The Land Use Impact and Revenue-Raising Potential
of Site Value Taxation, with Reference to Australia
[Reprinted from a reformatted and repaginated version
prepared by the author, 2000 / Part 1 of 2]
Economists have been debating land value taxation ever since the
Physiocrats proposed the impot unique at the very birth of their
discipline over two centuries ago - and they are still deeply divided
over its effects and significance. The Australian states have been
implementing a variety of land value taxes for a century, and so
furnish some of the best opportunities for resolving the economists'
disagreements empirically. However, before examining the evidence on
the ground we must first attempt to untangle the obstructing thicket
of theory which they have woven.
The four leading questions asked about land value taxation (LVT) have
- Would it promote efficiency in land use?
- Would it promote equity in the distribution of income and
- Would it raise significant revenue?
- Would it promote growth, full employment and stability?
The concensus amongst economists today is to affirm the first two,
deny the third, and remain agnostic about the fourth. But the
qualifications (even outright contradictions) hedging about the
affirmations are such as to give the impression that it is a fiscal
blunderbus best left in the policy cupboard.
The fourth question has been treated by the author in his
contributions to the first volume of The Sisyphus Syndrome. The other
three are the subject of this chapter.
Frustrated by the intellectual deadlock in the economics profession
over these questions, an American industrialist, who had stood for
Vice-President of the US in 1924 specifically to lift LVT out of the
cupboard, left a bequest which is used to fund a non-profit making
educational institute to explore land policy issues - the Lincoln
Institute of Land Policy, based in Cambridge, Massachusetts. In
September 1991 the Institute organised an International Conference on
Property Taxation and its interaction with Land Policy.
Amongst the papers presented were two on "current data on land
taxation", one by Wallace Oates and Robert Schwab of the
University of Maryland, dealing with Pittsburgh, USA, and one by
Kenneth Lusht of the College of Business Administration, Pennsylvania
State University, covering Melbourne, Australia. Both papers began
by summarising the theoretical state of play on the impact of LVT. The
inconsistencies which emerge between the two treatments - and with
other economists whom they do not cite - provide an entry into this
The question of efficiency: the incentive effect
A tax in proportion to the annual (rental) value of land, or to its
capital (sale) value, has generally been recognised as avoiding
distortion of markets, unlike many taxes. Thus, Dick Netzer wrote in
1966 for the Brookings Institute, in The Economics of the Property
Location rents constitute a surplus, and taxing them will
not reduce the supply of sites offered; instead, the site value tax
will be entirely neutral with regard to landowners' decisions, since
no possible response to the tax can improve the situation, assuming
that landowners have been making maximum use of their sites prior to
imposition of the tax (quoted in Oates and Schwab, p.614).
It follows that substituting a tax on location rents for a tax which
does reduce the use landowners make of their sites removes distortions
in the economy. For example, replacing an ad valorem tax on buildings
(as contained in most real property taxes), which discourages the
supply of buildings, with one purely on land values, constitutes a
change that "will result in a higher level of improvements to the
land (e.g., a higher capital-land ratio). We will refer to this as the
capital-intensity effect," write Oates and Schwab.
Turning to Lusht's paper, there is a reference to an "incentive
effect of the use of the site value tax" due to the accompanying
removal of a selective tax on a particular product (i.e., buildings):
"The reduction in the tax on improvements shifts the supply curve
by an amount equal to the tax reduction (Bourassa, 1987) decreasing
price and increasing supply" (Lusht, p.519).
The presence of an incentive effect is intuitively appealing. It
results from the removal of the economists' "excise effect"
which produces a "deadweight loss" to society when a
discriminatory tax is applied to a product (see Figure 1 - a).
Enthusiasts for a shift of real property taxes to site value taxes
stand by the slogan "untaxing buildings promotes building".
