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Land value tax

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Land value taxation (LVT), or site value taxation, is a tax that charges landholders a portion of the unimproved value of a site or parcel of land.

LVT is a special form of property tax. There are three species of property: land, improvements to land (immovable man-made things) and personal property (movable things).

LVT is an ad valorem tax where only the value of land is taxed, ignoring improvements to the land (e.g., houses, factories, ...) and personal property (e.g., cars, furnishings, ...). This is different from other property taxes which generally tend to fall on real estate--the combination of land and improvements to land.

Background

One argument for LVT is that it discourages speculative bubbles in land markets, while encouraging the efficient and productive use of land, particularly in urban areas - one estimate of the efficiency gain puts it at £15,000 a year per person.[1] An additional argument for LVT is that increases in land values are created mainly by changes that are not the result of the landowner's own effort; for example, the creation of new infrastructure, or a re-zoning, can dramatically increase the value of a piece of land. LVT encourages government development of infrastructure by providing a way of recouping some of the windfall changes to land values that occur as a result of such investment, placing less of the burden on taxpayers who don't benefit. The tax works in reverse also. If a development has a negative impact on land values (the closing of a nearby transport link, for example), the owner of a site is compensated by an automatic reduction of the charge on the property.

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. It is also said to be justified for reasons of fairness in that it recovers for community purposes the value the community creates. It is a cheap (and therefore efficient) tax to administer or pay because much less effort is required to track land ownership than to track income, deductions, capital gains, sales transactions, etc. Tax evasion on land is much more difficult than on financial wealth. For the same reason, it is also much more effective than a development or planning gain tax, which can be avoided by just keeping the land out of productive use.

As well as these pragmatic arguments, LVT may be justified with the philosophical premise that the natural world was originally the common resource of all persons, and therefore LVT is not really a tax, but simply the collection of rent on behalf of those who waive their right of access to the resources they would otherwise have been free to use. Some LVT advocates argue that in consequence, land value should be taxed at a high enough rate to recover effectively all its economic rent from users, and the proceeds should be equally distributed to each citizen in the form of a citizen's dividend. Others favor a combination of citizens' dividend and economically efficient provision of public services (i.e., government provision of services that yield an increase in aggregate land rent at least equal to their cost). Any such implementation of LVT would amount to a substantial land reform. The most influential advocate of this type of LVT was the 19th C American political economist and activist Henry George. Many contemporary American advocacy groups trace their heritage back to his thoughts and writings.

Implementation

In reality, every jurisdiction that has a real estate property tax has a land value tax, because part of the ad valorem basis for real estate is, in fact, the locational or land value in addition to the improvement value.[2]

Pure LVT, apart from real estate or generic property taxation, is used in Taiwan, Singapore, Hong Kong 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[3] and Japan. Many pre-modern societies used land tax systems that were not based on the land's value, but nevertheless approximated a limited LVT by taxing agricultural land according to its yield or expected yield.

Several cities around the world also use LVT, including Sydney, Canberra, and many other Australian cities; Mexicali and Fairhope, Alabama.

Nearly 20 Pennsylvania cities in the USA employ a two-rate or split-rate property tax: taxing the value of land at a higher rate and the value of the buildings and improvements at a lower one. This can be seen as a compromise between pure LVT and an ordinary property tax falling on real estate (land value plus improvement value). Alternatively, two-rate taxation may be seen as a form that allows gradual transformation of the traditional real estate property tax into a pure land value tax.

LVT in Pennsylvania and the "Two-Rate" Experiments

Pittsburgh used the two-rate system from 1913 to 2001[4] when an ineffective property assessment system led to a drastic increase in assessed land values during 2001 after years of underassessment, and the system was abandoned in favor of the traditional single-rate property tax. Pittsburgh's tax on land was about 5.77 times the tax on improvements. Notwithstanding the change in 2001, the Pittsburgh Improvement District still employs a pure land value taxation as a surcharge on the regular property tax.

Harrisburg, Pennsylvania has taxed land at a rate six times that on improvements since 1975, and this policy is credited with reducing the number of vacant structures in downtown Harrisburg from about 4,200 in 1982 to less than 500.

Primarily as a result of technical assistance from the Henry George Foundation of America and the Center for the Study of Economics,[5] nearly two dozen local Pennsylvania jurisdictions use two-rate property taxation in which the tax on land value is higher and the tax on improvement value is lower. Local governments in Pennsylvania which use the two-rate tax system as of 2006 include:

Aliquippa, Allentown (since 1996),[6] Altoona, Clairton (city and school district), DuBois, Duquesne, Ebensburg, Harrisburg (since 1975),[7] Lock Haven, McKeesport, New Castle ,Oil City, Pittsburgh Improvement District, Scranton, Steelton, Titusville, and Washington

The following sites sponsored by The Henry George Foundation use actual assessment data and have tax calculators showing how two-rate taxation (lower on improvements and higher on land value) might actually be implemented and the effect on parcel by parcel basis: Maryland Land Value Tax Project, New York Land Value Tax Project, Indiana Land Value Tax Project, Washington Land Value Tax Project, and New Jersey Land Value Tax Project.

