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.
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ABOUT THE AUTHOR
Alanna Hartzok is the author of The Earth Belongs to Everyone and co-director of the US based Earth Rights Institute, a civil society organization working for economic justice, land rights, green tax shift, peaceful resolution of land and resource conflicts, and ecovillage development.
In 1993 she initiated tax reform legislation and worked with state Senator Terry Punt and his staff to guide it through Pennsylvania legislative hearings to nearly unanimous passage of Senate Bill 211, signed by Governor Thomas Ridge as Act 108 in November of 1998. In 2001 she ran for Congress on the Green Party ticket.
Her published articles on tax reform are used by legislators in the states of Pennsylvania, Maryland, New Jersey and New York. Her articles are referenced in the literature of the Association of Bay Area Governments (ABAG) in California, a recent issue of the Federal Reserve Bank of St. Louis Review, Dialogues, a publication of the Canada West Foundation, and in several books, including the Worldwatch Institute book by David Roodman, The Natural Wealth of Nations: Harnessing the Market for the Environment and Creating a Sustainable World: Past Experience & Future Struggles, an anthology edited by Trent Schroyher and Tom Golodik. She is one of several people featured in
Planet Champions: Adventures in Saving the World, authored by Jack Yost.
Alanna is a United Nations Economic and Social Council (ECOSOC) NGO Representative for the International Union for Land Value Taxation based in London. She invites you to register for her online course – Land Rights and Land Value Capture. Course modules include: Land Rights and Poverty, Land Prices and the Law of Rent, Land Value Capture, Economics of War and Peace, and Policy Implementation. You will receive an attractive paper certificate upon completion of the course and thereafter you will be eligible to partner with Earth Rights Institute on policy research and implementation projects for your city/country. There are currently more than 600 people enrolled from 90 countries. The registration form can be found at the course website.
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