But some professors of economics have noted that buildings are a
special case of the simple excise tax analysis.The supply of buildings
is relatively inelastic - totally inelastic in the short term, by
definition. This means that the supply curve in the short term is
vertical and cannot shift. The construction industry has no power to
raise prices for buildings by taking existing buildings out of use. An
annual ad valorem tax imposed upon buildings cannot be shifted to
customers immediately. So the prospective owners of buildings cannot
offer as much for buildings with the tax as without it. The
construction industry would have to cut back production for many years
before an overall shortage forced up the market price of buildings
significantly. Does this mean that it has to bear the whole of the
tax, reduce output, and await the natural growth of demand?
Fortunately for builders there is a factor of production which is so
specialised in supplying inputs to builders that it usually has very
little exchange value without them. That factor is land. The supply of
land is even more inelastic than the supply of buildings - even in the
long run its stock cannot be reduced. So in the event of a tax related
to building prices, all builders have to do to maintain the profits
they require to keep them in business is bid less for building sites.
They all face the same proportionate tax on their output; none of the
firms is enabled by the tax to reduce its bid by a lesser proportion
than its competitors without loosing customers. Landowners cannot take
their sites to other markets where comparable prices are paid for uses
not mediated by buildings or improvements of one sort or another. So
they must accept the level of bids offered. The market prices of
building sites fall by the capitalised amounts of the taxes the
improvements are expected to incur over their lifetimes.
Professor Raymond Richman of the University of Pittsburgh caused a
stir when he elucidated such matters, in a conference on fiscal policy
and land values in 1970 sponsored by the Committee on Taxation,
Resources and Economic Development (TRED). Noting that capital
improvements to land are not totally elastic in supply, he concluded:
"If this is true, the bulk of the burden of a tax on
improvements, that is, the tax on capital, must be borne by the
landowner and is capitalised." 
The main cause for concern was his deduction from this fact:
capitalisation of the buildings tax into lower land values means that
lower interest costs on the purchase price of land counterbalance the
effect of the tax on builders' profits, so the rate of development is
unaffected. Only in marginal areas where land prices are too low to
absorb the full weight of the tax is development reduced.
At TRED's previous annual conference, Professor Mason Gaffney, now at
the University of California (Riverside), presented a paper which
included a lengthy explanation of why "all property taxes come
out of land rent."  He went even further and suggested that
taxes on buildings reduce annual land rent by more than the annual
amount of the tax (p.191), other things being equal. But unlike
Richman, Gaffney did not conclude that removal of the buildings tax
has little effect on the rate of development; he went on to list at
length (pp.192-206) the disincentive effects associated with taxing
buildings. He argued that the removal of these mean additional upward
pressures on land rents as the buildings taxes are removed.Econometric
models  and empirical studies (see Lusht's below) have provided
support for this view of the effect on land prices.
Gaffney's reasoning on the effects of the removal of buildings tax
will be examined below. Meanwhile, Stephen Bourassa, postdoctoral
fellow in the Urban Research Unit of the Australian National
University, who was cited by Lusht in connection with the simplistic
excise tax interpretation of the buildings tax, must be pursued on
this point. In a sequel to the article cited, Bourassa provided a
review of the theory of the impact of the land tax and mentioned two "incentive
effects" resulting from the presumed accompanying buildings tax
The global effect is a reduction in the real rate of
return to capital by the average property tax [footnote:
reproducible capital tax, not land tax] rate.... [T]he excise
effect, which depends on geographical variations in tax rates, with
low tax communities having a lower cost of capital than high tax
jurisdictions. Given the assumption of highly mobile capital, it is
reasonable to expect that changes in tax rates will result in flows
of capital from jurisdictions with high rates to those with low
Both of these incentive effects appear vulnerable to the Richman
critique above. Capitalisation of the buildings tax into lower land
values should protect real rates of return on reproducible capital.
The average property tax rate across all jurisdictions reduces average
land values. Local tax differences carve out local undulations in land
values. Bourassa nevertheless claimed that his study of the data for
Pittsburgh in the years 1978-1984 unearthed significant incentive
effects. We shall return to this claim below.
