Frank Knight's Proposal to End Distinctions among Factors of Production and His Objection to the Single Tax

Few topics in the area of public finance have been debated as hotly as the economic and social effects of taxes on land value. Until the late nineteenth century, most economists considered taxes on land value to be desirable. But in the aftermath of Henry George's proposal of a "single tax," well-known economists like John B. Clark, Herbert J. Davenport, Richard T. Ely, Frank H. Knight, and Edwin R. A. Seligman offered a multitude of reasons why it would not be desirable to concentrate taxes on land. Their arguments effectively removed the idea of concentrating taxes on land value from the agenda of economics. Today, only a few economists are aware of the debate, and even fewer consider taxes on land value to be an attractive alternative to taxes on labor and capital.

This development is somewhat surprising, because there is a consensus in the local public finance literature that taxes on land value are nondistortive.¹ Land value taxation could therefore be a desirable policy for municipalities that wish to increase economic activity within their borders. But such policies are rarely debated or even considered.² It is possible that the objections that were raised against taxes on land value in the first half of the twentieth century lurk somewhere in the background, and effectively prevent economists from taking the issue seriously. In this context, the question arises as to whether these objections are valid.

Some objections are generally considered to be invalid. For example, John B. Clark (1890) asserted that market outcomes are proper because the owner of each factor of production receives that factor's marginal product, so that singling out a factor for taxation is improper. His assertion has been widely criticized; for example, see Blaug 1997, 408–9. However, we are aware of very little discussion of the objections to the single tax of the economist Frank Knight, whose views are widely respected.³ He vehemently rejected the idea of the single tax in several of his writings, once calling it "utterly fallacious" (Knight [1921] 1948, 160). In this article, we examine Knight's main objection and discuss its validity.⁴

At the heart of Knight's objection are his claims that there is no conceptual difference between rent and interest, and that "pure land value" does not exist. In Knight's framework, the value of land equals the value of the resources that are necessary to "produce" land. If Knight's interpretation is correct, then a tax on land value leads to the same inefficiencies as does a tax on capital. The argument that rent and interest are different words for the same concept did not originate with Knight. The idea is generally attributed to Irving Fisher, who publicized it at the beginning of the twentieth century (Fisher 1907).⁵ However, Fisher was much less hostile than Knight to the idea of the single tax, because his arguments for subsuming rent under interest are different from those of Knight. Fisher emphasized that the value of any stock can be regarded as the present discounted value of a future income flow, and he argued that there are no relevant conceptual differences among the income flows that stem from land, labor, and capital. Knight, on the other hand, argued that all factors are the products of previous investment, and that there are no relevant conceptual differences among the origins of land, labor, and capital. Because the main motivation behind the single tax was the understanding that land, unlike capital, is not produced by human effort, Knight's argument directly contradicts the theoretical foundation of the single tax.

In section 1 of this article, we examine Fisher's and Knight's arguments in more detail. We show that Knight's objection to the...