In 1920, New York City was in a crisis situation. The city was overcrowded. Rents skyrocketed. People were getting evicted left and right. There was no place to live; you could have hung a "No Vacancy" sign at the city limits.
By 1940, the city had increased its population by over a third from its 1920 level. And no, it wasn't because of immigration through Ellis Island: Congress curbed immigration in 1924 and there was no net immigration to America in the 1930's. Also, the Big Apple didn't even annex other cities or otherwise increase geographically.
How did New York City grow so much over the two decades, even though it was "all filled up" in 1920?
For the same reason that San Francisco recovered after the 1906 earthquake. The city was pretty much wiped out, and it didn't receive any aid from Washington or Sacramento. Yet San Francisco grew by 22% in the first decade of the 1900's, another 22% in the 1910's, and 25% in the 1920's. Like New York in the 1920's San Francisco's growth was not due to geographical expansion; it became the most densely populated city outside of New York's Manhattan borough.
The reason for the explosive growth of these cities is explored by Mason Gaffney in his paper New Life in Old Cities (.pdf). Both San Francisco and New York were strongholds of a social movement launched by Henry George with his 1879 book Progress and Poverty. George was soon celebrated around the world and became one of the most famous men in America, and Progress and Poverty became the biggest-selling book on economics of all time. George was helped in writing the book by Edward Robeson Taylor, who became mayor of San Francisco in 1907. George himself twice ran for mayor of New York City, and after his 1897 death he left a movement that remained a force in New York politics.
And the same movement was alive in other cities such as Chicago and Cleveland. Famous Chicago personalities such as Jane Addams and Clarence Darrow supported Georgist solutions, and Chicago became the birthplace of the modern skyscraper. Both Chicago and Cleveland tripled in population between 1890 and 1930. This was the "golden age" of American cities with vibrant downtowns and neighborhoods, before the flight to the suburbs.
The key to the growth of several cities of the period was that they taxed land more and buildings less – if at all. This was inspired by the Georgist movement and George's call for a "Single Tax" on land values only – sweeping away all other taxes of every kind.
Why is land so important? Here's an example. In the last few years, modest homes in the formerly working neighborhood of Lakeview sold for over a million dollars. Some were refurbished, but others were torn down for condo development. Developers didn't want the houses, but the land they sat on. It's conceivable that condo developers would have paid more for a vacant lot than a lot with a house, so they wouldn't have the expense of tearing the house down. In the city, land is at a premium, and those who own land can make a killing. As years go by, buildings depreciate in value, whereas the land they sit on often appreciates. By taxing land values but not buildings or other improvements, construction is encouraged, and a city can revive from the ashes, as San Francisco did after 1906. And it can attract more and more people to enjoy the city's amenities, as New York did after 1920.
Under a pure Single Tax (borrowing William F. Buckley's example), if there is a vacant lot next to a skyscraper, they would both be taxed the same. The land would be taxed much higher than it is now, but the skyscraper wouldn't be taxed at all. The owner of the vacant lot would be encouraged to put it to more productive use. He would have incentive to get revenue from the site, and would no longer afford to hold it for a couple years (while its value appreciates) before selling it for windfall profits; he would have to develop the land now. As the website Wealth and Want puts it,
When property taxes are low, the landlord can afford to receive only that low level of rent on the property, while he waits for the land to appreciate due to factors he can take no credit for; when taxes on land values are somewhat higher, the landlord becomes motivated to replace the obsolete building which draws little rent with a more appropriate building which will provide him cash flow with which to pay the land tax. The land gets moved toward its highest and best use. Everyone benefits: those who need a place to live, those who want more jobs to choose from, those who want to start a business and need a centrally located site, those who want more vendors to choose from, those who seek the lower prices that competition and an active marketplace creates.
San Francisco was destroyed in 1906, but as Gaffney notes, its tax base was not – because the tax base was the land itself. Since the land was going to be taxed anyway, owners had incentive to rebuild quickly. And when New York stopped taxing residential buildings in the 1920's, more residential space was built and people came. These cities grew in population not by building out, but by building up. And as the supply of residential space goes up, living in the city becomes more affordable to more people. Owners of dilapidated apartment buildings would not be punished with property taxes for replacing them, whereas the land value tax would give them incentive to build. Greater revenue comes in to landlords not through higher rents, but because there are more renters.
No city adopted the Single Tax program entirely, but those that began taxing land more and buildings less enjoyed tremendous growth, prosperity, and civic improvement in the early part of the 20th century. Pressure by wealthy interests, civic corruption, poor planning, and the aging of Georgist activists led to the abandonment of Georgist policies by the 1930's. The decline of many of our great cities followed soon after.
But a Georgist revival in city politics will go a long way toward solving many of America's pressing social problems. By taxing land values more while slashing other taxes,
- Land in poor, depressed neighborhoods would be attractive, as the land value tax would be low and there would be no taxes on constructions or improvements. Ghettos would experience a revival with new businesses, and more livable buildings.
- More construction and more residential and business space means more people and more jobs.
- The greater population will increase the demand for mass transit. Also, more people will be able to walk to stores, restaurants, theaters, etc. instead of driving. The energy savings would be enormous.
- Highways and streets linking the city and suburbs would be less congested, improving the quality of life for all. The less suburban sprawl, the better for the environment.
- Cities will compete with each other and with their own suburbs. By cutting or eliminating most taxes, cities would be a magnet for business as well as people. Tourists and customers from nearby suburbs would be more likely to spend money there.
- With taxes based on land, cities would be more self-sufficient in the face of disaster. Whereas federal intervention in New Orleans has been worse than useless, leading to rampant land speculation and exorbitant rents, land value taxes would encourage rebuilding and attract people drawn to reconstruction jobs and low rents.
- This greater self-reliance would make the federal department of Housing and Urban Development unnecessary.
Land value taxation may or may not be a good idea for rural areas. My opinion is that the further away from "civilization" one lives, the fewer taxes of any kind one should have to pay. But the land value tax was the key to urban revival a century ago, and if implemented today it would go a long way toward solving many of our domestic problems.