ve done nothing to create its plump flesh, its sweetness, or its ability to nourish. But it’s scarce; you could eat it, feed it to the birds, lob it against the wall, or leave it to rot in the garden. Any one of these options precludes all of the others, but only the first satiates your personal hunger.

So if you want to benefit from the apple in that way, you have to decide to take the first option, at the expense of all of the others. The causal element of benefit is therefore the act of use, not the natural properties of the apple. It stands to reason, therefore, if you start taxing the eating of apples, the other options become more attractive. More apples will be fed to birds or left to rot – i.e. they will be wasted compared to what you actually want. Moreover, your opportunity cost doesn’t just stop at pondering what to do with an apple. You could just as easily decide to abandon the apple altogether and eat an orange instead.

The same is true of land. Like all factors of production, a patch of land commands a price because it is scarce. There are many competing users and uses vying to occupy it and combine it with labour and capital to produce valuable, final goods and services. The LVT, then, is not a tax on land. It’s a tax on the entrepreneurial decision to use that land to create something. And that decision carries the risk that you will make the wrong choice.

Let us suppose, for the sake of clarity, that you’re a prospective landlord of pure ground land – i.e. you want to own the underlying land but not the buildings or improvement work done on top of the land. This is usually not the arrangement with modern settlements or where land changes hands frequently; there, ownership of the land and buildings tends to be combined. But separation is still the case with some very old aristocratic land holdings, such as those owned by the Royal Duchies or the Grosvenor family. And let’s suppose also – to concede the LVT its best possible case – that you, as landlord, will bear no cost other than the time it takes you to decide how to allocate the land.

(The notion that landholders make “unearned” profits is referred to, in the lexicon, as “economic rent”. For the sake of clarity, I will use the word “rent” to refer to the gross payments made from tenants to landowners for using the land; I will use the term “profit” to refer to a surplus of income over cost; and “unearned profits” in place of “economic rent”).

Now the first thing you will notice is that you cannot buy a patch of valuable land for free. You have to stump up the cash for it. Assuming you are paying fair value, that purchase price is set by the market’s estimation of all of that land’s future profits, discounted and capitalised. So when you invest in that land, you are already out of pocket: you have paid upfront for all those expected future profits.

Thereafter, there is only one way in which you can earn a true profit on that investment: by finding tenants who will put the land to a more productive use (and therefore willing to pay more rent) than the market anticipated. And for as long as you hold onto that land, you bear the risk of being unable to do so.

Why? Because if your tenants pay you the same amount as that estimated by the market, then the net rent you receive would be the equivalent to the interest on the amount you invested (reflecting the passage of time between the date of purchase and the rent coming into your pocket). In short, you might as well have just put your money in a savings account.

If, on the other hand, you can only find tenants who will pay you less than interest, then you are making a loss, relative to the alternative. You believed that land would be the more lucrative avenue, but you were wrong – putting your money in the bank would have been better.

Only if you find tenants who are willing to pay you more than interest do you start earning profits. And those profits are not “unearned” – they’re the direct result of you discovering tenants who will put the land to an, as yet, unanticipated productive use. It was a feat of entrepreneurship; the market had mispriced the land, and your action corrected that mispricing. That correction has a direct social benefit: ensuring that the land wasn’t wasted on less valuable uses.

As you can see, therefore, owning land very much does come with an opportunity cost: the possibility that there are better uses for your money. The existence of this opportunity cost ensures that only those who are most able in directing land to its most highly valued uses (and willing to bear the risk of failure) commit that money to ownership of land.

What if you were a settlor of virgin land? What if you identified a plot of unloved, uninhabited bit of dirt that you think could be worth a fortune if put to use? In that instance, there’s no purchase price, so surely there’s no opportunity cost?

True enough, there’s no purchase price, but that is not the only cost. What you save in a direct cash investment you still have to spend in time, money and resources settling the land and finding tenants or uses that will start earning you an income. Only if your efforts are successful will you succeed in earning a return on that expenditure. At the outset, you have no idea whether this will provide you with more income or satisfaction than doing something else with that time and those resources.

