Land Value Tax (Georgism)

Most of this text is directly borrowed from Wikipedia’s entry about the topic.

A land value tax (or site valuation tax) is an ad valorem tax on the unimproved value of land that, unlike typical property taxes, disregards the value of buildings, personal property and other improvements.

Although the economic efficiency of a land value tax (LVT) has been established knowledge since Adam Smith,[1] it was perhaps most famously promoted by Henry George.  In his best selling work Progress and Poverty (1879), George argued that when the site or location value of land was improved by public works, its economic rent was the most logical source of public revenue.[2] A land value tax is also a progressive tax, in that more tax burden would fall on wealthy landowners than on the landless poor.[3] The philosophy that land rents extracted from nature should be captured by society and used to replace taxes is often known as Georgism.

Land value taxation is currently implemented throughout Denmark,[4] Estonia, Russia, Hong Kong, Singapore, and Taiwan. The tax has been applied in subregions of Australia (New South Wales), Mexico (Mexicali), and the United States (Pennsylvania). Land value taxation is known as site-value tax, LVT, split rate tax, and site-value rating.

Economic effects

The value of land can be measured using two concepts:

  • The sale price of land in fair exchange between an landowner who transfers ownership to a buyer. (This measurement is conditional on no LVT being applied, because when it does apply, the price is affected.)
  • The land value of the site is also directly related to its demandable ground-rent, which is its potential for use in either production or residential capacities. The capitalization of this rent gives the land value too. Land which is not useful has no value as explained by British economist David Ricardo in 1816.

Efficiency

A supply and demand diagram showing the effects of land value taxation. If the supply of land is fixed, the burden of the tax will fall entirely on the land owner, with no deadweight loss.

Most taxes distort economic decisions.[5] LVT is payable regardless of whether or how well the land is actually used. Because the supply of land is inelastic, land rents depend on what tenants are prepared to pay, rather than on the expenses of landlords, and so LVT cannot be directly passed on to tenants.[6] The direct beneficiaries of incremental improvements to the surrounding neighborhood by others would be the land’s occupants, and absentee landlords would benefit only by virtue of price competition amongst present and prospective tenants for those incremental benefits; the only direct effect of LVT on prices in this case is to lower the unearned increment (reduce the amount of the socially generated benefit that is privately captured as an increase in the market price of the land). Put another way, LVT is often said to be justified for economic reasons because if it is implemented properly, it will not deter production, distort market mechanisms or otherwise create deadweight losses the way other taxes do.[7] Nobel Prize-winning Canadian economist William Vickrey believed that “removing almost all business taxes, including property taxes on improvements, excepting only taxes reflecting the marginal social cost of public services rendered to specific activities, and replacing them with taxes on site values, would substantially improve the economic efficiency.”[8] A correlation between the use of LVT at the expense of traditional property taxes and greater market efficiency is predicted by economic theory, and has been observed in practice.[9]

Proponents, such as American free-market economist Fred Foldvary, state that the necessity to pay the tax encourages landowners to develop vacant and underused land properly or to make way for others who will. They state that because LVT deters speculative land holding, dilapidated inner city areas are returned to productive use, reducing the pressure to build on undeveloped sites and so reducing urban sprawl.[10] For example, Harrisburg, Pennsylvania in the United States has taxed land at a rate six times that on improvements since 1975, and this policy has been credited by its long-time mayor Stephen R. Reed with reducing the number of vacant structures in downtown Harrisburg from around 4,200 in 1982 to fewer than 500. LVT is an ecotax because it ostensibly discourages the waste of locations, which are a finite natural resource.[11][12][13] Many urban planners claim that a land value tax is an effective method to promote transit-oriented development.[15][16] LVT is an efficient tax to collect due to the immobility of land. Unlike labour and capital, land cannot move to escape tax.[14]

Real estate bubbles

Real estate bubbles direct savings towards rent seeking activities rather than other investments, and can contribute to recessions which damage the entire economy. Advocates of the land tax claim that it reduces the speculative element in land pricing, thereby leaving more money for productive capital investment and making the economy more stable.[17]

If the value to landowners were reduced to zero or near zero by recovering effectively all its rent, total privately held asset values could decline as the land value element was stripped out, representing a shift in apparent private sector wealth. Since landowners often possess significant political influence, this has significantly deterred the adoption of land value taxes.[18]

Practical issues

There are several practical issues involved in the implementation of a land value tax. Most notably, it needs to be:

  1. Calculated fairly and accurately,
  2. High enough to raise sufficient revenue, but not too high causing land abandonment, and
  3. Billed to the correct person or business.

