Land Value Taxation
URL = International Union for Land Value Taxation: http://www.interunion.org.uk
"It is estimated that approximately 93% of taxes collected worldwide fall on labor and economic production. Removing the tax burden on all forms of labor and productive activity can greatly enhance private sector enterprise, especially small business. Freed from taxation, workers get increased purchasing capacity and investors more funds to invest.
Shifting taxation ONTO the economic base of land and natural resources has other positive consequences. Taxes would function as user fees for what is essentially common heritage resources. Investments in land speculation would be curbed, thus freeing funds for productive activities.
Taxing land sites according to land value promotes urban and rural land reform, providing affordable access to land for homes, businesses and farming. Sufficiently high resource rental fees, captured for public sector benefits, promote more careful and efficient use of natural resources by the private sector. Conversely, the undertaxation of natural resources leads to their over-exploitation. A high access cost for nonrenewable resources can also stimulate investment in renewable energy and other sustainable technologies, as less profit can be made on extracting irreplaceable resources.
The policy is to shift taxes OFF labor and productive capital (thus increasing everyone¹s purchasing capacity and wealth creation incentives) and ONTO land and natural resources (thus curbing speculation and private profiteering in the world¹s common heritage). Such a tax shift makes land prices affordable for housing, other basic needs production and infrastructure.
When we fail to tax land values adequately, as they rise during development, and tax wages instead, workers soon cannot afford housing and other basic necessities unless they work longer or go deeper into mortgage debt. What should be the true purpose of a market economy and development - to efficiently provide for the needs of all - is undermined. Under the current model which commodifies land and resources, land prices become a greater proportion of the costs of production as development proceeds.This primary cause of the widening rich/poor gap demonstrates the law of rent, a concept little understood even within the field of economics. As private profits accumulate from resource rents and interest payments, the gap between rich and poor keeps growing year by year.
Most "poor" countries are not poor. Rather, their people are poor, because the countries¹ valuable land and other natural resources are controlled by only a few. Land value taxation promotes both urban and rural land reform.
Land values rise because of population growth or concentration and because of infrastructure and other services provided by the public sector. Reducing taxes on wages and productive capital while recapturing the increase in land values (resource rents) BACK to the public sector assures both a fair and functional market economy and a continuing source of tax funds for the public sector.
The public fund can also be a source of low-interest loan financing to community members. Under this arrangement, the people themselves become beneficiaries of both resource rents and interest payments. The recapture of rises in land value and the revolving of loan monies all within the public sector enables countries to develop with less need for outside funds." (http://www.earthrights.net/docs/fin4devt.html)
"Harrisburg, the capital of Pennsylvania, was in 1980 on the Federal list as the second most distressed city in the United States. The city gradually reformed its municipal tax policy by shifting taxes OFF of buildings and ONTO land site values. Now taxes on buildings have dropped and land is taxed five times more heavily. With land sites freed from speculation and underuse and buildings less burdened by taxes, labor and capital went to work restoring the city, now considered to be one of the highest quality of life cities in the US.
Seventeen other municipalities in Pennsylvania have put this policy in place, all with proven benefits of economic regeneration as indicated by increased building permits and other criteria. This approach generates steady urban renewal in Sydney, Australia. Hong Kong and Singapore capture land rent primarily by nationalizing land and renting it out." (http://www.earthrights.net/docs/fin4devt.html)
The following examples are from Jeffrey J. Smith, geonomics.org (exact URL unknown for the moment):
- The “Four Tigers”, 1940s.
Apologists for state planning and state partnership with big business point enthusiastically to Pacific Rim Asia but overlook the fact that all these success stories began on a firm footing of land reform. The city-state Singapore, founded on Georgist tax principles, reached a tax rate on land of 16%. Hong Kong existed only on crown land, funding 4/5 of their budget with 2/5 of site Rent (Yu-Hung Hong, Landlines, 1999 March, Lincoln Inst., Cambridge, MA). The city uses land rent, not subsidy, to fund their new metro and in its suburbs grows much of its own food. Hong Kong enjoys low taxes, low prices, high investment, and often the highest per capita salaries. The city is often voted the world’s best city for business and the freest for residents.