Efficiency: the liquidity effects
(1) the timing effect
In their "overview" of land taxation theory, Oates and
Schwab move on to "a second effect that is less widely
In two important papers, Brian Bentick (1979) and David Mills (1981)
have shown that in an intertemporal context LVT clearly is
non-neutral. While the taxation of land rents retains the property of
neutrality [because it lowers the net return at each point in time
proportionately], the taxation of land value [i.e., capital value,
anticipating future rents] changes the comparative returns of land-use
projects with differing time horizons. In particular, LVT favors
projects that yield their returns sooner ... it encourages the earlier
development of unused parcels. We shall call this the timing effect.
LVT...taxes future returns in advance of their receipt. It makes it
relatively more expensive to hold land idle in anticipation of future
returns. As Mills (1981) shows, a development project, in order to be
profitable, must promise a rate of return in excess of the market
interest rate - but in the presence of LVT, it must, in order to pass
muster, offer a prospective return that exceeds the sum of the rate of
interest and the rate of taxation of land values.
LVT ... is a distortionary form of taxation (p.615).
It seems that Richman saw through this effect, too. As with
capitalisation of the tax on improvements, capitalisation of the tax
on land means that the developer pays less land price, hence lower
interest charges on loans for land purchase (or foregone interest on
own money), and more taxes, in equal amounts.The annual amount of the
land value tax simply substitutes for the annual amount of the lower
interest costs (see Appendix 1).
Gaffney confirmed this position: "It is widely believed that
they [land taxes] speed up ripening [of land for development], but the
belief has been wrongly rationalised. It rests mostly on assuming that
land taxes are piled on top of interest costs of holding land. But
land taxes are capitalised into lower values, and thereby supplant
interest costs rather than supplement them." 
Land value is the net present value (NPV) of the optimal development
project after all future taxes and developer's necessary profit and
other costs are taken into account. It is the NPV of the project's
expected flow of future revenue surpluses over costs. It is the
price that the developer of the optimal project must bid to secure
land in a competitive market. The developer's target profit is a cost
of production to be paid out at the completion of the project. Tax
liabilities while holding land are also a cost. Expected revenue is
reduced by anticipation of land value tax liabilities on the part of
the developer's customers. Thus, anticipated land value taxes reduce
the NPVs of projects and the price that developers are able to bid for
land. They do not reduce the anticipated profitability of the projects
themselves. In the presence of LVT, "to pass muster" a
project does not have to promise a rate of return in excess of the
market rate of interest to secure the developer's target profit.
Instead, it is enabled to bid less for land by the fact that the NPVs
of all competing projects are equally affected.
It makes no difference to the essence of the "timing effect"
theory whether the tax reflects currently realisable rents or future
rental values. Either, according to Mills' erroneous logic, would
raise the required rate of return that the project would need to
achieve, though the latter would do so more. Either would make it
relatively more expensive to hold land wherever higher development
possibilities are anticipated, though the latter would do so more. The
continuum of "highest and best use" land rents (the basis of
land rent taxation) rises above existing use land rents well in
advance of redevelopment for a higher and better use (see Appendix 2).
The "timing effect" argument appears to have two
unconnected strands tied together: a pull effect and a push effect.The
supposed pull effect, or attraction, of earlier yielding developments
depends on the rate of LVT supplementing rather than supplanting the
investor's interest rate. The push effect involves a reduction in the
capacity of landowners to hold out until investments have borne fruit.
Bentick wrote that "a tax on market value causes taxes to be
levied ahead in time of the returns on which the tax is based,
creating a liquidity problem which cannot be solved by a perfect
capital market." 
While it is true that taxing capital gains in land as they accrue
causes a liquidity problem, it is not true that such a tax is "levied
ahead in time of the returns on which such a tax is based."