1. Assessments/Appraisals

In theory, levying a land value tax is straightforward, requiring only a valuation of the land and a register of the identities of the landholders. There is no need for the tax payers to deal with complicated forms or to give up personal information as with an income tax. Because land cannot be hidden, removed to a tax haven or concealed in an electronic data system,[19] the tax cannot be evaded.

However, critics point out that determining the value of land can be difficult in practice.  Austrian School economist Murray Rothbard objected stating that no government can fairly assess value, which can only be determined by a free market.[21] However, firstly, as Steven Spadijer has pointed out, free market businesses are already determining the value of land. For example, valuators in the home insurance industry are already performing such a function on a daily basis when, in order to calculate an insurance premium, the valuator must separate the value of the home from the indestructible value of the land beneath the home itself using market evidence from selling prices and rentals.

Where development already exists on a site, the value of the site can be discovered by various means, of which the most easily understood is the residual method: the value of the site is the total value of the property minus the depreciated value of buildings and other structures. The system involves no more fuss in the places where it has been implemented than ordinary real estate taxation. Secondly, when compared to modern day real estate tax evaluations, valuations of land involve fewer variables and have smoother gradients than valuations that include improvements. This is due to variation of building style, quality and size between lots. Modern computerization and statistical techniques have eased the process; in the 1960s and 1970s, multivariate regression analysis was introduced as a method of assessing land.[22]

Usually, the valuation process commences with a measurement of the most and least valuable land within the taxation area. A few sites of intermediate value are then identified and used as “landmark” values. Other values are filled in between the landmark values. The data is then collated on a database and linked to a unique property reference number,[23] “smoothed” and mapped using a geographic information system (GIS). Thus, even if the initial valuation is difficult, once the system is in use, successive valuations become easier.

(Compare to Real estate appraisal)

Limited revenue

In the context of land value taxation as a single tax (replacing all other taxes), some have argued that LVT alone cannot raise large enough revenues.[24] However, this is to ignore the fact that other taxes have the effect of reducing land values and hence the amount of revenue that can be raised from them. The Physiocrats argued that all taxes are ultimately at the expense of land rental values. Most modern LVT systems are alongside other taxes, and thus only reduce their impact without removing them completely.

In the above case, land is taxed at 100% of its rental value, eliminating the landowner surplus completely. Land tax revenues cannot be raised beyond this point without resulting in landowner abandonment and a sharp decline in tax revenue if there are no improvements on the land.[25]  A tax that is greater than the land value would then begin to fall upon the improvements on the land.

 Requires clear ownership

In some countries, LVT would be nearly impossible to implement because of lack of certainty regarding land titles and clearly established land ownership and tenure. For instance a parcel of grazing land may be communally owned by the inhabitants of a nearby village and administered by the village elders. In these situations, the land in question would need to be vested in a trust or similar body for taxation purposes. If the government cannot accurately define ownership boundaries and ascertain the owners, it cannot know from whom to collect the tax. The phenomenon of lack of clear titles is found worldwide in developing countries[26] and is in part the subject of the work of  Hernando de Soto. In African countries with imperfect land registration, boundaries may be poorly surveyed, the landlord can be elusive. Proponents of LVT argue that it will help produce clear land ownership because elusive landlords would lose ownership of the land if taxes are not paid.[27]

Incentives

As a model of how Land Value Taxation affects incentives, take for example a vacant lot in the center of a vibrant and growing city. Any landowner that must pay a tax for such a lot will perceive holding it vacant as a financial liability instead of an investment that passively rises in value.

A Land Value Tax does not increase the purchasing price of land. Tax incidence rests completely upon landlords.[citation needed] This is to say that landlords can not collectively raise the overall market price of land as a result of the tax.[citation needed]

Buyers will not pay for the anticipated appreciation of land since such appreciation is taxed away. From the seller’s perspective, land costs more to continuously maintain ownership of. Thus, Land Value Taxation gives buyers of unused/underused parcels in central locations increased leverage over sellers who would use it productively.

Similarly, the selling price of anything that is fixed in supply will not increase if it is taxed.[citation needed] Since there is, for all intents and purposes, a fixed supply of land, a land value tax is paid by the land owner.

Furthermore, unlike taxing goods that carry higher purchasing prices as a result of higher production costs, land does not increase in price when taxed. This is because land simply exists. It is not produced by individual land owners.