Ah, but what about those eternal landholders who are effectively sitting on land for free? The incumbent Duke of Westminster never paid for his holdings in Belgravia or Mayfair – surely we can tax him, right?

Not quite. Because any owner of land, regardless of how he came to possess it, bears the constant opportunity cost of selling the land for its capital value – an amount that will fluctuate with market conditions. In order to continue earning a profit, the landowner must assess whether the market’s estimation of the land’s value is accurate.

If he thinks the market is underpricing the land, then he will hold onto it – and make a bumper return from the rents if he turns out to be right. The land is saved from being diverted from wasteful uses that would have been enabled by the underpricing.

If, on the other hand, he thinks that the land is overvalued – i.e. that no act of production on the land could justify the capitalised level of profits – then the best thing to do is sell it for an immediate windfall. Land is diverted into the ownership of people who think they are better able than he is to make it profitable.

Acting contrary to either of these possibilities would result in losses. Either way, however, the outcome is a result of entrepreneurial judgment – judgment that has clear social benefits in ensuring that land is never wasted.

These latter aspects are important because it demolishes the view that – because the supply of land is generally inelastic – a landowner can profit from land purely by waiting for increases in demand. For instance, general improvements to the surrounding area can push rents up, with all of those increases disappearing into the pockets of existing landlords.

However, if the market expects future increases in profit to occur purely from local or general economic development, then those increases will already be discounted and capitalised in the land’s value. As such, if you purchase land after such increases are expected, then you will earn no profit on that eventuality. The only way you can profit is if you invest in land (or decide to hang on to an existing holding) either before the market expects those increases to occur, or if the value of future developments has been underestimated – outcomes that must be anticipated, and thus are not, by definition, foregone conclusions. If you are right, then it proves the land was undervalued, and so the additional returns are a product of entrepreneurial risk-bearing, not free gifts.[4]

Effects of the LVT

If levied as an annual fee that aims to collect 100% of the land’s rental value for that year, the effect of a LVT would be to eliminate this entrepreneurial function of allocating land to its most valuable uses. Why? Because it decimates the trade in ground land. With no prospect of profits to be earned from the ownership of land, its capital value will fall to zero. All existing owners of pure ground land would have their wealth wiped out overnight, and would probably abandon their titles. Thereafter, consideration for contracts for the sale of land will only ever be for the buildings and improvements, not for the land itself. In short, real estate values will plummet to reflect the fact that new owners will be blighted with an ongoing tax burden.

A new owner of land would therefore pocket the profits from the activity done on the land, but pay the land value in tax to the government – money that would have been paid in rent if the ground land was owned by a private owner (or in a higher purchase price for the land if the purchaser owned the land and the buildings combined). As such, the tax becomes a de facto rent of the ground land, with the government elevated to the status of national landlord in what is now a fully socialised market for land.

But whereas rents payable to a private ground landlord would be negotiated between the parties based on the incentive to direct land to its most highly valued uses (and thus maximise profits), the government arbitrarily fixes a price to be paid in an attempt to “estimate” the land’s value – an estimation which is derived from a market which the very act of taxation has destroyed. And as with all price fixing, the varying distorting effects will depend on whether the state over or underprices the land.[5]

If the tax is assessed below 100% of what the landlord would have charged in rent, then the occupants of the land will pay less tax to the government than they would have paid in rent to a private ground landlord. That reduction in the cost of occupying land means that the demand for land swells relative to supply, attracting the bids of sub-marginal occupants. The result will be that land gets wasted on less valuable uses; important city-centre plots could be turned into gardens, art projects and ego monuments which would never have seen the light of day had the cost been priced correctly. More resources would be wasted on cultivating poor quality, badly located, sub-marginal land as genuinely productive enterprises attempt to alleviate the problem.

If the tax is assessed above 100%, then it starts eating into the returns not from the ground land but from the productive activities carried out on the land. This means that marginal uses of land (those whose operations are only just about profitable) will start making losses, and plots will be vacated. Buildings and improvements will fall into ruin while farm land will turn to dust. In the same way that the minimum wage reduces the demand for labour while increasing the same for automation or machinery, an over-assessed LVT will shift investment out of land-intensive sectors and into activities that derive more revenue from other factors. In other words, we’ll have more services and skyscrapers, and less agriculture, industry, and mining. Existing holdings will be used more intensely, with resources that would have been more productively deployed on fresh land now being deployed to existing land. For instance, instead of planting additional acreage, farmers will dump more fertiliser onto existing land in the hope of increasing crop yields.

