Land Value Taxation: Panacea or Placebo
Alanna Hartzok
[Reprinted from
Mother Peilican: A Journal of Sustainable
Human Development, Vol. 7, No. 8, August 2011.
Originally published in The Land, Issue 8, Winter 2009]
Concentration of land ownership in the hands of a privileged class is
blatantly unjust, and arguably is the mother of all other injustices.
Century after century has witnessed bitter struggles over access to
land between the haves and the have-nots. Revolutions have toppled
land-owning elites, often only to set others up in their places. Land
reform concessions have sometimes had a mitigating effect, without
ever addressing the core of the problem; even in a wealthy country
like Britain, the widening gap between rich and poor is the gap which
separates those who own property from those who don't.
Over the past 150 years a growing body of opinion has maintained
that the solution to land concentration and monopoly is not to fight
it, but to tax it. Land Value Taxation (LVT) was first articulated
in depth in Henry George's Progress and Poverty, and it now
has many exponents and supporters around the world, ranging from
municipal authorities in the US, to the UK Green Party.
Some advocates of LVT seem to believe that it is the answer to all
social problems; to the uninitiated, on the other hand, LVT is an
arcane economic mechanism which is hard to fully understand. The
Land has therefore invited Alanna Hartzok of the Earth Rights
Institute, in Pennsylvania, to address some of the most frequent
queries and criticisms, after this brief introduction to the theory
of LVT.
What is Land Value Taxation?
Unlike manufactured goods and services, land (which according to
the original definition in classical economics is taken to include
the sea, mineral deposits and all other gifts of nature) does not
cost anything to produce; it is provided by Nature for free.
If there were limitless supplies of land then nobody would need to
pay anything, or anybody for its use. However there are not
limitless supplies — as Mark Twain said "they are not
making any more of it." The supply of land is fixed, while the
demand for it is growing. Owners of land, collectively, have a
monopoly over a scarce resource, which everybody needs, but which
costs them nothing to produce. They are charging the rest of us for
the use of this resource. The object of LVT is to ensure that any
payment for this resource goes to society as a whole, rather than
into the bank accounts of landowners and mortgage lenders.
What gives land its value?
There is probably still some land in the world — miles away
from anywhere and capable of producing very little — which can
be had for nothing; and there is still some very isolated moorland
in Britain which can be had very cheap, perhaps for £50 per
acre. So what makes the rest of the land more expensive than this?
There are two factors which increase the value of land above this
rock bottom minimum.
(1) The land may be better endowed by nature: it may be very
fertile, or on a south facing slope, or have just the right amount
of rainfall, or be next to a river or natural harbour. This value is
created by nature, independently of humans, and it is often (but not
always) fairly constant.
(2) The value of land may be enhanced by all the human activities
carried on around it. Land that can produce three tonnes of wheat to
the acre is not worth much if there is no nearby community to eat
the wheat, and no road to export it. A waterfall capable of
generating 1,000 kilowatts is worthless for that purpose if there is
no village nearby to use it. Land tends to increase in value the
nearer it is to roads, railways, villages, towns, shops, good
schools and "good neighbourhoods". This is the value that
estate agents refer to when they cry "Location! Location!
Location!" This value is created by society as a whole, rather
than by the individual owner; and it tends to increase with
population and human activity. The total value of the land as a
result of its natural endowment and its social location is known as
its "economic rent".
Economic rent is not the same as the rent that you might pay for a
flat in London or a farm in Devon. When you pay rent for a flat or a
farm you are not only paying for the land, but for the buildings and
other improvements made to the land. If land is drained, or fenced
or a barn is built on it, then that is an improvement made or paid
for by the owner of the land, which will increase the value of the
property. If a house is built, or twenty houses, or offices or a
multiplex cinema, then that is likely to increase the value even
more. These improvements, usually known as "development",
are normally made or paid for by the owner of the land, and they are
distinct from the "economic rent" relating to the natural
endowment and social location of the land.
If someone puts up fencing, or builds a house it is reasonable
that they should be rewarded for their work or expense. But it is
not reasonable that they should be rewarded for owning land which
was created by nature; nor that they should be rewarded for owning
land that is valuable because society has built a high street, a
secondary school, and a tube station, nearby.
