Long ago, Adam Smith and the other classical economists agreed on the following self-evident characteristics of a good, socially beneficial tax, which have come to be known as the "Canons of Taxation":
The best tax by which the public revenues can be raised is evidently that which will most closely conform to the following conditions:
When we evaluate our current methods of raising public revenue by these criteria, we find that they fail rather miserably. Let's take the sales tax, for example. We find that it does all right on #3, Certainty -- because it takes a definite proportion of the price of the good being taxed (unless the good is sold on the black market, of course). But, the sales tax is not light on production, because it adds to prices. It does not fall on the ultimate payer, but on the merchant who sells the good, who has a built-in incentive to under-report the tax owed. And it bears very un-equally, for it puts a greater burden on lower-income buyers. Sales tax flunks.
How does the income tax do? Well, it is sort of fair, since it seeks to levy a greater burden on those with higher incomes (if they don't take advantage of loopholes and deductions). But, alas, it burdens production by decreasing the money people have to spend. It is phenomenally expensive and difficult to collect. And, because it depends on an abstruse, gigantic tome of regulations, and on individual's accuracy at calculating their own tax burdens, it is far from certain. Income tax gets an F.
It begins to sound as though those classical economists just didn't like taxation, and thought we shouldn't have very much of it at all. Is there any source of public revenue that passes the criteria?
Just for the heck of it, let's evaluate a property tax on the value of land. Not on the value of buildings, because buildings are items of wealth, and taxing them would increase their cost just as a sales tax does. Let's consider a tax on the value of land alone.
What we find is surprising! A tax on land value does not burden production one bit, because land is not produced. It is both certain and easy to collect, because land cannot be hidden, and its value is easy to determine. And, it is fair, in that the value of land is an exact expression of the value of benefits that are enjoyed by the owner of a site: the benefits of public services and closeness of neighbors.
There's another interesting thing about the value of land that recommends it as a good source of public revenue. That is the fact that as society expands, in both population and complexity, its needs for public services -- and hence for public revenue -- tend to increase. And, as society expands in population and complexity, land values tend to increase as well. So, there exists a fund that grows as society's need for it grows, which satisfies all of the classical criteria for a fair and efficient tax!
This insight, which was championed in the writings of Henry George, led to a large political movement around the turn of the 20th century in support of "The Single Tax". The proposal was to collect the value of land for public revenue and dispensing with all other taxes. The United States eventually did not choose this solution, largely due to the political pressure applied from landowners who wanted to preserve their privileged positions. Nevertheless, the logic of the Single Tax -- and the movement advocating it -- exist to this day. We can only wonder what the 20th century may have been like had the United States followed this wise policy -- but it may not be too late to find out.
Background Questions