All of these outcomes assume a best case scenario in which the state is attempting to act as a neutral assessor of land values. In that instance, the effects are likely to be scattered. Because land is heterogeneous, plots need to be assessed on a case-by-case basis, resulting in the overvaluation of some land and the undervaluation of other land – with everyone left guessing which way the state might jump.

But I submit that the more likely scenario is that the state varies the LVT in order to accomplish political goals. Want to build a wind or solar farm? You’ll benefit from an LVT cut. But if you want to construct a “polluting” factory or dig for oil, I’m sure you’ll be hit with a punitive rate.

Ironically, all of these distortions and calamities are likely to make land speculation more, not less likely. If the tax underestimates the true rental value of land, the untaxed residue will tend to capitalise back into the land’s price. This may partly restore incentives for higher-value use, but only by reintroducing the very private land value the tax was supposed to eliminate. That residual value then becomes a signal to the assessor that further taxable rent remains, which they will act to quash – and the final assessment may, once more, be under or over the actual value. If, on the other hand, the tax over-assesses a piece of land, revenues will fall as the land is abandoned, thus incentivising the government to lower its assessment – which, once again, may result in it attracting a capitalised value, and reigniting the whole circus.

Speculation in this environment would not, therefore, disappear, because the fluctuating, residual capital values create clear arbitrage opportunities if you buy and sell at the right time. But the speculation will not be on the future demand for land, but on what assessors, politicians, appeal bodies, and future governments will do. Will the valuation be revised? Will the tax be raised? Will exemptions be granted? Will a politically favoured class be protected? Will reassessment lag behind market conditions? The result is not the abolition of speculative behaviour, but a cat-and-mouse game between landowners trying to preserve whatever residual value remains and tax authorities trying to identify and capture it.

The result of a 100% LVT, therefore, is nothing short of the socialisation of land allocation. Far from being “neutral”, all it achieves is the substitution of risk-bearing markets with central planning, and all of the chaos, calamity and waste that brings with it. These effects can be diminished only if the LVT is explicitly imposed at a rate lower than 100%, as ground land would again attract some of its capital value, albeit lower than before. There will therefore be some attempt to allocate land to better uses, but marginal landlords will be squeezed out.

State Interference in Land Markets

Although we have already explained that land speculation would persist following the introduction of an LVT, speculation in land more generally remains a motivating factor for its imposition. It is therefore worth examining why land can be held idle, sites can remain undeveloped, or owners may sit on a plot in the expectation that prices will rise.

First, in an undistorted market, leaving land or other resources idle is not an economic problem, and there are good reasons for doing so. For instance, there are socks in my dresser right now that are “idle”. The reason I don’t wear all of them at once is obvious: I only need one pair at a time, but I need pairs for all of the coming days before I next have an opportunity to do some laundry. In short, to use them all now would be wasteful.

Similarly, if a major resource such as a plot of land is left idle, it simply means that using it, right now, would be wasteful relative to alternatives. A landowner sitting on an unused plot has estimated that rent, sale proceeds and whatever income could have been earned had the land been put to use would not cover the cost of doing so. The other resources he needs to combine with the land to develop it would be diverted from other, more important uses, and so the whole operation would be economically harmful. That includes the possibility that use of the land now would be too risky or uncertain relative to those other uses.

Second, neither is speculation in land, or of any other resource, economically destructive under conditions of economic freedom – quite the contrary. If a speculator holds onto land, he is estimating that the future value of the land will outweigh the income that could be derived from exploiting it now. He may be right, in which case he will profit, or wrong, and suffer losses. Either way, the act is not mere passivity; it is an entrepreneurial judgment about future demand, future costs, and future uses. His act is economically beneficial because he saves the land from being wasted in a relatively less productive development now, and releases it again in the future when a more productive use becomes viable.

The question, then, is what makes this kind of speculation artificially attractive in an interventionist economy. It should come as no surprise that the line up consists of the usual suspects.