The object of land value taxation is to ensure that the rent
attributable to the natural value of the land, and to the value
created by its fortunate location, is paid to society as a whole,
and not to individual landowners who have not earnt it.
The Advantages of LVT
What happens if society taxes the economic rent of land? Consider
a piece of land valued at £100,000, and which has a rental
value on the market of £5,000 per year. If the government or
local authority imposed a land value tax of 40 per cent, the owner
would have to pay £2000 tax per year, and would only receive £3000
in rent. The market value of the site would therefore go down, and
if the owner sold it he would only get £60,000 for it instead
of £100,000. Similarly if the land value tax were 60 per cent,
the owner would pay £3,000 per year in tax, receive just £2,000
in rent, and the capital or resale value of the land would be only £40,000.
In other words, when a land value tax is introduced, the capital
value of land, and hence the cost of buying it, tends to decline in
proportion to the rate of tax, while the total rent paid (either to
the owner or as tax ) remains the same.
There are three main advantages to introducing a land value tax
system.
1. Money that was formerly paid to landowners would instead be
paid to the local authority or national government. This would mean
that the government could reduce other taxes, such as income tax and
VAT, correspondingly. Someone who was formerly paying rent and
income tax and VAT, would still be paying the same amount of rent,
but less or even nothing in income tax and purchase tax (Henry
George advocated abolishing all taxation save that on land values).
Everybody would be better off, except land speculators and those who
had been living off the rent of land.
2. Reducing income tax and purchase tax would encourage industry
and manufacturing. In Henry George's words: "Tax manufactures,
and the effect is to check manufacturing; tax improvements and the
effect is to lessen improvement; tax commerce, and the effect is to
prevent exchange; tax capital and the effect is to drive it away.
But the whole value of land may be taken in taxation, and the only
effect will be to stimulate industry, to open new opportunities to
capital, and to increase the production of wealth."
3. Land tax would do away with land speculation. Landowners would
get no advantage from sitting on land and waiting for its value to
increase before selling it, because all the time the land was doing
nothing, they would have to pay LVT. They would be under financial
pressure to do something with the land or sell it to someone else
who wanted to do something with it. This would put an end to land
speculation, empty city office blocks etc.
A further advantage is that LVT is relatively easy to collect. You
can't hide land the way you can hide income. "Non-doms"
can stash dollars in the Cayman Islands, but they can't take acres
there. In summary, a land value tax would encourage the production
of wealth, while at the same time ensuring that wealth was better
distributed.
Questions and Answers about LVT
Alanna Hartzok and colleagues respond to questions from Simon
Fairlie of The Land.
SF: The system of Land Taxation, as expounded by
Henry George in Progress and Poverty seems to be designed to address
poverty in two ways: (a) by taxing landowners so as to distribute
wealth more fairly and (b) by removing tax from industry so as to
create more wealth. I don't think many readers of The Land would
have much quarrel with objective (a) (though they might have queries
as to how it would work); but there are several concerns about
objective (b).
AH: Regarding objective (a): while the policy
proposed by Henry George is often called "land value taxation"
the concept is more precisely understood as the capture of "land
rent" which is a measure of socially generated surplus value.
When retained by the landowner, land rent is an unearned income,
which can be captured by the state for the benefit of all. In
Australia, profits from land rent have increased disproportionately
as the economy has grown.
How
Land Rent has Eaten into the Australian Economy
In 1911, when land was plentiful in Australia, 85 percent of
income went to labour and capital, and only tiny amounts were
taken as tax or went to landowners. By the 1950s, the amount of
tax taken had tripled, but land rents were still low. However,
over the last three decades land rent has grown to occupy 32.5
percent of the economy, yet only 4 percent of this is captured
through taxes for the public.
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Objective (b) has two parts as stated, so let us consider these
separately. First, "removing tax from industry" does not
mean removing taxes from big polluting factories. What George meant
by industry was labour, as in "this person is very industrious."
As for the second part of (b) "so as to create more wealth",
this phrase might conjure up the image of everyone insatiably
accumulating piles of material stuff. But George uses it in the
sense of common weal: "a condition of society in which no one
need fear poverty, no one would desire great wealth - at least, no
one would take the trouble to strive and to strain for it as men do
now."