Capital gains form part of the total rate of return (the other part
being annual income) as they accrue, not when they are eventually
realised on sale (see Appendix 1; also Gaffney's 1970 paper,
pp.183-187). Each year the capital gain accrual can be cashed in by
sale of the land at market value. But even if that occurs in order to
realise cash to pay a land value tax, that does not mean that
development is hastened. For whoever owns the land will still find
that the annual accrual of the NPV of the optimal development project
from one year to the next (plus any existing use rent) still outweighs
the annual return on land value that can be gained from the current
optimal development; in other words, postponing development yields a
higher return than does precipitating it (see Appendix 1). Developing
prematurely lowers the market value of the site, given that the market
anticipates development at maturity, and thus adds capital devaluation
to lower income yield. Any existing land value tax regime cannot alter
Given the apparently baseless claims for the "timing effect"
of a steady or even increasing tax on land values, it is curious that
Oates and Schwab should find the results of their preliminary
empirical tests of the theory "encouraging: new building activity
clearly picked up following the striking rise in land taxation in the
city of Pittsburgh - and this increase in new building permits is not
to be found in other cities in the region.... The results are in a
sense, too good: it is difficult to believe that city property tax
reform should by itself produce such dramatic results" (p.619).
Adding to that difficulty is the fact that their theory is not that
the tax on land per se may have contributed to the increased activity,
but that only that part of the tax on land values which distinguishes
it from a tax on land rents contributed. They even stress that
whatever incentive effects may flow from the removal of buildings
taxes are ruled out in the case of Pittsburgh, for the situation in
the period studied (1960-1989) was one divided by a sudden doubling
around 1980 of the overall nominal rate of tax on land values (from
about 1% to about 2%) accompanied by a slight increase in the rate of
tax on structures (from about .07% to about .09%). "The tax rate
on structures was not reduced - so what we are examining is a case of
a dramatic increase in the rate of taxation of land in the city"
These facts make even more curious Bourassa's claim, mentioned in the
previous section, that his empirical "results for Pittsburgh
indicated a significant incentive effect, but no liquidity effect"
(p.107). In other words, he found that the non-existent reduction of
the tax on structures is influential, while Oates and Schwab found
encouraging preliminary support for the timing effect - a liquidity
effect - of the increase in the tax on land values - and each denied
the conclusion of the other.
(2) The Cash drain effect
We have not finished with the "liquidity effect". In
Lusht's "summary of theory" (and Bourassa "review of
economic theory") the "liquidity effect" encompasses
the "timing effect", but extends beyond it:
Assuming the supply of land to be inelastic, the supply
cannot be changed in response to increased changes in the tax
burden, and the tax cannot be shifted. Faced with an increased cost
of holding developed sites, owners are encouraged to develop
This is the timing effect, and therefore ignores tax capitalisation.
If interest foregone on developed sites falls by the same amount as
the tax increase, there is no increased holding cost. The statement
also has a second aspect: it refers to a transition phase to higher
LVT rates rather than a steady state. But again there is no reason
why, in a perfect market with economically rational behaviour, the
transition period should spur site development any more than other
periods, despite the capital losses to landowners. It would not be to
land developers' advantage to buy land in a falling market, for there
would be no related increase in the profitability of building to
override the losses in capital value.
Ironically, the extension beyond the "timing effect"
depends upon tax capitalisation. In Lusht's words (p.519):
As the tax rate increases, the value of land decreases.
In turn, lower land values encourage liquidity and development
Bourassa's statement of the same point indeed furnishes a quote from
The benefit would be the equivalent of an automatic
perpetual loan to the developer for purposes of land acquisition in
the amount of the capitalized value of the land tax.
But to the extent that increased holding costs are illusory, so must
decreased acquisition costs be illusory. If capital markets are
perfect it makes no difference whether acquisition costs are borne in
terms of annual land value tax bills, annual interest charges on loans
for land purchase, or interest foregone on own money used for land
purchase. Each is an opportunity cost of land ownership.
Only the title given to this group of effects -- "liquidity"
-- provides a cluue as to why a tax on land values might be expected
to stimulate development. There is an important difference between the
three types of carrying cost of land which none of the authorities so
far cited mention, other than Gaffney. Although the three costs are "economically
equivalent", only two involve actual cash flow, and only one
involves taxes. Gaffney has observed:
A common misuse of theory is the notion that people
react to opportunity cost [alternatives foregone] as alacritously as
to cash costs, because that is what "rational" people "should"
do. This belief is a severe case of doctrine overriding
observation.... A cash drain is what attracts the attention of any
seller and moves him. 