Gen. Douglas MacArthur, an admirer of Henry George, forced the Japanese provisional government to write land reform into their new democratic constitution that limited Rent paid by tenants to owners. South Korea adopted a similar Rent reform. Gen. Chiang Kai-shek likewise forced land reform on Taiwan (below). A 1980’s World Bank study credited land reform with creating the basis for their economic miracles. Secure farmers can afford to consume manufactured goods. Soon successful industries can trade with other developed nations. Another World Bank report, in 1998 by Roy Prosterman and Tiom Hanstad, Chapter 10, “Land Taxation” by Jennifer Duncan: “Land tax is an important vehicle for transferring some of the benefits of land privatization to the public sector. Revenues from land tax can fund significant and increasing portions of infrastructure and social services, fostering public and local government support for privatization.” Today, to try to control their skyrocketing location values, both Japan and Korea have tried to tax land, tho’ still minusculely.
- Taiwan, 1940s.
Old Formosa was mired in poverty and fast breeding. Hunger afflicted the majority of people who were landless peasants. Less than 20 families monopolized the entire island. Then the Nationalist Army, led by Chiang Kai-shek, retreated to Taiwan. General Chiang figured he lost mainland China in part by not reforming land-holding. Chiang did not want to risk losing his last refuge – east of that isle lay nothing but open ocean.
A follower of Sun Yat-sen, the father of modern China and an adherent of Henry George, Chiang knew of the Single Tax. Borrowing a page from George via Sun, the new Nationalist Government of Taiwan instituted its “land to the tiller program” which taxed farmland according to its value. Soon the large plantation owners found themselves paying out about as much in taxes as they were getting back as Rent. Being a middleman was no longer worth the bother, so they sold off their excess to farmers at prices the peasants could afford.
Working their own land with newly marketed fertilizers, new owners worked harder. They produced more, and after years of paying taxes to cover the onerous public debt, at last kept more and lived better. From 1950 to 1970 population growth dropped 40%, and hunger was ended. (Altho’ Taiwan did receive a billion dollars from the US, it was mostly military aid, spread out over eight years.) Taiwan began to set world records with growth rates of 10% per annum in their GDP and 20% in their industry. (Fred Harrison, Power in the Land, 1983)
Denmark, 1950s. The Danes built on their land tax heritage. In 1957, the tiny Georgist Justice Party won a few seats and a role in the ruling coalition. Anticipating a higher rate on land, investors switched from real estate to real enterprise. One year later, inflation had gone from 5% to under 1%; bank interest dropped from 6.25% to 5%. By 1960, 100,000 unemployed in a country of just five million had found jobs and at higher wages, the highest widespread pay raise ever in Danish history. (The New York Times editorial, “Big Lesson From A Small Nation”, 1960 October 2)
Tho’ many people were better off, next election landowners spent enough money to convince people otherwise. The Justice Party lost its seats, the land rate lost its boost, and investors again became land speculators. Quickly inflation climbed back up to 5% and by 1964 reached 8%. Land prices began to sky-rocket, from 1960 to 1981 increasing 19-fold while prices of goods and services went up merely fourfold. (Knud Tholstrup, Dansk MP, A Third Way, 1986)
Denmark, 1960s. Before 1970, the annual income tax fell upon the previous year’s income; in 1969, the government taxed 1968 income. Then parliament decided to tax income in the same year it’s earned; in 1970, they taxed 1970 income. Earners realized that 1969 income would not be taxed. Their response, from 1968 to 1969, was to double the increase in production (4% to 8%), halve the inflation rate (8% to 3.5%), quadruple investment increases (5% to 20.5%), raise savings by a quarter (from 2.9 million kroner to 3.8), and employ nearly all workers. (Knud Tholstrup, A Third Way)
- Estonia, 1990s.
After the break up of the Soviet Union, each newly separate republic had to find its own way of raising revenue. Estonia, across the gulf from Finland, found the tax for farmland. Because neither land nor its value can be hidden, it was the most feasible way for the new government to raise funds. Collecting from farmowners was vastly more successful than trying to collect from others, succeeding over 95% of the time. The low rate of 2%, which even governmental owners of public land had to pay, was still enough to spur efficient use of land. (The Economist, 1998 Feb 28)”
DR. ADRIAN WRIGLEY challenges the above examples:
"You’re absolutely right that LVT is economically sound, and has proven its potential value in places like Denmark.
Unfortunately the examples given are not examples of successful, sustained LVT reforms being introduced by their nation’s government.
Singapore, Taiwan and Hong Kong had their systems imposed from outside. The Danish system seemed to be so successful that plans were scrapped – they now have hefty Income Tax and VAT, and a highly controlled property market. Estonia’s system was very limited in scope and scale, and the nation never recovered its GDP of communist times. It has been “taken out” by the international financial capitalists, and its prospects are bleak.