Environment
SF: When Henry George wrote Progress and Poverty
in 1879 he was living in the USA which was still a young country
with an expanding frontier, and seemingly limitless resources. He
could write with confidence: "All things that furnish man's
subsistence have the power to multiply manifold . . . How is it that
this globe of ours, after all the millions of years that man has
been on the earth is so thinly populated? . . . The increase of
population will never exceed subsistence.
But now the context is different: we may not have exceeded
subsistence but we are stretching the bounds of extravagance.
Resources such as land, energy, water and pollution sinks appear to
be limited, and many people wonder whether, in rich countries such
as the UK and the USA, we shouldn't be putting a brake on economic
growth.
I can see that when absentee landlords are sitting on land that
could be cultivated, or when speculators leave buildings empty so
that they can make a profit, yes, it is a good idea to tax them. But
wouldn't the same tax mean that every landowner, however small, and
even if they weren't trying to speculate, would be under pressure to
extract as much profit from their land as it was capable of?
AH: For many environmentally aware people, alarm bells
start to ring when George says that under a system of Land Value
Taxation (LVT) "no one would care to hold land unless to use
it, and land now withheld from use would everywhere be thrown open
to improvement."
It is important to read statements like this from the perspective
of Henry George and the problem he is trying to solve, namely, want
amidst wealth, poverty, hunger and material deprivation alongside
abundance. George never advocated economic growth for growth's sake.
When he talked of productivity increase it was always with the view
that those who were poor and hungry were being locked out of natural
opportunities to apply their labour to land in order to secure their
basic needs. He saw that a few had appropriated the gifts of nature
and vast lands were enclosed for no other reason than for land
speculation and the over-accumulation of wealth by the few, while
great numbers were penniless and poor. A statement like "land
now withheld from use would everywhere be thrown open to improvement"
is the way George expressed his enthusiasm for a just society where
the rights of all to the gifts of nature was made manifest.
SF: Yes, I appreciate that. But nowadays, when we
ransack the earth for luxury goods, how does LVT avoid creating an
incentive for excessive, undesirable or unecological development?
Under LVT, where land is taxed according to its productive
potential, wouldn't owners of quarries, mines, peat bogs, forests,
fisheries, irrigation rights and so on be under pressure to extract
the maximum return from their land even if it wasn't ecologically
wise?
AH: Rights to use each natural resource domain
should be determined by the community in what we might call
democratic, participatory zoning (or in England "land use
planning"). Thus the allocation of water usage rights might be
determined by water table level, annual rainfall, base level use
needs, and so forth. Imagine that with full democratic land use
planning, the citizens of a uranium rich area might decide that the
best use was no use. Their community could still thrive from other
forms of publicly captured resource rent and thus not have the
pressure to mine uranium. If mining or quarrying was permitted, this
use would be conditional on payment of a security deposit to
guarantee that the land would be reclaimed and not simply left in a
degraded condition.
SF: So if I had a uranium mine, or more likely a
gravel pit, with permission to extract, but didn't implement the
permission and just kept sheep, would I have to pay LVT for the
value of that permission, or would I just pay for the value of
agricultural land?
AH: I'll let two Georgist economists, Nic Tideman
and Fred Foldvary, respond to this one.
NT: If the site is more valuable as a gravel pit
than as a sheep farm, it is the value as a gravel pit that goes into
the calculation. But the question is concerned both about the
possibility of excessive development and about the possible
unfairness to the person who has been keeping sheep. Thus one should
note:
- There should be not just a question of permission, but also
charges for any adverse consequences of a chosen land use.
- It is possible that running sheep adds scenic value or adds in
some other way to the community. The best system of land use rules
will reward those land uses that add value to their surroundings,
according to the value added.
- There is a question of the fairness of telling someone who only
knows running sheep that she now needs to pay according to the
value of using her land for something that she has no interest in
doing and no capacity to do. When such "accidents"
cannot reasonably be foreseen, equity may require that landowners
be awarded one-time, lump-sum compensation for the loss associated
with adapting to the unforeseen new use for the land (e.g. moving
the sheep operation).
FF: If the economic rent of the gravel extraction
is greater than sheep ranching, the sheep ranch would pay the LVT of
the gravel pit. That would indeed promote the development of the
gravel pit. However, the gravel pit has a secondary consideration.
