[MUSIC] Well so much for that digression, let's get back to Henry George and the single tax movement. In his very important, and best selling book, Poverty and Progress, published in 1879. Henry George called for financing the government principally through property taxes on land. George's idea was to use this single tax to cut or eliminate all other taxes on capital, labor, and improvements an the land. And George argued that such a tax would not only be more fair, it would also be more efficient. In fact, as modern economists have demonstrated. George was absolutely right, that such a tax could improve the distribution of income, without harming the productivity of the economy. Let's demonstrate the Georgist argument, and in doing so, prove this point. A tax on pure economic rent will result in no distortions of allocative inefficiencies. Suppose then that the government introduces a 50% tax on all land rent paid by farmers to landowners. And now that when I'm talking about this tax, I'm talking about a pure tax on land alone. In particular, this is not a tax on the buildings on the land. Nor is it a tax on building improvements. This clarification is an important one. The reason is that while the supply curve for land is vertical. The supply curve for buildings and building improvements is upward sloping. This is because the price of such improvements surely affects their supply. With that said, why don't you take a minute now to draw a graph of the market for land. And what you think will be the impact of the 50% tax on the quantity of land supplied and demanded. Does your graph look like this? You can see that the initial equillibrium is at point e. While after the tax is imposed, both the quantity of land supplied and demanded remains the same. Now here's one of the most interesting questions about this figure, one that has great historical significance. Who actually winds up bearing the burden of paying this tax, the farmer or the landowner? Well, you can see from the figure that the total amount that the farmer pays out for the land remains the same at $200. However, the landlord now only keeps half that amount and let's give the other half to the government. Thus, in economics, we say that the landlord bears the burden of the tax. This, by the way, is an exercise in what economists call tax incidence analysis. Now, besides this tax incidence question, there is an equally interesting question. Here it is. What do you think will be the allocative inefficiency or deadweight loss associated with this tax? Now this answer may surprise you. A tax on pure economic rent leads to no allocative inefficiency or dead weight loss. The reason is that a tax on pure economic rent does not change anyone's behavior. Consumers are clearly unaffected by the tax because price has not changed. At the same time, the behavior of landlords is unaffected because the supply of land is fixed and therefore cannot react. Hence the economy operate after the tax exactly as it did before the tax, with no distortion our inefficiencies arising as a result of the land tax. The argument offered by Henry George in defense of a single tax on land are so strong, From both an economic and equity perspective, it is probably useful to point out at this point, why such a tax has never really been implemented. One obvious problem is that current levels of government spending are such that, a land tax alone would not bring in enough revenues. A second problem is that land is typically improved in some manner by productive effort. And economic rent cannot be readily disentangled from payments for capital improvements. Still a third problem is that, historically, a piece of land is likely to have changed ownership many times. Thus, while former owners may have been the beneficiaries of past increases in land rent. It would hardly be fair to tax current owners who paid the competitive market price for land.
