A century-old idea to rethink how we tax land.
I can’t tell you how sad it makes me to see the place where I spent my college years embroiled in a bitter class war. As San Francisco housing prices skyrocket, protests are multiplying against the tech companies that have decided to relocate their offices to the city. I can understand why the protesters are angry—the city has a woeful lack of housing and public transit. And yet, the tech companies are only doing what they should—clustering together to take advantage of the ideas that bubble up out of the community when creative people live in close proximity. Both sides are right.
So what is the Bay Area to do? How can this class war be ended peacefully? As it happens, the solution was thought of more than 100 years ago, by a San Francisco economist. His name—sadly forgotten in this day and age—was Henry George.
George’s key insight was simple: The value of land is more than just the value of the things on the land. As any broker will tell you, there are three important things in real estate: Location, location, location. A plot of land in downtown Manhattan will be worth much more than an identical plot in rural Kansas, even if they have identical houses built on top of them. So when a city grows or enjoys a boom, a lot of the new economic value will go to the people who own the land, regardless of what they build on it. He described the moment of his insight:
I asked a passing teamster … what land was worth there. He pointed to some cows grazing so far off that they looked like mice, and said, ‘I don’t know exactly, but there is a man over there who will sell some land for a thousand dollars an acre.’ Like a flash it came over me…With the growth of population, land grows in value, and the men who work it must pay more for the privilege.
George thought that this was unfair. After all, landlords don’t create land; a location will be there no matter who collects rent on it. By getting paid just for being in the right place at the right time, he reasoned, landlords suck value out of the productive economy. George suggested that the fair thing to do would be to tax the value of the land—not the structures built on top of it, but only the land itself—and distribute the proceeds to the poor, or use them for infrastructure and other public improvements.
But it was not until a century later that economists realized that the land value tax (or Henry George Tax) was not just fair—it was efficient as well. That discovery came about through the work of two Nobel Prize-winning economists you may have heard of: Joseph Stiglitz and Paul Krugman.
Stiglitz, along with co-author Richard Arnott, realized that one reason locations have value is because local governments provide “public goods”—things like trains and parks and sewage systems. They showed that if the value of a location comes from public goods, then it makes sense for the city to tax the value of land itself to pay for things like infrastructure. In other words, the people getting the benefit of the public spending that makes a place good to live in should also be the ones paying the costs.
But locations are valuable for another reason. As Paul Krugman showed (pdf) in the 1990s, it makes sense for businesses and their employees to live near each other. Like joining Facebook, the reason to live in a city is because everyone else lives there. So when a bunch of people move to the city—for example, as the result of a tech boom—we should expect their productivity to go up. But some of the fruits of that productivity will be captured by the people who happened to own the location before the boom even began: Landlords. As the boom goes on, rents soar, just like they are soaring now in San Francisco. Those high rents keep people out of the city, and prevent productivity from going as high as it could go, thus choking off the boom. Although Krugman didn’t emphasize the point, this is one more reason why a Henry George Tax would boost the whole economy.
The Henry George Tax has many good points and few downsides. Unlike income taxes, sales taxes, or corporate taxes, the Henry George Tax has no chance of choking off economic activity; after all, the amount of land is fixed, so you can’t tax it out of existence. Also, unlike the property taxes we have now, a Henry George Tax actually encourages landlords to build useful, valuable stuff on top of the land they own. Conventional property tax pays people not to build things on their land, since doing so will mean having to pay more tax. But the Henry George Tax—which would replace conventional property taxes—makes buildings and other productive structures tax-free, thus encouraging landowners to build more of them.
And, as Henry George himself pointed out, the tax redistributes wealth from the rich to the poor without punishing rich people for creating wealth. Tax Mark Zuckerberg on his Facebook profits, and you’re punishing him (slightly) for creating Facebook. But tax a San Francisco landlord on the value of the land under her buildings, and you’re just canceling out her good luck. It appeals to our principles of fairness.
What San Francisco needs now is a Henry George Tax. The policy would bring rents down, and thus encourage tech companies and their brilliant employees to keep moving into the city, to keep interacting and mixing and generating the ideas that make the tech world go. At the same time, it would raise the money the city needs to build better trains, run more bus lines, and build more public housing that will benefit the poor and middle class of San Francisco. And it would do it all in a way that seems much more fair than other kinds of taxation.
Implementing the tax would take some legal maneuvering; it’s not clear how the tax would square with California’s statewide cap on property taxes. And it would undoubtedly face dogged opposition from many landlords, who would of course prefer to collect rents simply for having had the foresight to buy up a plot of land before the boom. But if tech companies and San Francisco citizen and activist groups end their battles and team up for mutual benefit, they just might be able to get a Henry George Tax passed.
It’s time for San Francisco to embrace the brainchild of its first legendary economist. It’s time for Henry George to become a household name again.
This post originally appeared on Quartz, an Atlantic partner site.