STWR - Share The World's Resources

Being scarce, land is in great demand, but in many cases its potential as a source of public revenue goes unrecognised. Introducing a Land Value Tax is a simple way to significantly improve the fairness and sustainability of an economy, argue three contributors to Tax Justice Focus.

The following articles first appeared in Tax Justice Focus, Volume 6, Number 1 (PDF), published by the Tax Justice Network.

A Tool for Economic Development - Nicolaus Tideman

A Tax That Is Not a Tax - Henry Law

Harnessing Land Value as a Green Tax - Molly Scott Cato

26th July 2010

A Tool for Economic Development

May 2010 - Tax Justice Network, Nicolaus Tideman

A land value tax is a periodic tax (monthly or yearly) on those who have title to land, levied in proportion to the value that the land would have if it were not improved. A land value tax reflects the value that is added to land by public improvements such as streets, water service, sewers, parks, etc., but not the value of structures, fences, grading, draining or other improvements to an individual parcel of land.

Land value taxation promotes economic development in at least six different ways. First, land value taxation serves as a regular reminder to those who have title to land that they are not using, that they have something of value that could be put to use. Land is often in the hands of people who have other concerns and prefer not to think about what might be done with their land. A regularly recurring tax bill reminds people that they have something of this and if they have no use for their land themselves, they could save on their taxes by transferring the land to someone else. By putting land in the hands of people who will use it, such transfers of land promote economic development.

Second, land value taxation provides revenue for governments, permitting them to reduce taxes that have harmful effects on economic development. Taxes on wages discourage people from working. Taxes on saving or investments discourage people from saving and investing. Sales taxes and value added taxes discourage productive activity generally. But a tax on land values does not discourage any productive activity. Thus any substitution of a tax on land value for a tax on wages, incomes, savings, sales or value added will increase the efficiency of an economy and promote economic development.

Third, land value taxation reduces the profit from land speculation. Land speculators leave land unused because they think its value will rise rapidly, so it should not be improved now. These expectations of speculators are often disappointed. Valuable land in the centres of cities is often left unused or very poorly used for generations. The inefficient decisions of land speculators to not develop land mean that economies must contend with artificial scarcities of land. When a tax on land value is implemented or increased, the potential profit from land speculation falls. Regular tax bills limit the capacity of speculators to speculate. As a result, less land remains in the hand of speculators and more land goes into the hands of those who wish to use it. With more land in the hands of those who wish to use it, economic development improves.

Fourth, land value taxation provides a special benefit to those who have limited access to capital, and in the process it promotes economic development. Other things being equal, when the tax rate applied to land value is increased, people who might want to buy land will reduce their offers according to the present discounted value of the increase in taxes. But every potential investor will use his own interest rate in determining the amount by which to lower his or her offering price in response to an increase in the rate of a land value tax. Those who have high discount rates will have lower present discounted values for future taxes, and will therefore have smaller reductions in the prices that they will offer for land, compared to those who face low interest rates and therefore have high present discounted values for future taxes. Thus a tax on land value will tend to move land from those who have low discount rates to those who have high discount rates. And those who have high discount rates (those with limited access to capital) tend to get returns on their assets that reflect those discount rates. Thus land value taxation puts land in the hands of those who do more with it, thereby promoting economic development.

Fifth, land value taxation has a particular capacity to finance infrastructure improvements such as road paving, bridges, water lines, and sewers. An infrastructure improvement is worthwhile if its benefits are greater than its costs. Because of the mobility of labour and capital and the fact that benefits of infrastructure tend to be limited to the vicinity of the infrastructure, the benefits of infrastructure tend to be reflected in increases in the rental value of the land in the vicinity of the infrastructure. This means that financing infrastructure by a tax on the land in the vicinity of the infrastructure has three important benefits.

1. When infrastructure is financed by taxes on land there is no dead-weight loss from the taxes as there would be with most other sources of financing.

