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The Case for a Land-Based Income Tax

A while back, it had come to my attention that the imposition of a conventional land value tax would require a Constitutional Amendment in the United States since there are Constitutional constraints upon the federal government with regard to imposing direct taxes. (Cf. U. S. Constitution, Article 1, Section 2 & Section 9) However, the 16th Amendment allows the federal government to tax income from any source whatsoever without those same constraints. The conclusion that I reached was that a tax on income derived from land — a land-based income tax (LBIT) — may be a more feasible alternative to conventional land value tax (LVT). I discussed this idea in my article The Holy Trinity of Taxes. Recently, it has come to my attention that the case for an LBIT as an alternative to an LVT may actually be much stronger than I originally thought.

The LBIT proposal has four main strengths relative to conventional LVT:
(1) It does not require a Constitutional Amendment and, therefore, would be easier to pass.
(2) It could be used to tax banks on income they derive from mortgage interest.
(3) It would exempt owner-occupants and, therefore, would encounter little popular resistance.
(4) It would effectively constitute a differential tax on land value. The amount of the tax and the rate would be higher on rentiers than on owner-occupants and charitable organizations.

The first point has already been addressed, so let’s move on to LBIT’s potential to capture unearned income from interest on mortgages. This observation is derived from an article that Rick DiMare published on Progress.org. DiMare gives a brief overview of various LBIT proposals and makes the following observation:

"... when a landowner takes out a mortgage with the bank, the bank becomes the superior landowner, a partner of the onsite landowner, with the actual rents paid to the onsite landowner being shared with the bank in mortgage interest payments. Thus, almost all of bank net profits from mortgage lending is unearned, and someday should be heavily taxed for the general welfare." (The 4 Major Land-Gain Income Taxes)

Interest payments on mortgages should, therefore, be treated as land-based income and be taxed accordingly. Banks lend money into existence out of thin air. This is because the government allows private banks to carry out the Treasury’s function of creating money. If any income is derived from money creation itself, that income ought to belong to the people of the United States and not to private bankers.

The third point in favor of an LBIT is that it would not tax owner-occupants. A land-based income tax would only be collected if/when the owner derives income from the land. If you are an owner-occupant that is just living in your home with your family, then no regular LBIT will be collected from you. If you are a landlord and are currently collecting rent from a tenant, then you will be paying a monthly land value tax. If you are selling the land, then you will have to pay an LBIT at the point of sale. If you are a bank that is earning income from interest on a mortgage, you will have to pay a monthly tax on that income. A conventional LVT tends to be met by popular resistance because it is seen as a tax increase on the average homeowner. An LBIT, however, does not tax the average homeowner at all unless they rent out their property or sell it. Consequently, the LBIT proposal is likely to be met with much less resistance than the LVT proposal has been in the past.

Finally, an LBIT can be seen as a differential tax on land, where the amount of the tax and the rate of tax differs depending on the use of the land. I have been re-reading An Essay on the Restoration of Property by Hilaire Belloc. In this work, Belloc writes the following:

"It must be a first principle in attempting the reconstruction of property in land…that the burden upon land occupied by the owner shall be markedly less than the burden upon land used as a source of profit by letting it out to others.

"As to the second, the distinction between land used by the owner and land not used by him, unless it is made and insisted upon and expressed in social law and custom, the effort at the restoration of well distributed property in land fails. Today a man in England inheriting from his father a house to which the rental value is, say, £100 a year, is taxed upon it exactly as though he was getting £100 a year rent by letting it out to somebody else. This social falsehood is fundamental, and undermines the whole situation. There must be a radical difference in the burdens imposed upon land occupied, as land (according to our view) should be occupied, by a human family living thereon, and land occupied by others from whom the owner draws tribute. Throughout the history of our civilization the pretence that the two were the same has led to the breakdown of society, and if we desire to restore society we must restore the simple principle that a man living under his own roof, and on his own land, shall have the advantage over a man who uses his property only to exploit others." - Hilaire Belloc (An Essay on the Restoration of Property, Ch. 5)

If one believes, as I do, that we ought to impose taxes with the intention of fostering a widespread distribution of property-ownership (aka "distributism" or "property-owning democracy") and that owner-occupants ought to be subsidized relative to absentee landlords, then LBIT can be seen as an improvement upon convention LVT insofar as it does give the owner-occupant a lower tax rate (zero) compared to that of an absentee landlord. It should be noted here that Belloc’s recommendation could be satisfied by other versions of a modified LVT as well. For instance, one could do a more conventional LVT with a homestead exemption or one could opt for a differential LVT where the rate of tax differs depending on the use of the land (e.g. you could charge 6% for land in general but 9% for land not occupied by the owner).

LBIT does have its cons, relative to LVT. For example, an absentee landowner would be able to leave a house vacant and in disrepair, something that a conventional LVT would penalize. Additionally, an LBIT would not necessarily encourage the best use of land. It’s important to recognize, however, that these cons are only cons relative to conventional LVT. If conventional LVT is not a viable option, then LBIT is no different from any other alternative proposal when it comes to its disadvantages relative to LVT. There are certain disadvantages to LBIT relative to LVT, but it should be remembered that LBIT also has advantages as well. Apart from the obvious issue of feasibility, given the Constitutional constraints, there seems to be a fairly strong case for LBIT as desirable in and of itself. If it allows us to tax mortgage interest as land-based income, that is desirable. If it subsidizes owner-occupants at the expense of absentee landlords, that is desirable too.

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