Singapore’s system taxes buildings and land improvements equally to the land itself, at a rate of 0.5% of property values for non-residential properties. Singapore has just (Jan 2011) abolished its property tax for home owners of homes under $$6m (US$4.7m), and the rate is only 0.2% up to $$29.5m (US$23m). The Singapore experience is interesting, but it is not Land Value Tax, and abolishing it for home owners confirms that property taxes are not politically stable. Singapore has VAT (GST), Income Taxes, Stamp Duty, and all the tax paraphernalia of “modern” bureaucratic production tax systems.
Hong Kong’s system is market-based using government leases, not tax-based. While not perfect, it confirms that the economic rent of land can be collected successfully without Land Value Taxation.
Denmark’s experience shows how powerful and fast-acting the economic effects of LVT are. But also confirmed that LVT is politically not stable as opposition swiftly shut down government ambitions for the system.
Perhaps Taiwan is the best example of LVT success in action, and that was imposed on the nation’s constitution from outside as the article points out.
One key insight is that the economic rent of land is now collected by the banks which exchange financial bookkeeping entries for the economic flow from property owners. This must be recognised as at the core of any credible LVT proposals.
Summary: There are no successful examples of LVT being introduced by a national government. Where LVT has been used, pressures to abolish or stunt it are irresistible. Local governments habitually shrink, distort or abolish LVT under political pressure. The good news is that market-based methods of collecting land rent (such as in Hong Kong) are economically efficient and politically stable. One way of achieving this is through Location Value Covenants (LVCs) advocated by the Systemic Fiscal Reform Group (SFR Group)." (https://blog.p2pfoundation.net/successfull-examples-of-land-value-tax-reforms/2011/02/05)
Proposed creation of a Global Resource Agency
"A Global Resource Agency, similar to the Alaska Permanent Fund, could collect global resource rents for distribution and investment. This would provide a stable source of finance for UN expenditures for peacekeeping, environmental preservation and restoration, and to finance justice institutions such as the World Court and the International Criminal Court. Some of the revenue might be distributed to all nations according to their populations, reflecting the right of every person in the world to a "global citizen's income" based on an equal share of the value of global resources.
A Global Resource Agency with this mandate would:
- encourage sustainable development worldwide;
- provide substantial financial transfers to developing countries by right and without strings, as payments by the rich countries for their disproportionate use of world resources;
- help to liberate developing countries from their present dependence on aid, foreign loans and financial institutions which are dominated by the rich countries;
- reduce the risk of another Third World debt crisis; and
- recognise the shared status of all human beings as citizens of the world.
This land ethic and policy has potential to benefit all and has deep roots in the history of economic justice. A full Jubilee 2000 and beyond plan would not only reduce or eliminate debt, but would also promote systemic reforms in land tenure and taxation. This is the kind of "structural adjustment" the people of the world really need.
The Financing for Development process could further this tax shift approach by (1) worldwide education and information, (2) encouragement of implementation on the local and national level, and (3) creation of a body of experts to assist with the transition to this policy. " (http://www.earthrights.net/docs/fin4devt.html)
Responding to Critics
"To those who know and love Land Value Tax (LVT) the case for it seems self-explanatory, compelling and unanswerable. Yet strangely it all too often turns out to be a very hard sell. Present economic theory rests on false assumptions established so long ago that people have forgotten what they are. So the difficulty in explaining the immediate relevance of LVT is that one has to clarify first principles at the same time. This is not so easy. An audience waiting to hear how to revive the economy will not want to be asked to revise basic concepts they think they already know.
1. ‘Land’ is regarded as ‘capital’.
Today’s economic thought assumes a bi-polar world of Labour and Capital only. Books on economics never mention ‘Land’. When people hear about ‘Land Tax”, they might think of a rural economy, because the advantages and disadvantages of different tracts of land to farming are fairly obvious, and indeed often taught. But most will usually fail to see how the land factor is relevant to urban industrial and trading economies, which have no obvious link with the natural resources inherent in land.
Land was deliberately removed from the economist’s vocabulary in the early twentieth century. Landed interests, alarmed by growing clamour for raising public revenue from land value, obscured the issue by founding university courses in economics that deliberately conflated ‘Land’ with ‘Capital’.
Helped by Adam Smith’s definition of ‘Capital’ as ‘that part of man’s stock from which he could derive an income’, they taught that because one could derive an income from land, it should be treated as ‘Capital’.