2. When infrastructure is financed by a tax on land in the vicinity of the infrastructure, assessed so as to reflect the increase in the value of the land that is caused by the infrastructure, no one is harmed by the decision to produce the infrastructure. Everyone is a net beneficiary. Even if the tax cannot be assessed so perfectly that no one is harmed, the effort to assess the costs according to the benefits to owners of land greatly reduces the extent to which net harm to individuals is caused by the taxes that finance infrastructure.

3. By financing infrastructure through taxes on those who will benefit from the infrastructure, land taxes avoid the problem of efforts by beneficiaries to persuade governments to provide infrastructure that is not actually worthwhile. When the beneficiaries are the ones who will pay for infrastructure, they have an incentive to push the government to provide the infrastructure only when it actually is worthwhile.

The sixth way that land value taxation promotes economic development is by generating confidence in governments. Economic development is often financed by foreign investment, and foreign investors ask themselves, before investing, how confident they can be that they will not lose their investments as a result of confiscatory taxes or regulations. Potential domestic investors will also ask themselves whether, considering the risk of confiscatory government action, they would achieve higher expected returns with investments abroad than with domestic investments.

There may be no way that a government can provide an absolute assurance that no future government will confiscate investments, but a government can provide evidence of responsible planning for a future that does not require confiscating investments. By collecting the rent of land and using it for public purposes, a government can provide a signal that it plans to provide for its future revenue needs without having to confiscate the capital that investors bring to the country. Thus in this way too, a tax on land value promotes economic development.

Nicolaus Tideman is Professor of Economics at Virginia Polytechnic Institute and State University

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A Tax That Is Not a Tax

May 2010 - Tax Justice Network, Henry Law

Land Value Tax (LVT) is not a tax, but a payment for actual benefits received, just as the charge for a parking space is a payment for a benefit. It is the collection of part of the annual rental value of land. It is not a charge on the selling price of land, or the sale of land.

Street traders and buskers understand rental value. In most cities a busker will earn more in a busy railway station in the city centre, than at the end of the line, where nobody would bother to set up their pitch. Somewhere in between, the reward makes it just worth while. These latter locations are the “marginal sites”. The additional earnings on the better sites, over and above the margin, owe nothing to the skill of the musician. This is rental value, due to the benefits of location, economic rent. The more people that pass by, the higher the takings. The differences are due to the shape of the transport system and other local features – in other words, to the presence and activities of the community.

Buskers instinctively understand the phenomenon of economic rent, which was analysed by the economist David Ricardo when he formulated his Law of Rent. It applies universally but is largely absent from economic theory. Perhaps economics students should be sent busking or should operate a market stall for their first course assignment! Ricardo’s Law means that LVT – the collection and use of the economic rent of rent as public revenue – is not a tax but a payment for benefits received.

The Benefit Principle

What are these benefits? The legal recognition, protection and defence of the owner’s right of occupation, and the advantages enjoyed by the owner due to the presence and activities of the community, that give rise to the rental value. This rent will inevitably end up in someone’s pocket. If it is not collected as public revenue or by a landlord, it will be farmed by extortionists or fought over.

Land Rent as Public Revenue

Using land rent as public revenue has many advantages. It cannot be evaded or avoided. Parasitic speculation in the price of land titles becomes pointless, since land holding carries a liability to pay a charge proportionate to its actual present value. It inhibits corruption of the banking system through the trading of land titles, with consequential damage to the economy through boom-bust cycles.

Most of the so-called “obscene earnings” received by financial entrepreneurs are not earnings at all, since no labour has been applied and no wealth has been created. They consist either of profits made from the trading of land titles, usually concealed inside “assets” such as shares or property, or of land rent extracted by the financial system as interest charges on loans for the purchase of land titles: economic rent capitalised.

Under an LVT regime it is no longer possible to tap into this revenue stream. Income can only arise from wealth creation. The incomes that are diverted to tax havens are collected at source. Tax havens no longer have a purpose.

How Much?

How much can be raised? In many countries, both in the developed and the developing world, land rent is being collected as public revenue today through property taxes in some shape or form. Their usual defect is the method of assessment: improvements are penalised, under-used land is not assessed at its potential value, and vacant and agricultural land is exempt. In Greece, for instance, buildings are left unfinished so as to avoid the tax. Even a simple switch from existing property taxes to LVT would therefore raise more revenue. And since the reduction of existing taxes would tend to drive up land rental values, a benign cycle would be set up in which the LVT tax base grew as existing taxes were phased out.

