Fiscal policy has two primary components, taxation and government spending, both are widely understood to be necessary for the smooth running of a nation. The point of contention lies with how or how much a government should tax and spend.

We will first look at everyone’s favourite inevitability: taxation. Henry George the 19th century economist suggests that justice and efficiency should be the guiding principles for taxation to ensure prosperity for all.

The proponents of Henry George (called Georgists) have summarised these ideals into two simple policy positions: Abolish taxes on labor and shift taxation onto land and natural resources (the commons).

First, let us define “taxes on labor”; it is any tax that is calculated from the value produced by labor. Examples of these taxes include: income tax, payroll tax, company tax, and sales tax. All these taxes either come out of wages from labor or the fruits of labor (products and services).

These taxes are harmful as they take away from those who labor so less needs and wants are met. Moreover, taxes on labor discourage labor; for some, the tax burden presents diminishing returns for more work especially if the taxation is progressive.

For businesses, taxation on labor can be a barrier to entry which reduces competition driving prices up for consumers. In short, taxes on labor are a burden on all things that require labor, which encompasses almost all things in modern day life.

Negatives aside, Georgists generally believe that the fruit of one’s labor should be his to own and and therefore, should not be subjected to taxation. Finally, it’s a no-brainer to get rid of taxes on labor, especially when better alternatives exist that have none of the downsides and are able to fund government spending and so much more.

The just and efficient alternative is land value tax and more broadly, taxes on natural resources or the exploitation of “the commons”. First let us outline the rationale behind these taxes before listing their benefits. The “commons” refers to resources available to all members of society where no single person has sole ownership of that resource.

For example, the air we breathe is considered to be part of “the commons”, it is a natural resource available for everyone to use. To claim ownership of air is silly because it is abundant and we all need air to live; for millennia land was treated the same when it was abundant. Like air, land and natural resources are created by no-one and necessary for life.

Therefore, it would be unreasonable for any single person to lay claim to those things solely because they found it first or had taken it by force. However, most of these resources are not abundant and must be utilised.

It would be inefficient and impractical for everyone to simultaneously exploit the same resources equally. Therefore, Henry George suggested that for a person to privately exploit the commons they must compensate the value of the commons to all other members of society for excluding them from the resources common to all.

This gives rise to forms of taxation that tax the ownership of land and natural resources. Land value tax, sometimes called ground rent or land rent, turns the current system on its head.

Now that we’ve established that land is part of the commons, if one desires to exclude others from a piece of land or non-renewable natural resources, they must compensate society for the full value of the land that is being taken for private use as a tax.

The first benefit of this is the incentive to use land and natural resources to their fullest potential. Presently, landlords are incentivised to not use their land due to their ability to wait for others to increase the value of their land to sell at an opportune time; public amenities and conveniences such as shops, schools or public transport all add value to the land even when the landlord is idle.

It is easier to wait for land to increase in value than to risk some business venture or expend money on a building that will be taxed via property tax. Alternatively, landlords can capitalize on the necessity of housing or businesses and charge tenants and business owners alike extortionary rents, no different from feudal lords taking income from their toiling serfs.

These activities reduce the amount of wages business owners can give to workers and reduce the amount of businesses that can operate whilst simultaneously preying on the most impoverished and desperate individuals in our society; perpetuating unemployment and poverty and inhibiting progress.

The land value tax forces landlords to use their land more efficiently, as unused and underutilised land will lose money due to land taxation. By freeing the land from underutilisation more opportunity will be afforded to working people to improve on the land, increasing employment, housing, production and competition.

In the same way, natural resources would not be squandered or destroyed by reckless exploitation as damaging the commons also warrants compensation in the form of fines imposed for polluting the waterways or the air we breathe. As a result, a more efficient and prosperous society will evolve, without the homelessness, unemployment and poverty that plagues us today.

Now this might all sound “too good to be true” or too hard to implement, let me give you some examples of these principles applied in nations today. The four most prominent economies of Asia in the early 21st century known as the Four Asian Tigers: Singapore, Hong Kong, Taiwan and South Korea all have a small land tax or ground rent.

Singapore taxes 10% of the land value, Hong Kong takes 3% ground rent, Taiwan taxes 1 to 5.5% of the land value and South Korea taxes 0.1 to 5% of the land value. There seems to be a correlation between the amount of land value tax and the prosperity of the economy, as Singapore has the greatest GDP (PPP) per capita followed by Hong Kong, Taiwan and South Korea.

Another factor is that smaller nations stand to benefit the most from land value tax as their lack of landmass necessitates efficient land use. In the west, examples of resource rents can be seen in Norway, the US state of Alaska and the Canadian province of Alberta.

All three extract taxes from natural resources such as crude oil so that people can also profit from the natural resources of the land. With successful implementations of land tax and resource rents all over the globe why not give it a try? 

Read the next part in this series to learn how all this tax money can be justly spent for the benefit of all.