“When you’ve paid your rent, you’ve paid your tax.”
“So what’s a Georgist?” you ask. A Georgist (or at least a “full-on” Georgist) is someone who says there should be no taxes except those on land values, payable by the owners — and is keen to explain that “land” doesn’t include buildings. (It does include natural resources, monopolies and statutory cartels; but those details affect only a minority of businesses.)
Under a full-on Georgist system, a typical business on rented premises never hears from the tax man, ever. You don’t pay income tax on your profits. You don’t pay payroll tax on your workforce. You don’t collect personal income tax owed by your employees. You don’t collect GST/VAT from your customers or pay sales tax on your sales. You don’t pay stamp duties on your insurance premiums. If you rent your premises, you don’t pay council rates or property taxes; they’re your landlord’s problem (and are levied solely on the land value).
In short, under a full-on Georgist system, if you’re on rented premises you simply pay the rent, out of which the landlord pays the tax on the land value. When you’ve paid your rent, you’ve paid your tax.
“Ah,” you say, “but how does the landlord’s tax affect my rent bill‽” By reducing it. The landlord’s tax is payable on the value of the land, not on the rent actually received. So the tax is payable whether the premises are rented or not. So the landlord must find and keep a tenant in order to get income to cover the tax bill. That’s a strong incentive not to ask for too much rent. Moreover, in order to find and keep tenants, landlords need to build accommodation if they haven’t already done so, and doing so doesn’t increase their tax bills. That tends to increase the supply of accommodation and thereby reduce rents.
The tenants don’t have it all their own way. Prospective tenants compete against each other to lease premises. So if they no longer pay tax or incur compliance costs, the competition will tend to raise rents. This is not a tax being shifted from landlords to tenants, but rather a benefit being shifted from tenants to landlords. But, because the land-value tax increases the pressure on landlords to find and retain tenants, it strengthens the bargaining positions of tenants relative to landlords, so that only some of the benefit for tenants is competed away. The Georgist reform, like any tax reform, has its costs and benefits. But for renters at least, the benefits outweigh the costs.*
Even your landlord is better off in terms of time, and “time’s money”. The land-value tax is simply a periodic bill to pay. There’s no income-tax return or “business activity statement” or other tax-related record-keeping.
Under a full-on Georgist system, if you’re a typical business tenant, you never hear from the tax man in your business capacity. Whether you hear from him in your personal capacity depends on whether you own any other land. If the only land that you own is under your home, you still probably pay less under a Georgist system than under the present system, because your interests as a land owner are probably outweighed by your interests as a building owner, business operator, and consumer. This is especially the case when you consider “How income tax feeds into prices”.
To say nothing of the fact that a Georgist system leads to more income and wealth because it doesn’t penalize productive activities. The land-value tax is on owning the land, and whoever owns it will not be penalized for doing anything with it, but will be obliged to do something with it in order to generate income to cover the tax.
Needless to say, a Georgist system makes residential accommodation more affordable in the same way that it makes commercial accommodation more affordable. So if you rent your home and aren’t a full-on Georgist, you likewise need your head read. And if you rent both your home and your business premises and aren’t a full-on Georgist, then, if my arithmetic serves me correctly, you need your head read twice.
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* Of course, if the tax were payable only if the land is actually rented, then the landlord could hold out for higher rent and avoid the tax while holding out. But that’s not how a land-value tax works. For more details see “Why land tax can’t be shifted onto tenants” (wonkish).
If a land tax is imposed, the effect is to shift the cost of holding land from capital to cash flow. While there are numerous benefits to doing this, I can’t see that putting out that there will be a general reduction in rental charges is one of them.
The primary outcome of a land tax will inherently be to extract more value out of the land. The parasitic effect of land ownership is captured by the public, not eliminated. Land as an ‘asset’ shifts from being a parasitic asset to a productive one. That change is neither small nor simple, and will result in a shift inland ownership over time from those who seek to extract parasitic rent to those who have skill in achieving the best value out of the land.
Land ownership becomes about getting the absolute best out of land. That means matching the right tenant to the right land, and following changes in best use closely. Land tax will change with the economy, the seasons, and profitable land ownership will demand a rental that is able to move in sync with that.
Don’t ever put out the line that rental will not move with land tax. The truth is the opposite – land tax will move with the maximum available rental. Land that is poorly allocated will become unprofitable quickly, driving change in its use. This is the benefit of a land tax, but also points to a consequence often neglected – businesses and people will move more often, and areas will become more distinct in their character because of this.
A Land tax, properly constituted, is a good and necessary thing. Failing to think through the consequences of imposing one is not. The MRRT debacle is an example of just how badly it can be done.
Dear Christopher,
Re: “I can’t see that… there will be a general reduction in rental charges…”:
The effect on rent due to the land tax BY ITSELF is not to be confused with the effect on rent due to the combination of land tax and reductions in other taxes. Furthermore, a reduction in rental charges is not to be confused with an improvement in rental affordability, because the latter involves not only the rental charge but also the tenants’ spending power and the utility of the rented property. Rental affordability is therefore best understood in terms of the bargaining power of tenants relative to landlords — that is, in terms of competition.
Re: “The parasitic effect of land ownership is captured by the public, not eliminated”: Not eliminated, but reduced, because the need to use the land productively or to seek seek tenants, and therefore to build and maintain whatever improvements are needed for that purpose, makes the owners more productive, while the improved bargaining position of tenants makes the owners less exploitative.
Re: “Don’t ever put out the line that rental will not move with land tax”:
I didn’t say that. I said: ‘…”but how does the landlord’s tax affect my rent bill‽” By reducing it.’
Re: “The truth is the opposite – land tax will move with the maximum available rental.”
The truth is that the influence will be in both directions. Yes, the land tax bill will increase if the maximum available rental increases due to (e.g.) economic growth or improvements in infrastructure. But the land tax by itself, by strengthening the bargaining positions of tenants relative to landlords, will tend to reduce maximum available rentals.
Everything is more complex than it appears, and dependant on everything else.
In the OP, you did indicate a ‘full on Georgist system’, which is the situation I endeavoured to discuss.
Under a Georgist system, I cannot help but think that the default arrangement will be for land to be held by the tenant. Where this is not the case would be in situations of multiple tenants, and possibly another category which I would call expert land owners; people who have a skill at getting the very most out of land.
The landholders tax will pass directly through to the tenant, given an equilibrium state (which will only ever be approximated). Any departure from ‘best use’ however will come off the landholder.
But yes, I expect you are right that the balance of power will shift to the tenant somewhat. Landholding will no longer be an opportunity for any ‘mug punter’ to earn an easy parasitic return.
‘But the land tax by itself, by strengthening the bargaining positions of tenants relative to landlords, will tend to reduce maximum available rentals.’
That effect will be permanent but the change involved will once off. Once that effect is in place, land tax will move with the maximum available rental.
“Once that effect is in place, land tax will move with the maximum available rental.”
i.e. land rental, not to be confused with property rental which includes rental of buildings on that land. For moderately valued buildings, the building rent is greater than the land rent. e.g. on my street there are two houses on similarly valued pieces of land but one property is rented for double the other. Therefore most of the rent for the most expensive property is building rent.