How Might LVT be Introduced

So long as some form of property tax is in place, a smooth and uncontentious transition to LVT is possible. There is no practical difficulty in carrying out a valuation of land and producing a set of rental values for all land. The land has to be registered, but there are many ways of getting this done. Owners could simply be required to register their property. There is no practical difficulty in collecting the revenue using the existing administrative apparatus.

In Year One of LVT, the LVT charge is levied on occupiers, based on the land value assessment instead of the present property tax. Nothing else changes. The total amounts raised can be set so that, perhaps, just over half of all bills are the same or less than in the final year of the old property tax. That will raise more revenue and minimise protests. In the case of business and agricultural premises, where leases are often subject to an upwards-only rent revision clause, introduction of the tax must be accompanied by a regulation setting aside this clause, which is in any case fundamentally unjust, so that tenants can if necessary renegotiate their rents downwards as well as upwards.

In some countries, the property tax is local rather than national. But LVT cannot be a local tax except for the first few years, when the rate is low and before significant cuts have been made in other taxes. Some administrative areas have, in aggregate, high land values and a solid land value tax base. Others have little. This is true of all taxes at a local level: the amount that can be raised depends on the area. The land value charge should therefore, over a few years, move to a uniform national levy.

If local authorities do not have access to the land value in their area as a tax base, how can services provided by local government be paid for? One possibility is a capitation payment distributed from the national LVT fund, with the local body receiving a pot of money to spend as they wish.

The real difficulties are political. Vested interests are powerful. In most countries, the lion’s share of the most valuable areas of city centres is concentrated in the hands of a tiny elite of landowners. This gives rise to great political influence, working quietly in the background.

Objections also come from those who ought to be supportive. It seems to have arisen out of the concept of ‘Rent of Talent’, a notion that emerged around the start of the last century. It cast a fog of confusion over the term ‘Rent’. The talents in question were those of opera singers or today’s football stars. The argument goes that if land rent should be taxed, so should natural talent, thereby opening up the case for progressive income taxes. This helped the landowning interest by diverting attention from their privileged status. But ‘rent’ is the wrong term for the high earnings of opera singers. These are the rewards for labour: wages.

Always, the aim should be, above all, justice, and to promote the efficient use of resources, good behaviour rather than bad and reduce opportunities for fraud. LVT is a tax reform that achieves all of these.

Henry Law is a member of the Land Value Taxation Campaign

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Harnessing Land Value as a Green Tax

May 2010 - Tax Justice Network, Molly Scott Cato

The sense of vertigo you experience when trying to understand how financial alchemists have created so much meaningless monetary value out of thin air is an indication of the dislocation that financialisation has brought to the world economy. One reason why the regulators did not do their job was that the process of debt creation was alienating: it was technical and abstract and human minds are repelled by such stuff.

Ever since value slipped its attachment to the natural world—around the time the technique of fractional reserve banking was invented in the 17th century— money has become increasingly important and the planet and its resources less so. The early economic theorists - who called themselves Physiocrats - stated in their name their view that the land was the source of all value. But they were defeated by the mercantilists and then by classical economists, who argued that trade was what really mattered: it was trade that enabled the accumulation of money. Since that time economists have not been able to distinguish between money, wealth and value.

To find solutions to the financial crisis, as well as the environmental crisis, we need to get our feet back on the ground.

Whose Land is it Anyway?

From the perspective of a green economist, land is the primary source of all value; the nature of its allocation is therefore an issue of great political salience. This raises critical questions concerning the legal origin of a right to own land. In indigenous societies it would be considered blasphemous to make such a claim and even the notoriously legalistic Roman Empire had a law of usufruct that established the right of local people to make use of land if the landowner was not doing so. How many farmers who live from grants and subsidies would be able to justify their right to continued use of their land under such a legal stricture?