A cash drain to the taxman is something to be avoided most of all!
Gaffney observed that the motivated seller of surplus land is someone
"subject to debt and/or property taxes." In his 1973 paper,
If money talks, the tax dollar outtalks the interest
dollar, at least the dollar of foregone interest on equity, which
speaks in a whisper.... According to the portion of tax theory that
looks at marginal incentives and ignores the wealth and liquidity
effects of taxes, land taxes are simply neutral, and in an important
sense that is true.... In practice they accelerate renewal because
they drain cash from holdouts waiting for high bids from
builders.... The effect of a cash drain on a holdout far outweighs
the effect of foregone interest on equity because the cash drain
lowers his wealth and liquidity. The cash drain of land taxes also
conveys information to many owners who are only vaguely aware that
they are holding a resource of high salvage value to society. Land
taxes build a fire under sleeping owners (p.133, italics added).
Equity ownership of surplus land is like ownership of Premium Bonds
in the UK. They may not bring in any income, not even to stave off the
ravishes of inflation - but there is always the chance of hitting the
jackpot. The success of lotteries shows that it is natural to forego
income regularly for just that chance. But there must be a limit to
the cash haemorrhage -- especially to the taxman -- that owners of
land surplus to requirements will put up with.
More generally, equity ownership is a licence to behave as an
economically irrational person: to hold on to vacant land well beyond
its ripe-for-development date, for example. Gambling spirit, inertia,
ignorance and incompetence mean that much land is well past its
optimal redevelopment date. Society is already suffering loss, and
there are customers queuing up to put those sites to use. It only
requires the introduction, or an increase, of taxation on land values
tax to flush them onto the market. After the first flush, the flow
should steady - but remain higher than before.
Land value or rent taxation of all landowners transfers the financial
equity in land to the public sector. This is the "weath effect"
that Gaffney referred to. So long as the stewardship of the financial
equity transferred to the public sector does not produce decisions as
economically irrational, from both private and social viewpoints, as
those produced by erstwhile private, and to a large degree land-sated,
stewards, then the economy will function more efficiently.
Economically destructive forms of taxation will be reduced, and
sub-optimal land uses will be replaced.
The cash drain effect of LVT is purely to stimulate development which
would otherwise be impeded or delayed by economically irrational
decisions or imperfect markets. This does not mean that LVT is "distortionary"
and only has the secondary virtue of distorting in the opposite
direction to other distortions, tending to iron them out, as Oates and
Schwab suggest (pp.620-621). Where it is efficient to reap cash rents
- that is to develop - the cash drain will make the reaping necessary
to conserve the landowner's other assets. Where it is not efficient to
reap cash rents, the cash drain will not encourage developers to buy
land for development. Undeveloped land will remain in the hands of
owners who have sufficient liquidity to take advantage of the
competitive investment opportunities, partly secured by land value tax
payments, offered by market value gains as sites ripen for
In the absence of LVT those investment opportunities would be the
same, only the source of funds would be different. Rents foregone on
alternative uses of the sites would be the effective source, rather
than cash from sources of income unrelated to sites. For the
reasons stated above, the cash investments would have a higher chance
of being economically rational. They would also be a component of a
more equitable society, which in turn would be a more economically
(3) The redistribution effect
One aspect of LVT not mentioned in the theoretical overviews is its
progressive nature. It is important that land taxes reduce land
prices, because capital markets are not perfect and credit is rationed
to those with greater credit-worthiness - the rich. So the rich have
an unfair advantage in purchasing the fixed quantity of land. LVT
reduces this advantage.
We have noted that in the absence of LVT rents foregone on
alternative uses of ripening sites are effectively reinvested in
additional capital gains from those sites. The wealth of those
investors feeds itself. However, LVT requires that capital gains from
vacant sites be "purchased" with cash, either from current
income from labour or capital, or by liquidation of other assets.The
sites themselves cease to provide the income invested.
