Land value tax

Land value taxation (LVT) (or site value taxation) is an ad valorem tax on the annual rental value of land — only the value of land itself is taxed. This ignores buildings, improvements, and personal property. Because of this, LVT is different from other property taxes on real estate — the combination of land, buildings, and improvements to land. Every jurisdiction that has a real estate property tax has an element of land value tax, because land value contributes to overall property value.

Economic effects

Efficiency

A supply and demand diagram showing the effects of land value taxation. Note that the burden of the tax falls entirely on the land owner, and there is no deadweight loss.

Most taxes distort economic decisions. If labor, buildings or machinery and plants are taxed, people are dissuaded from constructive and beneficial activities, and enterprise and efficiency are penalized due to the excess burden of taxation. This does not apply to LVT, which is payable regardless of whether or how well the land is actually used, because the supply of land is inelastic, market land rents depend on what tenants are prepared to pay rather than on the expenses of landlords, and so LVT cannot be passed on to tenants. The only alleged direct effect of LVT on prices is to lower the market price of 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. Nobel Prize winner 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 takes on site values, would substantially improve the economic efficiency of the jurisdiction." 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.

Proponents allege that the necessity to pay the tax encourages landowners to develop vacant and under-used land properly or to make way for others who will. The claim is that because LVT deters speculative land holding, dilapidated inner-city areas are returned to productive use, reducing the pressure to build on green-field sites and so reducing urban sprawl. 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 about 4,200 in 1982 to less than 500. LVT is an ecotax because it ostensibly discourages the waste of locations, which are a finite natural resource.

Real estate values

The selling price of land titles is proportional to the expected profits from rent or investment after taxes, so LVT would reduce the capital value of all real estate owners' holdings. Critics warn that a rapid reduction of real estate values could have profoundly negative effects on banks and other financial institutions whose asset portfolios are dominated by real estate mortgage debt, and could thus threaten the stability of the whole financial system. However, the lending of money for real estate purchase and the use of land titles as collateral is itself a cause of instability in the financial system and was the primary factor in the rapid increase in real estate prices in the years from 2000 to 2007, and the subsequent collapse.

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.

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 but which is in fact a paper value only. Most LVT advocates support a gradual shift to avoid disrupting the economy, and argue that the reduction in private rent collection would result in increased net wages received from employment and asset growth from entrepreneurial activity.

Implementation

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

• Calculated fairly and accurately,
• High enough to raise sufficient revenue without causing land abandonment, and
• Billed to the correct person.

Assessments

See also: Land (economics)

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, the tax can not be evaded.

However, critics point out that determining the value of land can be difficult in practice. In a 1796 United States Supreme Court opinion, Justice William Paterson noted that leaving the valuation process up to assessors would cause numerous bureaucratic complexities, as well as non-uniform assessments due to imperfect policies and their interpretations. Austrian School economist Murray Rothbard later raised similar concerns, stating that no government can fairly assess value, which can only be determined by a free market.

When compared to modern-day property 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 analysis was introduced as a method of assessing land.

Land value for LVT purposes is assessed using market evidence. Such evidence may comprise both 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 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, "smoothed" and mapped using a geographical information system (GIS). The initial valuation is the most difficult; once the system is bedded-in, successive valuations become easier.

Sufficiency of 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. However, this is based on the fallacious assumption that land values would not change as existing taxes were phased out. But the presence of existing taxes has the effect of depressing land values. Thus, the phasing out of these existing taxes would lead to an increase in land values, and in this way the tax base itself would grow. It has also been argued that increasing LVT at the expense of other taxes would reduce government expenditure on welfare.

In a study for the Institute of Economic Affairs, Harrison has calculated that the indirect (deadweight) cost of the UK tax system is about 12% of national wealth. Most modern LVT systems are alongside other taxes, and thus only reduce their impact without removing them completely.

In a case or event where a jurisdiction attempted to levy a land tax that was higher than the entire landowner surplus, it would result in the abandonment of property by those who would be paying and a sharp decline in tax revenue. Whilst this is obviously the case theoretically, it sets a natural ceiling on the amount of LVT that can be levied.

Requires clear ownership

In some countries, LVT is nearly impossible to implement because of lack of certainty regarding land titles and clearly established land ownership and tenure. If the government can not accurately define ownership boundaries and ascertain the proper owner, it cannot know from whom to collect the tax. The phenomena of lack of clear titles is found world-wide in developing countries and is in part the subject of the work of the Peruvian economist Hernando de Soto. In African countries with imperfect land registration, boundaries may be poorly surveyed, the landlord can be elusive and significantly more difficult to tax than occupants, but most governments require that tax collectors track owners down nonetheless so that the burden of the tax does not fall on the poor.

Ethics

See also: Georgism and Catholic social teaching

In religious terms, it has been claimed that land is a common gift to all of mankind. For example, the Catholic Church as part of its "Universal Destination" 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."