Arguments/background for and against

In the United Kingdom, LVT was an important part of the platform of the British 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".[8] It was also advocated by Winston Churchill early in his career.[9] Labour's 1931 Budget included an LVT, but before it came into force it was repealed by the Conservative-dominated National Government that followed shortly after.

In 1990, several leading economists – including 4 Nobel Prize winners – wrote to then President Mikhail Gorbachev suggesting that Russia use Land Value Taxation in its transition towards a free market economy.[10]

Claimed advantages

  • A correlation between high LVT and growing economic prosperity is predicted by Georgist theory, and has consistently been observed in practise.[11]
  • A natural source of public revenue. All land makes its full contribution to the government, allowing reductions in existing taxes on labour and enterprise.
  • A stronger economy. If labour, buildings or machinery and plant are taxed, people are dissuaded from constructive and beneficial activities and enterprise and efficiency are penalized. The reverse is the case with a tax on land values, which is payable regardless of whether or how well the land is actually used. LVT is a payment, based on current market value, for the exclusive occupation of a piece of land. In the longer term, this fundamentally new and different approach to revenue raising is expected to stimulate new business and new employment, reducing the need for costly government welfare spending.
  • Marginal areas revitalized. Economic activities are handicapped by distance from the major centres of population. Conventional taxes such as VAT and those on transport fuels cause particular damage to the remoter areas of the country. LVT, by definition, bears lightly or not at all where land has little or no value, thereby stimulating economic activity away from the centre - it creates what are in effect tax havens exactly where they are most needed.
  • A more efficient land market. The necessity to pay the tax obliges landowners to develop vacant and under-used land properly or to make way for others who will. Holding land idle becomes financially unsustainable.
  • Less urban sprawl. Because LVT deters speculative land holding, dilapidated inner-city areas are returned to productive use, reducing the pressure to build on green-field sites.
  • Less bureaucracy. The complexities of Income Tax, Inheritance Tax, Capital Gains Tax and VAT are well known. By contrast, Land Value Tax is straightforward. Once the system has stabilized, landholders will not be faced with complicated forms and demands for information. Revaluation will become relatively simple.
  • No avoidance or evasion. Land cannot be hidden, removed to a tax haven or concealed in an electronic data system.
  • An end to land speculative bubbles. Speculation in land value - frequently misrepresented and disguised as "property" or "asset" speculation - is the root cause of unsustainable booms which result periodically in damaging corrective slumps. Land Value Taxation, fully and properly applied, eliminates the speculative element in land pricing.
  • Impossible to pass on as higher prices, lower wages, or higher rents. Competition makes it impossible for a business producing goods on a valuable site to charge more per item than one producing similar goods on less valuable land - after all, producers and traders at different locations are paying different rents to landlords now, yet like goods generally sell for much the same price and employers pay their workers comparable wages. LVT cannot be passed on to tenants, as they are already paying the full market rent, and the tax doess not affect the economic rent of the land.
  • Lower natural interest rates in economy. In the present system, the value of land has to be paid fully during the purchase. This increases the demand for money in the economy to serve these lump-sum payments. In a pure LVT system, the amount paid to buy a house or start a business is less because the initial prices of land are low due to the anticipated LVT payments as long as the land is held. Thus in an LVT system, the demand for money is lower (other things being the same), lowering the natural interest rates. The availability of more money for productive capital investment acts as a further boost to the economy.
  • Fairness. Land (unlike goods and services) has no cost of production. If an ample supply of land of equal desirability were available everywhere, there would be nothing to pay for its use. In reality land acquires a scarcity value owing to the competing needs of the community for living, working and leisure space. Thus the unimproved value of land owes nothing to the individual efforts of the landowner and everything to the community at large. It belongs justly and uniquely to the community. Conversely, the reward for individual effort can belong only to the one who earns it, to spend, save, or give away as he or she may see fit.
  • Voluntary. The tax is completely avoidable. Anyone who does not wish to pay it need only rent land in place of owning it

(Several of these advantages are from the Land Value Tax Campaign[12])

Criticism/Arguments against

One of the biggest potential problems with a Land Value Tax lies in the valuation process. Under current property tax systems, the notional value for taxation purposes is often allowed to diverge from the actual market value. Some jurisdictions assess property value at a fraction (sometimes quite a small one) of actual market value, and others tax only a fraction of reasonably accurate appraisals. Different rates of assessment and/or tax for different classes of property and even different sorts of owner also abound. When such complications go too far, people may end up paying an unfairly high or low amount of tax. Sudden, large changes may occur in the tax amount, owing to the politically unpopular revaluations to market occurring in a single year after long periods of no change, rather than small changes occurring every year in step with changes in the true market value.