The progressive effect of LVT is therefore compounded. Not only do
the rich have less preferential access to land, but the land itself
produces less private income for those who own it. A positive feedback
circuit which polarises society in terms of income and wealth is
The mechanics that initiate the vicious circle were termed by Mason
Gaffney "differential capitalisation":
Interest rates vary among people. They are regressive --
the poor pay more. Land taxes, assuming true assessment, are not
regressive. Substituting taxes for interest therefore undoes the
effect of regressive interest rates. It hits the rich owner harder
than the poor ... increases the bidding power of the poor for land,
causing them to encroach on lands held by the rich (1973, p.131).
As with the cash-drain effect, this has the effect of removing
distortions in the market which delay development and cause
sub-optimal intensity of land use. The effect is not uniform, but
subtly dependent upon place. Enthusiasts for LVT claim that it "forces
land into use" and thus physically intensifies land use (apart
from where, as a consequence, it relieves demand pressure towards the
external margins of land uses). But Gaffney pointed out that the
effect is not a simple plus or minus. The effect is equalizing as
among classes. Land taxes let the poor, who live crowded on poor land,
live less crowded and move to better land. They lower density for the
poor by raising it for the rich, who own most of the land (1973,
As a rule, both the physical and the economic intensity of land uses
are higher in poorer than in richer areas. But the overall effect of
equalization alone is unpredictable. If the increase in LVT revenue is
at the expense of revenue from taxes on buildings, however, the
overall effect should be higher physical intensity, due to removal of
delays in redeveloping (see Figure 6).
Efficiency: the incentive effect re-visited
Despite capitalisation of taxes on building values into lower land
values, there is still theoretical room for the operation of
disincentive effects, hence incentive effects from switching to direct
taxation of land values.
As with the effects of LVT, the effects of taxes on construction are
more subtle than appear at first sight. They are dependent on time and
place. Appendix 2 presents the necessary background for understanding
them. It shows that the primary effect of buildings taxes is to delay
the replacement of buildings, both as they wear out physically and as
they become obsolete economically. The latter point is specified in
the appendix, but the former also deserves elaboration.
A tax on building value delays replacement of an existing improvement
in the same land use category as before. With the market value and
optimal-use value of the site both rising at the same rate, as the
economy grows, challenger and defender buildings will be battling it
out in terms of the annual land rent they can provide. A fully
depreciated existing building will cease to earn income sufficient to
cover even the rental value of the land, and gradually the existing
use land rent will decline. The optimal building for the site,
meanwhile, will continue to offer a rising land rent to the site
owner. A tax that bears proportionately on land rents does not change
the competitive situation (unlike in the special case discussed in
footnote 12). However, a tax on structures bears down on land rent
maximally with the optimal building and not at all with the valueless
building, with the result depicted in Figure 7. Renewal of the
structure on the land is delayed for many years, production equal to
the value of the squandered land rents is aborted, and revenue that
the government might have raised by taxing land rents instead of
buildings is lost.
Builders may not be concerned about the buildings tax if it lowers
what they must bid for building sites -- but landowners are. They are
aware that de-intensification of land use targets, both physically and
economically, may raise bids simply by reducing the taxes on
construction values more than the project surpluses which enable the
bids. Builders will therefore have to adjust the physical capital
content of their projects downwards to pass muster. Referring to
figure 6 in Appendix 2, it is apparent that the potential for
reduction of taxes on buildings relative to revenues is greatest at
the external margins of land use bands, where construction costs are
highest in proportion to property values. The overall effect will
therefore be to lessen the slope of land values, and reduce the delays
of redevelopment dates. In aggregate, the physical intensity of land
use will be reduced by a mixture of two alternative means -- larger
gaps in the land use pattern or lower intensity of use between the
Thus the response to a tax on capital is to substitute land for
capital, and knock out marginal uses.
Ironically, an implication of attempts to brand LVT as encouraging
quick pay-off developments is the need to retain building taxes
instead. Apart from delaying development, these encourage quick
pay-off choices where development does occur. Acting like higher
mortgage interest rates, less durable buildings are built because
future returns do not enable present high interest rates to be paid.
