How can a tax help rather than hinder an economic recovery? Believe it or not, a tax on land value would best stimulate economic recovery. A land value tax, like today’s property taxes, is based on the value of land when put to its best productive use, regardless of the actual use or revenue from that plot of land. The value of buildings and other improvements is excluded. The result is that if the title holder is not putting that land to its best and highest use, the owner is suffering a loss, paying a tax not matched by revenue or benefits. Therefore, the owner has an incentive to put the land to its most productive use.
Greater productivity implies greater output, greater income, and greater employment. But there’s a problem! Pre-pandemic, a shop or restaurant could hire employees and get to work. Today, many such small businesses are locked down, unable to operate, or only with limited and unprofitable capacity. To pay the rent and the tax on the rent or land value, these tenants (as well as homeowners) need an income, which they are currently are struggling to achieve.
The government needs to provide a substitute for the once normal income individuals obtained. The US government did just that in March 2020 when it enacted the CARES (Coronavirus Aid, Relief, and Economic Security) Act. Individuals received a one-time compensation of $1200, couples $2400, plus child support. The cash benefit was non-taxable. Small businesses also received relief. Some not-so-small businesses, aka corporations, also received relief funds.
Instead of one-time relief compensations, which need repeated enactments, the compensation for lost income should be periodic, paid every month. Under this notion, every enterprise and household would receive a monthly compensation for lost income. With the restoration of household and business income, local and state governments would obtain their normal tax and fee revenues.
The payment should be an 80% grant and a 20% optional interest-free loan. The recipient would need to have evidence of the previous income and of the legal inability to obtain income. Such evidence could be provided later, but there would be a stiff penalty for fraud.
The reason for the 80% grant limit, rather than 100%, would be to provide an incentive for the employee to obtain work and for the business to innovate and become productive. It would be a conditional basic income until the lockdowns end.
Since the owner of a real estate property, whether residential or commercial, is already paying a property tax, the owner would be able to deduct the portion of property tax due to the land value, from the land-value tax. For landlords, the land value tax would be deductible from income taxes. With the periodic compensation, property owners would be able to pay the land value tax as well as their current property tax, and their mortgages.
An objection to further coronavirus relief is that the US government has already paid out trillions of dollars, and further payments would increase the already-huge federal budget deficit and debt. The response to this objection? If the lockdowns are justified by the science that has concluded that normal business (where people are close together in groups indoors) spreads the disease, then there is a moral question of who should bear the burden.
If the relief is not continued, the lockdowns will unfairly burden some sectors of the economy. While some businesses, such as delivery services and communications technology, are booming, what about the small retail store? A grocery store is able to operate, but restaurants are ordered to shut down. It’s hard to justify one business’ ability to have income and not another. Government should spread the burden on the entire economy by providing compensation for those who lost income.
During a major war, governments go into debt to pay for some of the expenses. The urgent problem is to win the war, and the debt is taken care of later. The whole human world is now at war with COVID, and as with other wars, we need to spend the resources to defeat the enemy. This burden should be shared equitably.
Compensation to those locked down, plus a land value tax paid by all landowners, would have the short-run effect of promoting enterprises and products that can endure. The long-term effect would be that after business returns to normal, enterprise would be pushed to rebuild and restore their business. If they don’t restore production and employment, they would pay the land-value tax, so those who are idle would quickly sell to those who can restore production. The land value tax delivers what we will need, a push to greater productivity. And the revenue from the land value tax would help reduce the debt.
In the very long run, central banks, such as the Federal Reserve, will have bought much of the government debt, paid for by creating more money. Though the money will generate price inflation, the burden would be broadly shared, making it more equitable than concentrating the burden on those shut down.
To promote the greatest stimulus to economic recovery and future growth, there should be a permanent land value tax that collects most of the ground rent and land value. Taxes on income and goods could then be reduced. That was how it worked in San Francisco after the great earthquake and fire of 1906. In those days, there was no income or sales tax. Taxes were on real estate, and with the buildings destroyed, the property tax was on land. The owners quickly rebuilt to make the property tax worthwhile. This provided a real stimulus. We could do this nation-wide with a land value tax that replaces market-hampering sale and income taxes.