First, fiat monetary inflation encourages the holding of real assets as stores of value. If money is being debased, land becomes attractive not only for what it can produce, but for what it can preserve. The more unreliable the currency, the more rational it becomes to hold scarce, durable assets whose nominal prices are expected to rise. To blame “land speculation” in such circumstances is to complain that people are seeking refuge from a monetary system the state itself has corrupted. Moreover such inflation is the root cause of ballooning property prices that increasingly make it more difficult for ordinary people to purchase in that market.

Second, planning law turns permission into an artificially scarce commodity. Zoning, green belts, conservation rules, density restrictions, environmental mandates, infrastructure bottlenecks, and local vetoes all reduce the flexibility with which land can move between uses. The more difficult it is to convert land to its most valued use, the more likely owners are to wait, lobby, speculate, or gamble on future political change. Moreover, where development rights are rationed, delayed, politicised, or withheld by the state, speculation is directed not at the use of land as such, but at the possibility that a given plot will receive official favour at some point in the future. Much so-called “land banking” is not speculation in land as much as a speculation in government permission.

Third, the costs of transferring and developing land are themselves heavily politicised. Stamp duty, capital gains tax, legal complexity, compliance burdens, uncertainty over compulsory purchase, and the risk of future regulation all discourage turnover. An owner who might otherwise sell or develop may rationally sit tight if every alternative is made costly, risky, or slow by government intervention.

In short, the “withholding” of land is often not a mysterious defect of private ownership at all. It is the result of monetary debasement, planning scarcity, regulatory rigidity, and fiscal friction. The LVT advocate sees land sitting idle and concludes that ownership is the problem, but in many cases the owner is responding to incentives created by the state.

The same applies to so-called “odd” uses of valuable sites – the single-storey car park, the vacant lot, the underdeveloped city-centre plot. Such examples are treated as proof that private owners are irrationally wasting land. But they may just as easily reflect planning uncertainty, tax treatment, redevelopment timing, holding costs, regulatory delay, or the expectation that permission for a more valuable use will arrive later. What looks like waste from the outside may be a rational response to a distorted institutional environment.

The central irony, therefore, is that the state creates a world in which land becomes inflexible, permission becomes scarce, money becomes unreliable, and development becomes politically rationed. Then, when landowners respond predictably to those conditions, the same state proposes an LVT to punish the resulting behaviour.

The proper answer to land speculation is not to give the state a permanent fiscal claim over every site in the country. It is to remove the distortions that make speculation so attractive: sound money instead of monetary debasement; liberalised planning instead of permission-rationing; lower transaction costs instead of fiscal obstruction; and freer land use instead of bureaucratic control. If land is being withheld from genuinely productive use, the first question should not be how heavily we can tax its owner, but what state-created conditions have made withholding the more rational course of action.

Land and Wealth Taxes as “The Better Tax”

At the beginning of this essay, I noted that the Land Value Tax – especially in its “single tax” form – can seem attractive to libertarians and free marketers who wish to reform the tax code by abolishing existing taxes and replacing them with something less damaging. The attraction may be practical: the hope of finding the least burdensome tax upon the economy. Or it may be moral: the hope of correcting unjust patterns of wealth ownership that owe more to state privilege than to entrepreneurial talent. In either case, the aim is to shift the burden away from productive activity and onto supposedly unearned or excessive wealth. Similar arguments are made for wealth taxes and taxes on unrealised gains, and so much of what follows therefore applies not only to the Land Value Tax, but to that wider family of replacement-tax proposals.

If the libertarian goal is to remove as much state interference as possible, the question is always: what is the quickest, most realistic, most effective, and least bad way of accomplishing that goal? In most cases, the answer is: whichever option removes the greatest amount of existing state power. It is very unlikely to be changing, reforming, swapping, or remoulding what the state already does in the hope that the outcome will somehow end up as fairer or less burdensome.

If the goal is to reduce the economic burden of taxation, then, as I have long argued, that burden depends far more on the height of taxation than on its form. The priority should therefore be to reduce existing rates of tax and spending as far as possible. Along with abolishing especially unpopular taxes such as inheritance tax, these are proposals that are already discussed in mainstream politics. By contrast, rewriting the tax code requires one to change the form of taxation to something new and unusual, and then still campaign for their height to be lower – a roundabout way of trying to achieve the same thing.