The question of equity
Considerations of equity are intimately bound up with considerations
of efficiency, so we have already explored the main equity issues as
we have attempted to unravel the efficiency implications of land value
It has become apparent that part of the effect of LVT is to prise
land from the hands of the relatively wealthy. We have called this the
"redistribution effect". Another effect of LVT is to shift
sites into the hands of those with sufficient liquidity to handle with
the "cash drain effect". The latter influence appears at
first sight to be at odds with the former, and accounts for the irony
that LVT is commonly thought to be regressive. However, the fact that
many landowners hold most of their wealth in the form of illiquid land
does not make them any less wealthy; only less able to find the cash
to pay taxes if they choose to consume the rental income from their
wealth in the form of owner-occupied living space, or to invest it in
the form of vacant sites.
Both difficulties for landowners are soluble. In the first case, the
owner may move to a lower value rented accommodation and let his or
her own property. The land value tax would then be paid out of cash
income, as would be the accommodation rent. The individual would be no
less wealthy; he or she would simply be paying the same taxes as
others who own equally valuable land. In the second case, footnote 12
suggests that an interim land use should usually solve the cash flow
problem. If that is impossible, perhaps due to planning law, then
premature development is the individual's short run solution. As this
harms both society and the individual owner in the long run, agreement
over interim solutions is probable.
These special cases should not be allowed to distract from the larger
picture, which is that the proportion of land value in real property
assets tends to be proportional to the wealth of the owner, and the
proportion of real property assets per se in wealth tends to be
proportional to the wealth of the owner. The relatively poor live in
-- may even own -- houses the value of which is mainly in the
buildings; the relatively rich occupy mainly land value. A tax on
buildings is therefore regressive, and a tax on land value progressive
- at its introduction and after.
This wider picture is confirmed by the evidence of choices that have
actually been made wherever communities have been given the chance to
choose directly between property taxes based on land values and those
based on building values. Australia and New Zealand both inherited the
British rating system which taxed the imputed rental value of occupied
properties, and hence the existing use value of buildings and land.
However, many parts of those countries enacted legislation from the
1880s onwards to allow ratepayers to change the basis of rating on a
majority vote. In New Zealand 80% of local authorities had changed
over to rating of land values by 1985; in Australia 65% had done so by
1976. In Melbourne, Australia, half of the 56 local government areas
were rating site values by 1989, 70 years after the option had been
introduced. Approximately 25 attempted changes have been defeated by
petition and popular vote, but most of these have been attempts to
change back .
Robert Hargreaves of Massey University, New Zealand, noted in a paper
for the 1991 Lincoln Institute conference that "the popularity of
the land value system in New Zealand can be attributed to the fact
that it tends to favour residential ratepayers...[hence] the majority
of taxpayers." In the residential sector the ratio of land value
to improvements value is lower than the average for all sectors, so
the sector as a whole benefits from a revenue neutral shift to land
value rating. Moreover, most homeowners within the sector probably
benefit more than the average homeowner.
Kenneth Lusht noted somewhat disparagingly about property tax changes
in Melbourne that "the pre-vote debates have been highly
emotional, with emphasis on the relative 'fairness' of the taxing
systems rather than their developmental impacts" (p.527) Such an
attitude is understandable given the purpose of his study, and his
frustration that because existing study of land use patterns in
Melbourne had been conducted mainly by land tax enthusiasts, it "consistently
(and predictably) supports the notion that site value tax stimulates
development, the tone tends to be exhortatorial and the quality of the
methodology at best uneven" (p.521). However, it overlooks the
possibility that "fairness" is itself a factor affecting
development patterns, and suggests a lack of awareness of the larger
issues that were responsible for the introduction of LVT in the first
place - in Melbourne, in Australia as a whole, and indeed in many
places around the world around the turn of the twentieth century.