Behind these laws and customs lies the fundamental understanding within human communities of the inevitability of land as a common resource—how could something so fundamental to survival pass in perpetuity into the hands of a minority? The history of the alienation of peasants from their land during the Enclosures in England is well known although, unlike the Highland Clearances, it is not burnished with the same continuing sense of injustice. It should be. Because the lowland clearances that removed subsistence farmers from their livelihood opened the way for over-exploitation and species holocaust. Neeson (1989) even argues that the disruption of this ancient way of life led to the population explosion that caused such distress to Malthus and the economists who followed his path.

It is interesting that this year’s Swedish Bank Prize (in spite of attempts by the economics profession to delude us to the contrary it is not a Nobel Prize) was given to a woman who is not an economist and has spent her life studying systems of allocation by commons. Elinor Ostrom’s citation—‘for her analysis of economic governance, especially the commons’—might be a hint that even inthe higher realms of what Hazel Henderson called the snake-oil priesthood there are uneasy feelings that the private-property free-for-all may have gone a little too far.

The horrifying levels of inequality that have resulted from 30 years of neoliberalism have pushed the issue of redistribution up the political agenda. But the failure of the redistributive measures, despite their vast expense, to solve the problem of persistent poverty makes clear the inefficiency of solutions that rely on redistribution rather than the predistribution that green economists have long been arguing for. Land redistribution is one such means of predistribution, but introducing a tax on those who currently own land so that the value they derive from it could be fairly shared is another. From a radical perspective, land is a common source of wealth for the inhabitants of a nation, and should therefore be shared fairly between them. Taxing owners of land and distributing the receipts to those who do not own would be a crucial aspect of predistribution.

Land in a Sustainable Economy

These are not new arguments but what gives them added salience is the limit and pressure for change exerted by climate change. No longer can we rely on the production of food and its transport across the globe to feed our families. Climate change brings irregular harvests and rising food prices; it limits the amount of carbon we can waste in pointless food swaps; and it undermines the security of the infrastructure that a global food market relies on. No wonder that food security is the political issue of the moment.

As food becomes scarcer and more expensive the exclusive ownership of land becomes an increasingly indefensible privilege. Unless we find a way of treating the world’s productive land as a common good the 21st century is going to degenerate into an era of food and other resource wars. This is why the virtual money that was created in the casino economy during the bubble was invested in land before it burst. The buying up of huge tracts of land in the poorer countries of the world that has become known as ‘the great land grab’ illustrates how, although the money was created by a computer, its power in the world is real.

Green economists argue for an economy that is just and sustainable, but such a world is not attainable without a reallocation, occupation or requisitioning of land. At the policy level we might suggest the immediate introduction of a Land Value Tax, which would require those currently in ownership of land to pay for this privilege. The value of land ownership could then be shared between the people of each nation or region—a policy response to Gerard Winstanley’s definition of land as ‘a common treasury’. Far from Hardin’s empirically ungrounded critique of commons (1968), Neeson’s account demonstrates how the best means of protecting a resource is to reconnect use-rights with shared ownership rights, backed up by a system of local social control. Being dependent on a resource emerges as a better protection than legalistic property rights.

It is money that has got us into this mess. The abstract nature of money has facilitated our dislocation and disembedding from the planet so that we can get more excited about an iPad than a squirrel or our own best friend. And it is the growth logic that is inherent in the way money is created under capitalism that is driving the planet to destruction.

So three steps to Green heaven? First, replace money with land as the source of true value. Second, challenge the right of those currently in ownership to enjoy that privilege when it is so socially and environmentally destructive. And third, argue with renewed vigour for the immediate introduction of the taxation of land value as the central source of national revenue.

Molly Scott Cato is a Reader in Green Economics at Cardiff School of Management and Economics and Speaker for the Green Party in the UK

References

Hardin, G. (1968), ‘The Tragedy of the Commons’, Science, 162:1243-1248.

Mellor, M. (2010), The Future of Money: From Financial Crisis to Public Resource (London: Pluto).

Neeson, J. M. (1989), Commoners: Common Right, Enclosure and Social Change in England, 1700-1820 (Cambridge: University Press).

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