If the gravel pit is ugly or noisy, then it would reduce the rent of
the neighbourhood. Also, folks might enjoy seeing the sheep.
So I would use "demand revaluation" to determine the
subjective values of the sheep versus the mining. If the gravel
mining produces £X more economic rent in total, aside from the
aesthetics, ask everyone the most they would be willing to pay to
keep the location in sheep. Any person whose stated value changes
the outcome would pay compensation for doing so, equal to the
negative effect on others. If the total willingness to pay is
greater than £X, the sheep would stay.
Atmosphere and Pollution
SF: How would LVT be applied to govern use of the
atmosphere and to combat global warming? Is LVT sufficient or do you
see some other mechanism being necessary?
AH: The cutting edge of Georgist economics is the
blending of the new field of ecological economics to fully cost the
commons. The mechanism to capture rent, set pollution fees or define
environmentally sane land use policy would vary depending upon the
specific common heritage domain – surface land, water,
minerals, spectrum, etc. In some cases the "highest and best"
use might very well be "no use." Overall, an "integrated
green tax shift" would "tax bads, not goods."
Regarding use of the atmosphere, most Georgists would advocate
direct pollution taxes rather than carbon-trading which would create
a market for pollution "rights" and administration of
which would assuredly be riddled with special privileges and
corruption. Polluters refusing to pay-up their pollution taxes would
risk having their companies shut down. But taxation has to be set at
a sufficiently high rate to incentivize pollution reduction.
Cities
SF: I also worry about pressure from LVT to
improve property would result in denser developments in urban and
suburban areas. This might be helpful for reducing suburban sprawl
(which you have lots of in the USA), but in high value areas isn't
there a danger it would result in "town cramming" (which
is more of a problem in a small country like England) involving
excessive infill, the disappearance of gardens and the replacement
of human-scale housing by high rise flats? What is to stop urban
development becoming too dense?
AH: "Too dense" means that people would
not want to live there and so they would go elsewhere. They would
have other pleasant options for living space and they would have the
purchasing capacity to choose them. Thus, nowhere would be "too
dense". The problem of "too dense" is a
manisfestation of the current unjust land tenure and tax system.
Here is Henry George's vision of how it would work, (and note that
detailed studies of this policy where it has been even partially
implemented show that the facts correspond to his vision):
"The destruction of speculative land value would tend to
diffuse population where it is too dense and to concentrate it where
it is too sparse; to substitute for the tenement houses, homes
surrounded by gardens, and to fully settle agricultural districts
before people were driven far from neighbours to look for land. The
people of the cities would thus get more of the fresh air and
sunshine of the country, the people of the country more of the
economies and social life of the city."
SF: I don't understand how LVT would promote
houses with gardens. Surely owners of small plats of green land in
cities would be under pressure from the land tax to build on them.
How do you find space for low value uses like local urban food
production?
AH: Even without zoning, land value tax harnesses
positive incentives. For example, if the city had no parks or green
space for recreation, people would likely move to more pleasant
cities. The parkless, greenless city, with lower land rent being
generated for public purposes would soon find a way to increase
green space.
As for urban agriculture, a pure resource rent system, without
zoning or planning restrictions would probably not yield bushels of
tomatoes grown on lots in the centre of the city. But if a community
wanted to grow tomatoes in an area of high land value, they should
be entitled to make that choice. So we are back to democratic
participatory zoning and planning for this one.
Keep in mind that the land records, transparently available on
websites, would show that the lot zoned for tomato growing is only
yielding a tiny percentage of the potential land rent that the
community could otherwise collect LVT to pay for public education,
healthcare and other public needs. The community might at some point
change its mind, in which case urban agriculture could do one of two
things – move out a bit towards the edge of the urban area,
maybe converting some suburban house lots to micro-farms and/or move
up to the rooftops.
This common sense approach would be possible because the resource
rent for public revenue system would be transparent and easy to
understand with all the information posted on free access websites.
Backroom rent-seeking dealings of politicans and land speculators
would cease to exist, public officials would increasingly serve the
people because the people would have gained the power of economic
democracy; the power-mongering of the super rich, who have gained
the upper hand via massive privatized rent and other unearned
income, would decline as a consequence.