For these same reasons, a land value tax is also not passed on to tenants as higher rent.[citation needed] Landlords are impelled to make land available to tenants as a means of generating the funds required to pay the Land Value Tax. Relatively speaking, landlords compete with other landlords for tenants instead of tenants competing with each other for space.

Land Value Taxation creates an impetus to either use a site for an income generating purpose, such as apartments, store fronts, office space, etc. or to sell part or all of the site. Of course, anyone who purchases the land will be faced with the same incentive, which is to use it or lose it.

The Land Value Tax paid per surface area is high in locations with high land values, especially cities. In vibrant cities, under use of land in the form of buildings which are underused, short, or even derelict are generally speaking converted to more intensive uses. Of course vacant or ground-level parking lots are also generally converted to building space and parking structures.

Vacant Chicago LotCC Photo by Flickr User Greg Wass

In the above image, there are vast vacant lots near my former home in Chicago.  This land has very high value because of its location near expensive condos and skyscrapers in the background, but it sits vacant because of speculators who are waiting for its value to rise.  If Chicago taxes were based upon land value rather than real estate value, then this land would be used rather than hoarded.  The real estate tax on vacant lots it tiny because most of the value of nearby real estate (the condominimums and skyscrapers) is in the buildings rather than in the land.

A LVT gives more incentive to use land rather than hoarding it for speculation.  That would increase the supply of space for living, working, recreation, etc. Assuming constant demand, an increase in supply of constructed living space (a substitute for land), would decrease the rents for living space.

The LVT would replace taxes on buildings that are a large component of real estate tax.  Taxes on buildings restrict the supply of building space. A revenue neutral shift from buildings to land increases the supply of building space.

Taxing land reduces the incentive for tax evasion. Multi-national corporations for instance cannot take land with them overseas. Land values are considered public information unlike income, sales, etc. GIS maps provide a means to easily compare taxes paid on land values. Such transparency reduces landowners’ ability to evade the tax.

Ethics

In religious terms, it has been claimed that land is a common gift to all of mankind.[28] For example, the Roman Catholic Church as part of its Universal destination of goods principle asserts:

Everyone knows that the Fathers of the Church laid down the duty of the rich toward the poor in no uncertain terms. As St. Ambrose put it: “You are not making a gift of what is yours to the poor man, but you are giving him back what is his. You have been appropriating things that are meant to be for the common use of everyone. The earth belongs to everyone, not to the rich.”[29]

In addition, the Church maintains that political authority has the right and duty to regulate, including the right to tax, the legitimate exercise of the right to ownership for the sake of the common good.[30]

From a secular point of view, land acquires a scarcity value owing to the competing needs of the community for living, working and leisure space. According to proponents,[31] the unimproved value of land owes nothing to the individual efforts of the landowner and everything to the community at large. These supporters suggest that the value of land belongs justly and uniquely to the community.

Equity

A land value tax takes into account the effect on land value of location, or of improvements made to neighbouring land, such as proximity to roads, public works or a shopping complex. LVT is said to act as value capture tax.[32] A new public works project like a new park or subway station may make adjacent land go up considerably in value, and thus, with a tax on land values, the tax on adjacent land goes up. Thus, the new public improvements would be paid for by those most benefited by the new public improvements — those whose land value went up most.[33] Thus, a land value tax would tax socially created wealth, allowing a reduction in tax on privately created wealth.[34]

Additionally, a land value tax is also a progressive tax,[3][35] in that the tax burden is entirely based on land ownership, which is highly correlated to wealth,[36] and there is no means by which landlords can shift the tax burden onto tenants or laborers. Thus it would be paid for by those with a higher ability to pay, and reduce the tax burden of lower income families. Land value capture would reduce economic inequality, increase wages, remove incentives to misuse real estate, and reduce the vulnerability that economies face from credit and property bubbles.[37]

See also:

  • Land (economics).
  • Wikipedia’s entry on Land Value Tax from which this is borrowed also contains a history of the concept and many examples of implementation.
  • Wikipedia’s entry on Georgism lists numerous proponents like Milton Friedman and opponents like Karl Marx who viewed it as a way to preserve capitalism.  The biggest opponents are wealthy landowners who have the most to lose and tremendous power to influence politics.  Richard Ely sympathized with landowners in arguing that although it is the most efficient tax, it wouldn’t be fair to penalize landowners simply for owning land.  Two potential solutions would be to announce a future policy now so that markets have time to adjust gradually or to compensate landowners for their loss by paying them cash which they could reinvest in forms of capital that can be created like improvements to their land.

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