Perverse Incentives

Another practical objection to an LVT system is that there would be a strong incentive for landowners to find appraisers that ascribed more of the real estate value to improvements than to the land itself. Thus the actual sale price of a parcel would remain unchanged and the relative valuation of land vs. improvements would shift towards improvements.

Since an LVT increases the value of improvements and penalizes dispersed land use, it could create strong incentives toward high intensity land use. For example, in large cities a pure LVT may not have adequate provision for open spaces in a densely populated city. Any parkland in a city would have an economic value higher than its usage as a park, leading to parks being removed and the city losing out in the process due to lack of open spaces.

A land tax may lead to dynamic economic inefficiencies by distorting timing decisions with regards to development. A land tax might induce an owner to develop a vacant land parcel earlier than he might otherwise (rather than extract delayed income streams), even though instances could arise where latter the decision to delay development yields a higher net present value in the absence of the tax. So, although a current market value land tax reduces incentives for speculation, it may lead to suboptimal decisions favoring improvements solely for the sake of placing non-taxable value on the parcel.

Karl Marx

Marx's criticism of land tax (as anything more than one of the measures to be imposed during a transition to communism) was relatively influential - he argued that "The whole thing is...simply an attempt, decked out with socialism, to save capitalist domination and indeed to establish it afresh on an even wider basis than its present one." He also criticized the way land value tax theory emphasises the value of land - arguing that "Theoretically the man is utterly backward! He understands nothing about the nature of surplus value and so wanders about in speculations which follow the English model but have now been superseded even among the English, about the different portions of surplus value to which independent existence is attributed--about the relations of profit, rent, interest, etc. His fundamental dogma is that everything would be all right if ground rent were paid to the state."[13]

However, in 1875 Marx changed his opinion on land taxation. In a letter, he wrote: "In present-day society the instruments of labour are the monopoly of the landowners (the monopoly of property in land is even the basis of the monopoly of capital) and the capitalists... the capitalist is usually not even the owner of the land on which his factory stands."[14]

Unequal taxation

In addition, the emphasis on land's value exceeds what many feel to be reasonable. It is claimed that workers who do not need to own land, such as doctors or computer scientists, would feel little effect, while agriculture or manufacturing, for instance, would bear far more of the tax burden. The tax would have a greater impact on people whose assets are more concentrated in land, and such people would have difficulty paying the tax without selling or mortgaging their property.

Herbert J. Davenport

Herbert J. Davenport, an early 20th century economist from the University of Missouri and Cornell University, was a major critic of the land value tax. Davenport sympathized with the goal of taxing the "unearned increment." However, he believed that efforts to do this by means of a land value tax would cause the land to be used less efficiently. For farm land, he thought that this was obvious. "The farmer", he said, "is continually renewing his land's fertility and other characteristics. A tax on one parcel of land will simply cause farmers to abandon it and to prepare and fertilize other untaxed land. And a tax on all agricultural land will simply be a tax on the production of farm goods." The result, he believed, would be a decreased supply of farm goods relative to other goods, higher prices of farm goods, and a fall in the amount of land on which crops are grown.

Loss of Asset Value

Land value is the discounted present value of expected future after-tax rents; so LVT, by increasing the taxation of those rents, would reduce the value of all real estate owners' holdings. 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 soundness of the whole financial system. Rapid introduction of LVT must therefore be considered a somewhat irresponsible approach, and most LVT advocates consequently favor a long phase-in process lasting at least a decade, and potentially much longer.

If land's value were reduced to zero or near zero by recovering effectively all its rent, as many LVT advocates propose, total privately held asset value could decline by as much as 1/4 or even more, a massive reduction of private citizens' wealth.

See also

Notes

  1. ^ New Statesman - The case for taxing land
  2. ^ Washington Monthly - Two Cheers for the Property Tax by Steven Ginsberg
  3. ^ Glass Wings - Denmark
  4. ^ The Progress Report - Some States Already Have Two-Rate Site Value Tax Enabling Laws
  5. ^ Pennsylvania's Success with Local Property Tax Reform -- The Split Rate Tax
  6. ^ Hallwatch.org - Land Tax for Philadelphia
  7. ^ The Progress Report - Land Reform versus Sprawl
  8. ^ New Statesman - A revolutionary who won over Victorian liberals
  9. ^ Winston Churchill: Land Price as a Cause of Poverty
  10. ^ CounterPunch - Standard Schaefer: An Interview with Michael Hudson on Putin's Russia
  11. ^ The Progress Report - Property Tax Shift Successes
  12. ^ Land Value Tax Campaign - What is Land Value Taxation?
  13. ^ Karl Marx - Letter to Friedrich Adolph Sorge in Hoboken
  14. ^ Karl Marx - Critique of the Gotha Programme

References

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