The original settlement of Australia was mainly a mercantilist
project; the establishment by Britain of self-supporting naval bases
to safeguard its commercial interests in the Pacific. The dumping of
convicts was an ancilliary activity. The interior of the continent was
of no relevance to this enterprise, which displayed, in the words of
Dr J.F.N. Murray, an Australian valuer of global reputation, "an
almost complete disregard of the value and potentialities of land, and
of the fundamental principles applicable to its allocation and use."
 Theories of uniform price, and grants of free land, led to
sporadic settlement, with settlers fanning out to select the areas
most suited to immediate use as opposed to long term development.
This was the veritable apogee of the "timing effect": areas
would be selected "for their immediate response to a minimum
application of labour and capital."  And it was the result of
a diametrically opposite policy to allocating land on the basis of
cash payments related to its long term value. The only notional
qualification for the receipt of land was the possession of sufficient
capital to use it. All grants in the early nineteenth century carried
a quit rent determined by area, not by quality. Later, land came to be
sold at a uniform price of one pound per acre, and then with uniform
minimum prices at auction."[T]he uniform price led those with
speculative tendencies, or who possessed special information, to pit
their knowledge or estimates of the future trends of the market prices
for land, against those bidders who were concerned only with the
probable future incomes to be derived from farming ... [aided] by the
exceptional facilities for obtaining credit which were available."
Edward Gibbon Wakefield's infamous land settlement scheme of the
second quarter of the nineteenth century completely overlooked the
possibility that the land of Australia might not be of uniform
character. He relied on setting a price per acre for land release --
uniform within each colony -- which was sufficient to prevent
labourers from obtaining land too soon, and thus reducing the supply
of labour at low wage rates, but not too high to prevent them from
purchasing within a reasonable time, thus filling the public coffers,
funding further immigration, and providing a demand for labour.
The combination of earlier land grant and later land famine policies
produced the "squatter" problem of the second half of the
nineteenth century. The original "squatters" overran Crown
lands outside the areas granted or offered for sale, were then
converted into nominal fee-paying licencees or tenants by a pragmatic
government, and finally offered their holdings at one pound an acre --
the outer areas of which they did not buy but became the de facto
owners of anyway. Along with purchasers and grantees they were
occupying for pastoral purposes huge areas of land which included the
"eyes" of the country (its waterholes) and much of the most
fertile land. Latecomers to the colonies were forced to accept an
urbanised future, "shut out of their rightful patrimony"
(Peter Burroughs ).
This was the setting for the birth of land value taxation in
Australia: a bitter realization of injustice on the part of the urban
masses. As early as 1854 the Melbourne Argus began a campaign
demanding that the government "unlock the land" and impose a
land tax. Public policy was also set on fostering an agricultural
industry, which required closer settlement.
After 1860 the governments of the colonies were faced with another
problem that made land taxation look tempting: "revenue from the
sale and rental of land had been diminishing as the areas of
unalienated useful land decreased.... In 1877 the Victorian Parliament
enacted a provision for the imposition of a tax on pastoral land to
vary with the capacity of the land to carry sheep." This was
the forerunner of the State land taxes. By 1915 every State in
Australia was levying an annual tax on the "unimproved value"
LVT was thus originally introduced throughout Australia because it
was popularly thought to be effective in promoting more efficient and
equitable land use, and raising revenue.
In 1910 the Land Tax Assessment Act became law, introducing the first
direct tax to be levied by the federal government. "The objects
of the tax were stated to be the breaking up of big estates and
provision of funds for defence purposes." The former
objective was challenged unsuccessfully in the High Court in 1911. The
Federal land tax was abolished in 1952 as the result of a move to
secure sole authority to tax incomes to the Federal government. In
exchange the States claimed most of the revenues from unimproved
values that had been going to the Commonwealth through their own land
taxes. Both were levied at steeply progressive rates, and only on
properties above a high minimum unimproved value (5,000 pounds in the
case of the Federal tax, 1910-1952). That was deemed a necessary part
of the attack on big estates and the promotion of smallholdings and
home ownership. In reality, it undermined the aims of the taxes.