Helen R. Ladd
Historically, a tax on land has appealed to many people, both because it is neutral with respect to resource use — that is, it does not distort economic behaviour — and because it seems fair in that it applies to land rents that are caused not by the actions of the landowner but rather by population growth and public investments. In contrast, the primary land-based tax used in the United States, namely the property tax, has been frequently criticized for distorting housing and investment decisions and for imposing a heavier burden on households with low income than on those with high income. However, neither the virtues of land taxation nor the liabilities of property taxation are free from controversy. This chapter elucidates the nature of the theoretical controversies that surround both types of tax.
According to the 19th-century social reformer, Henry George, a tax that appropriated all land rents would provide the correct incentives for landowners to use their land in the most productive manner and would eliminate the need for all other taxes. Thus in the ideal Georgian world, the only relevant tax would be a tax on land value. George's belief that land taxes do not distort land use and are the most efficient way to finance public services continues to appeal to many economists and his modern followers. It is worth asking, however, whether Henry George was right. That is, do his claims of neutrality stand up to the rigorous analysis of modern economists?
A neutral or efficient tax is one that provides no opportunity for taxpayers to reduce their tax burdens by changing their behaviour. Provided the population in each jurisdiction is fixed, a head tax is neutral in that no taxpayer can