Textbook example is not grounded in earthy reality
The mistaken idea that there is some monopoly return to land ownership, geo-rent, that can be taxed with impunity simply won't die. It doesn't help, of course, that many textbooks use land tax as an example of a tax that cannot be passed on to consumers, or back to suppliers. Yet there is big difference between reality and textbook example.
The early Greeks viewed direct tax on land as the mark of tyranny. So too do modern taxpayers. The American social reformer and journalist, Henry George, popularised the notion of a geo-rent tax to correct social injustice and collect revenue. In particular, George argued that a geo-rent tax could generate enough income to replace all other forms of taxation.
He also took the view that land was a "free gift of nature".
Existing landlords had a monopoly access to land (independent of usage) and should pay the monopoly profit as a tax. This would keep land in productive private ownership, reduce speculation in land and raise sufficient revenue that all other taxes could be abolished. The linchpin to this theory is that land is "free" and fixed in supply.
Even Friedrich von Hayek says: "If the factual assumptions on which it were based were correct, the argument for its adoption would be very strong". While land is fixed in geographic terms, land as an economic asset is not. Land, like capital, can be allocated from one usage to another. As John Bates Clark argued: "The idea that land is fixed in amount ... is really based on an error which one encounters in economic discussions with wearisome frequency."
The argument is quite simple. Money does not grow on trees and nature does not yield economic value easily. At any level of economic activity above hunter-gathering natural produce must be combined with capital, labour, and entrepreneurial insight before economic value can be created.
Adam Smith arguing for the notion of geo-rent used the example of collecting kelp to make soap. But the kelp itself did not generate a return; the knowledge that alkaline salts can be derived from kelp and turned into soap generated the returns. The geo-rent is not inherent in the land itself; it is a return to entrepreneurial discovery. Land is an input into the wealth creation process just as any other factor of production.
So, a tax on "land" is not a free lunch. It is a tax on either capital or labour. Of course, government likes the land tax because it has pleasing theoretical qualities, but the taxpayer knows the reality of the situation.