That said, there is a definitive qualitative difference between taxing income and taxing wealth (including land) which “free marketers” in search of a “better tax” often seem to land on the wrong side of. An income tax takes from the output of productive activity created by the economy’s existing productive capacity. It will depress growth, but the underlying capacity remains intact. By contrast, a wealth tax, a land tax, or any annual levy on capital value can eat into the machinery itself. It does not merely take a share of what an asset produces, but demands payment because the asset exists, or because an assessor claims it could command a certain price.

The potential for economic destruction is therefore far greater. The stock of capital is orders of magnitude larger than the net income it produces, so even a 0.5% or 1% annual wealth tax could seriously impair the generation of future income. It is the difference between taking the fruit and hacking away at the tree – and advocates of such taxes tend to underestimate the importance of the tree. Worse still, they weaken the incentive to plant more trees in the future.

If the goal is to make the tax system as a whole less intrusive, then wealth taxes or land taxes are no less obviously so than income taxes. To tax land or wealth annually, the state has to know what you own, value it, dispute it, monitor transfers, police avoidance, and repeat the whole miserable circus year after year. It has to assess land, improvements, companies, shares, trusts, family holdings, private businesses, liabilities, exemptions, and transfers. And even if you did start out only with a land or wealth tax for “the rich”, it would soon be spread to other income groups – just like every tax has. Once the machinery exists, rates rise, extensions multiply, valuations become politicised, and the supposed single tax becomes one tax among many.

If the purpose is to redress wealth gathered through state privilege, interference, or, in the case of land, historically unjust possession, it is not obvious to me why the least bad option is to transfer that wealth to the state. Even if wealth is held by a politically connected billionaire, then, with the exception of businesses whose main client is the government, it is still likely to be subject to some degree of market discipline. It is invested in definite industries, employs people, and produces goods or services which, however imperfect the surrounding market may be, people retain some choice as to whether to consume. Taxation does not purify that wealth, but removes it from whatever productive structure it currently supports and redirects it into avenues preferred by the state.

Expressed through slogans such as “giving back to society”, bolstering the state’s coffers is all too casually assumed to be synonymous with benefitting everyone.  But the state and the people are not the same thing. Paying tax is not a civic virtue that automatically benefits the general welfare; it is a transfer into the hands of specific individuals who control the apparatus of institutionalised force. Nor is there any such thing as “public ownership” or “public spending” in the sense of resources benefiting everyone equally. By definition, scarce resources can only ever be directed towards the satisfaction of some people rather than others.

At best, therefore, the taxpayer receives whatever services the state chooses to provide, in the form the state chooses, through the gateways the state controls, and at the quality the state permits. We rely upon state roads, hospitals, schools, and law enforcement not because state provision is uniquely “essential”, but because the state has forcibly crowded out or excluded alternatives. It is rather like taking £10 from someone who would have preferred to buy a steak, buying him tofu instead, and then declaring that he depends upon you because you have provided him with “essential” food.

When aiming for the correction of unjust land and wealth holdings, the first question should instead be whether another person has a superior title, and should be owed restitution. Failing that, the proper response is not to transfer that wealth to the state, but to remove as many privileges as possible and expose those assets to genuine competition. If the wealth was earned through enterprise, it may survive. If it was sustained by subsidy, regulation, monetary distortion, planning restriction, corporate protection, or political favour, it may not.

In other words, if the problem is state privilege, attack state privilege. If the problem is monetary inflation, attack monetary inflation. If the problem is planning restriction, corporate protection, regulatory capture, and cheap-money asset inflation, attack those things directly. Do not build another tax machine and call it anti-oligarchy. Proposals for new or different taxes to correct an injustice are often proposals to hand still more power to the very engine of that injustice.