— Pope Paul VI, Populorum Progressio

Land acquires a scarcity value owing to the competing needs of the community for living, working and leisure space. According to proponents, 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. Additionally, supporters of the LVT argue that those who assert an exclusive right to use a given parcel of land morally owe recompense to the community that is thereby dispossessed of their previous liberty to use that land in usufruct.

LVT is also purported to act as value capture tax. A new public works project 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.

History

Pre-modern

Land value taxation has ancient roots, tracing back to after the introduction of agriculture. One of the oldest forms of taxation, it was originally based on crop yield. This early version of the tax required simply sharing the yield at the time of the harvest, akin to paying a yearly rent.

Physiocrats

Anne Robert Jacques Turgot, one of the leading physiocrats.

The physiocrats were a group of economists who believed that the wealth of nations was derived solely from the value of land agriculture or land development. Physiocracy is considered one of the "early modern" schools of economics. Physiocrats called for the abolition of all existing taxes, completely free trade, and a single tax on land; they did not distinguish, however, between intrinsic value of land and ground rent. Their theories originated in France and were most popular during the second half of the 18th century. The movement was particularly dominated by Anne Robert Jacques Turgot (1727–1781) and François Quesnay (1694–1774). It immediately preceded the first modern school, classical economics, which began with the publication of Adam Smith's The Wealth of Nations in 1776. The Physiocrats were also highly influential in the early history of land value taxation in the United States.

Thomas Paine contended in his Agrarian Justice pamphlet that all citizens should be paid 15 pounds at age 21 "as a compensation in part for the loss of his or her natural inheritance by the introduction of the system of landed property." This proposal was the origin of the citizen's dividend advocated by Geolibertarianism.

Henry George

Main article: Land value tax in the United States § Henry George

Henry George in 1865.

Henry George (September 2, 1839 – October 29, 1897) was an American Journalist and political economist who advocated a "Single Tax" on land. In 1879 he authored Progress and Poverty, which significantly influenced land taxation in the United States.

Liberal and Labour Parties in the United Kingdom

In the United Kingdom, LVT was an important part of the platform of the Liberal Party during the early part of the twentieth century: David Lloyd George and H. H. Asquith proposed "to free the land that from this very hour is shackled with the chains of feudalism." It was also advocated by Winston Churchill early in his career. The modern Liberal Party (not to be confused with the Liberal Democrats, which are the larger heir to the earlier Liberal Party) remains committed to a local form of land value taxation, as do the Green Party of England and Wales and the Scottish Green Party.

From its early years, and until just after the Second World War, there was strong support for land value taxation within the Labour Party. The Member of Parliament Andrew MacLaren was a consistent and vocal advocate. The 1931 Labour budget included a land value tax, but before it came into force it was repealed by the Conservative-dominated National Government that followed shortly after.

An attempt at introducing site value taxation in the administrative County of London was made by the local authority under the leadership of Herbert Morrison in the 1938–9 Parliament, called the London Rating (Site Values) Bill. Although it failed, it sets out detailed legislation for the implementation of a system of land value taxation using annual value assessment.

After 1945, the Labour Party adopted the policy, against the opposition of a substantial body of MPs, of attempting to collect "development value": the increase in land price arising from planning consent. This was one of the provisions of the Town and Country Planning Act 1947 and it was repealed when the Labour government lost power in 1951.

Existing tax systems

United States

Main article: Land value tax in the United States

Land value taxes are used in various jurisdictions of the United States, particularly in the state of Pennsylvania.

Australia

Local governments (councils) in Australia are almost exclusively funded using land value taxes refered to as council rates. Local government revenue represents about 18% of total government revenue. [1]

In the state of NSW determination of land value, for tax purposes at a state and local level, is the responsibility of the Valuer General. [2]

NSW also levies a state land value tax. However unlike local government rates a persons principle places or residence and farmland are generally exempt and there is threshold value on which no tax is levied.

Other countries

Pure LVT, apart from real estate or generic property taxation, is used in Taiwan, Singapore, and Estonia. It is currently being introduced in Namibia, and there are campaigns for its introduction to South Korea and Scotland. Many more countries have used it in the past, particularly Denmark and Japan. Hong Kong is perhaps the best modern example of the successful implementation of a high LVT. The Hong Kong government generates more than 35% of its revenue from land taxes. Because of this, they can keep their other taxes rates low or non-existent and still generate a budget surplus. In 1990, several economists wrote to then President Mikhail Gorbachev suggesting that Russia use Land Value Taxation in its transition towards a free market economy.

Several cities around the world also use LVT, including Sydney, Canberra, and others in Australia. An in-depth study under the Chairmanship of Sir Gordon Chalk issued a report in 1986 on the subject of local taxation for the city of Brisbane, Queensland. The report, which examined many alternative means of local finance, sets out comprehensive and concise arguments for LVT. It has also been used in Mexicali, Mexico.

References

• Coughlin, J. Anthony. "Land Value Taxation and Constitutional Uniformity", Geo. Mason L. Rev., Winter 1999, Vol. 7, No. 2