To Classical economists of the nineteenth century the terms ‘Land’ and ‘Capital’ were quite distinct. Labour interacted with land to produce wealth. ‘Capital’ meant any item of wealth [e.g. factory buildings, lorries, machine tools] intended to assist in further production. ‘Land’ was a gift from Creation. ‘Capital’ stemmed from enterprise and effort.
Crises in banking might be more easy to avoid were ‘Land’ and ‘Capital’ properly distinguished from each other. Borrowing by a gifted designer to produce an efficient wind turbine is one thing; borrowing to speculate on rising land values is quite another. At present both are covered by the worthy-sounding phrase ‘Capital Investment’.
2. Few see how radical Land Value Taxation’s benefits would be.
Many can accept that land values benefit when local infrastructure is improved and that site-owners should contribute. But LVT is often seen as no more than a useful ‘add-on’ to existing taxes – a way, perhaps, of targeting tax more fairly on those who benefit from government capital spending.
But what is usually missed is that raising public spending from land value, if carried to the full, deters anyone from holding more land than they actually wanted to use. Land would cease to be a privatised capital asset producing an income by being let to others or yielding speculative gains. Again, through LVT, marginal land of little value would no longer be driven out of production by the present weight of taxes on labour and enterprise.
Many do not realise just how much useful land is currently kept out of use by this unholy combination of private claims on public wealth in land and the ‘flat earth’ tax practices of charging the same PAYE and VAT everywhere. In London’s Mayfair it was recently reported that forty major residential properties stood empty. Battersea Power Station, and 25 acres of surrounding land, has remained out of use since it was decommissioned in the 1980′s. In other conurbations similar instances occur, and nationwide over half a million residential properties lie empty.
It takes time to get people to realise the immense benefits that the release of such land would cause. It would largely end unemployment by which wages are forced to minimum levels. Government spending to relieve poverty could then shrink and taxation be significantly reduced. Crucially, it would begin to re-establish the notion of preserving ‘Common Land’, by which land not wanted for immediate use would remain available for any natural growth of population or new immigrants. Without ‘Common Land’, nations inevitably see population growth as a source of internal stress, often leading to conflict with neighbours over territory and resources.
3. Other common objections.
a. ‘Poverty is inevitable so why bother?’
Dysfunctional economics have probably been with us since 1066 when the feudal system replaced the land taxes collected in Saxon times. Over the centuries, the public mind has come to see the resulting poverty as inevitable and many elegant and popular theories (e.g. Malthusianism) have been devised to explain and justify it.
b. ‘Current reforms will work eventually’.
Even when poverty is not considered inevitable, people are convinced that present economic reforms (e.g. common currencies, banking reform) will eventually bring prosperity, so there is no need to consider LVT.
c. ‘I will lose’.
Some fear LVT will leave them worse off. At present the distribution of wealth is much more uneven than it should be. But LVT would reduce the disparities, not by confiscating from the rich and giving to the poor, but more by eliminating poverty at its source. Everyone could be as wealthy as they wanted to, provided they worked for it. Of course the whole ethos of society would change, and perhaps the extravagancies that currently grip the minds of the super-rich might lose some of their appeal.
d. ‘LVT is too difficult to implement.’
Some say LVT is too radical to implement without disrupting society. The truth is of course that society is already disrupted precisely because of the lack of LVT.
Nevertheless, reform would need to be applied carefully step by step, beginning with registration of land and its valuation according to best permitted use [as opposed to current use]. The next step could be putting Uniform Business Rates onto a site value basis, as is current Liberal Democrat policy. Transitional arrangements would be needed for poor people occupying valuable land.
To fully accept LVT, people have to abandon many current beliefs about economics, which is especially hard for the experts. However the present crisis has been a wake-up call for many, and those in academia or in power are perhaps more ready to listen." (http://smarttaxes.org/2012/10/17/why-people-fail-to-understand-land-value-taxation/)
For further information about these policy approaches and how they can be implemented contact the authors of this statement: In the US, Alanna Harzok (717-264-0957 or email: [email protected]) and Pat Aller (212-496-8256), UN NGO representatives for the International Union for Land Value Taxation and in the UK, James Robertson, author, co-founder of New Economics Foundation, and consultant on alternative futures, economic & social change. Email: [email protected]
- Land Value Taxation Around the World, Second Edition, edited by Robert V. Andelson, 1997, published by Robert Schalkenbach Foundation, http://www.schalkenbach.org