The same is true if the objective is to tackle extreme instances of “wealth inequality.” But such claims are, moreover, weakened once we recognise that much modern “wealth” consists of unrealised paper gains, often inflated by monetary expansion rather than by any corresponding increase in real productive capacity. A land value or wealth assessment may treat someone as richer simply because asset prices have risen around him, even if his income, liquidity, or productive output has not increased at all. The tax then demands real money on the basis of a hypothetical valuation, treating an estimated opportunity to sell as though it were realised command over goods.

In such an environment, an LVT may fail to reflect the underlying rent-generating capacity of land at all. Instead, it may reflect the price that could be obtained from a debt-laden speculator in a frothy real estate market. The assessment then ceases to be a measure of productive value and becomes a tax on monetary distortion itself.

Finally, the goal of targeting only “the rich” may be a popular political programme, but it is impossible to achieve and, even if it were not, a political pipe dream.

It is impossible because it falls victim to a persistent misunderstanding found across the political spectrum: that a tax “punishes”, or otherwise falls only upon, the people directly footing the bill. Income tax is said to fall on workers; inheritance tax on the old rich; wealth taxes on billionaires; and the LVT on landowners. But taxes do not fall neatly on upper, middle, and lower classes according to the moral preferences of those proposing them. In a complex economy, a tax is not a laser-guided missile aimed at the wicked, but passes through the whole structure of prices, rents, wages, investment, saving, ownership, and behaviour.

For instance, if you tax individuals, businesses may earn less revenue because consumers have less to spend. If, on the other hand, you tax a business, it has less money available for investment, employment, and expanded production; the likely result is reduced supply, fewer opportunities, and higher prices. Nor should we consider only the immediate incidence of the tax. If businesses earn less revenue from customers, or if the rich and successful are taxed more aggressively, others are discouraged from starting businesses, accumulating assets, or taking the risks necessary to become wealthy themselves.

Even if such a proposal were desirable in theory, it is politically unrealistic in practice. The objective of any tax system is, as Jean-Baptiste Colbert put it, to pluck the goose so as to obtain the largest number of feathers with the least amount of hissing. The poorest have few feathers and produce a great deal of hissing. The very rich, meanwhile, have the most feathers, but they are also the hardest to pluck. They are mobile, legally sophisticated, politically connected, and often entangled with the same state that claims to be restraining them.

Indeed, much of the time, they are among the people who finance, advise, lobby, and benefit from the existing system. Taxes on capital therefore tend to produce sprawling codes full of exemptions, reliefs, valuation rules, deferrals, thresholds, anti-avoidance provisions, and exceptions to the anti-avoidance provisions. This is not “legislative incompetence” but reflects the political difficulty of taxing capital aggressively while still wanting capital to be formed, transferred, invested, restructured, and sold. The ordinary worker, by contrast, does not operate through holding companies, trusts, family offices, offshore structures, or disputed asset valuations. His income is recorded, reported, and deducted through PAYE before he has even seen it.

Any sustainable tax system will therefore tend to fall on the productive middle: those whose incomes are worth pursuing, whose assets are visible, whose affairs are relatively simple, and whose options are limited. That means the broad class of people whose prosperity comes chiefly from high-end labour, professional skill, small enterprise, savings, pensions, and straightforward assets. A surgeon, engineer, solicitor, accountant, shop owner, or consultant may be affluent, but he is still tax-visible in a way the owner of complex, mobile, and widely distributed capital is not.

The taxation of these “middle classes” is therefore not a bug in the tax system, but a feature of taxation itself. The middle classes are taxed heavily not merely because politicians are unfair, but because they are numerous, legible, compliant, banked, salaried, property-owning, and too embedded to flee. They are the only sustainable operational tax base of the modern state.

Any proposal for a grand replacement tax must therefore be judged not by its elegance on paper, but by the institutional reality into which it would be introduced. “Tax the rich” is sustainable as a slogan; as a tax base, it is far less reliable. The likely result is not that the ultra-rich meekly surrender their fortunes while everyone else is left alone, but that the new tax is added to the existing burden, its reach widens, exemptions are carved out for the connected, and the same productive middle is dragged back under the blade.

In any case, to complain that the tax system should be made “fairer” is a misconception; taxation as a whole is unfair, and it is not made any better just by rearranging its victims any more than you can make slavery fairer by swapping some slaves for others. If it must be taken as a given, the priority is not to devise the fairer tax, but to reduce the burden as far as possible. The point is not to pluck the goose more elegantly, but to stop feeding quite so many feathers into the state’s pillow factory.

In sum, the “single tax” version of the Land Value Tax is nothing short of utopian. In theory, one may imagine abolishing income tax, corporation tax, inheritance tax, capital gains tax, stamp duty, council tax, VAT, and the rest, replacing the whole apparatus with a single levy on the unimproved rental value of land. But in practice, the state is far more likely to add an LVT to the existing burden than to abolish everything else. Even if other taxes were abolished at first, there is no constitutional magic preventing their return once the new machinery is in place.

The libertarian answer should therefore be much simpler: reduce taxation; abolish privilege; remove planning barriers; end monetary manipulation; stop subsidising corporate incumbents; dismantle regulatory capture; and allow people to acquire, use, exchange, and develop property without being treated as tenants of the state.

The search for the perfect tax, or the tax that feeds the beast more fairly or efficiently, risks distracting us from the main objective: the beast should not be fed in the first place. If the aim is liberty, the priority is not to redesign the tax system with greater elegance, but to make it smaller, weaker, and less capable of reaching into productive life.

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Notes

[1] The supposed relevance of the fact that land is not “produced” stems from a confusion between land in the physical sense and the economic concept of a land factor, which simply means an unproduced resource. No land factor is produced by man. Such factors must be combined with other factors of production, such as labour, in order to produce something economically useful. Aluminium beneath the ground, for instance, is a land factor. Once extracted, refined, and used with other materials to construct an aeroplane, however, it has been transformed into a produced good, and we no longer regard the aluminium as having any particular economic relevance.

Similarly, a virgin plot of land may begin as a land factor. But once it has been cleared, ploughed, drained, fenced, paved, irrigated, or built upon, the relevant produced good is no longer “land”; it is a farm, a mine, a road, a shop, a factory, or a housing plot.

One may, for accounting or valuation purposes, attempt to estimate the contribution made by the original physical site separately from the labour and capital expended upon it, just as one might estimate the value of the aluminium contained in an aeroplane’s fuselage. Similarly, there may come a point at which these components are separated entirely – for instance, when an old aeroplane is sold for scrap, or when a plot is cleared and devoted to another use. But none of this should mislead us into thinking that production relates to the original virgin factor as such – or that the unproduced nature of physical land has greater economic significance than the unproduced nature of any other original resource.

[2] When capital flees overseas to escape excessive tax and regulatory burdens, it isn’t usually the case that a factory gets transported brick by brick to a new location (although some specific tools and machines can be). Rather, the existing factory is simply run down until it is no longer useful, while fresh investment is directed to the creation of new factories elsewhere.

[3] The phrase “unearned income” is scientifically problematic, as it is also an ethically loaded term the definition of which is not always agreed. The economic essence under examination here is whether the landowner receives value without making any relevant productive or allocative contribution that would be deterred if taxed. The strongest case for the LVT rests on the claim that all ground rent is “unearned”; in softer versions, the claim is confined to increases in land value generated by surrounding development, population growth, or public works. The economic effects of taxing either will be addressed in this essay.

[4] While a specific plot of land can benefit from specific local development, there is no reason to suppose that land as a category benefits unduly from general economic prosperity. True enough, as prosperity rises, land rents may buy more goods – but so may interest, profits and salaries. That doesn’t prove land has captured the social surplus, just that everyone’s money income may command more output because production has increased. Land also may be fixed in supply as demand rises, but the supply of economically useful land services is not. Rising demand for land incentivises more intensive use of existing sites, vertical building, better transport that expands practical location choices, substitution into different regions, technologies that reduce dependence on specific locations, different production methods that use less land, and capital investment that raises output per acre. The proceeds of development therefore need not accrue disproportionately to land as such, but to whoever discovers better ways of overcoming land’s apparent fixity.

[5] This was one of Rothbard’s chief practical objections to the LVT. See Rothbard, Murray N, The Single Tax: Economic and Moral Implications, Ch. 29 in Idem., Economic Controversies, Ludwig von Mises Institute, 2011, 580-81.