Land Value Taxation:
The Overlooked But Vital Eco-Tax
Karl Williams
[Karl Williams is a graduate of Monash University
(Australia) and at the time this paper was prepared was Editor of the
Geoist Journal of Australia]
SYNOPSIS
Land value taxation (LVT) has often been omitted from the lists of
natural resources for which eco-taxes are being advocated. LVT
provides strong financial encouragement for land to be put to its
optimal use and will eliminate speculation on land, as occupants must
pay the full LVT whether the land is being fully utilised or not. This
leads to better land management, a reduction in urban sprawl, less
urban smothering of agricultural land, and less farmland being pushed
into hinterland.
LVT makes the investment in resource-efficient infrastructure
affordable because the resulting enhanced land values are "recycled"
back into public coffers.
One particular application of LVT to agricultural land provides
much-needed financial incentives for organic farming.
Unlike other ecotaxes which "sow the seeds of their own revenue
demise", LVT actually increases over time as our environment is
enhanced and is thus a stable revenue base.
This paper argues that the LVT assessment process shifts and refines
our focus from monitoring human activity onto our use and abuse of
natural resources, as any responsible form of stewardship should. It
suggests that only if land users are prepared to pay the full cost of
utilising resources should private resource holding be permitted.
"The depletion of natural resources and the
despoliation of nature is due to a single reason: the failure
properly to measure the rental value of all of nature's resources,
and to make the users pay the community for the benefits they
receive." F. Harrison, "The Corruption of Economics"
[1]
I. Historical overview
Why has land value taxation (LVT) frequently been omitted from lists
of significant eco-taxes yet, as this paper will argue, LVT can be
enormously influential in its effect on economic and environmental
practices?
One reason lies in the confusion arising from how the very word "land"
is used imprecisely or in different circumstances such as land with
agricultural value, (urban) land with largely locational value, land
as the very soil itself, or even land in the broad and inclusive sense
of meaning natural resources in general.
Even within the discipline of macroeconomics, there have been three
major shifts in the way land has been regarded, almost in the manner
of a magician's sleight of hand. Scene 1 has the magician display a
rabbit in a cage. Scene 2 has the rabbit disappear. Scene 3 has the
magician pull the "same" rabbit out of a hat.
Scene 1 was the era of classical economics, when the 3 factors of
production were labour, capital and land - and here the rabbit
represents land principally in the sense of urban land with locational
value, while other natural resources were accorded little or no value
as they were considered to be drawn from an almost infinite
storehouse. Scene 2 was the era of neoclassical economics, whose
textbooks invariably started with a recognition that there were three
factors of production but from then on treated land as simply a type
of capital. Land was simply conflated with capital and the rabbit had
disappeared! Scene 3 is the era of the environmental reform of
economics, when the rabbit suddenly reappears in the form of natural
resources which effectively exclude land. "Hang on!" squeals
a freckle-faced boy in the front row, "that's a different rabbit!"
The confusion between land and capital is well exemplified by the
description of property prices which comprise, of course, buildings
and land. Whereas the former depreciate, the latter usually
appreciate, yet their escalating values are invariably referred to as
"house prices increases". Such confusion demands an
examination of the distinctive qualities of land (whose value is
largely locational) on which the theory and practice of LVT is based:
1. Unlike capital which is produced and reproduced, land
is fixed in supply (except for minor exceptions like multistorey
developments and land reclamation). As the old saying goes, "Invest
in land - they're not making any more of it". Furthermore, one
can't go out into the desert and truck in prime real estate. And
unlike natural resources like air and water, land can be neatly
parceled up and readily "owned" (with title deeds which
confer ownership in perpetuity).
2. There are all sorts of substitutes for capital items and for
many natural resources, but there's no substitute for land - at
least, not while the Law of Gravity holds! It is this twin
combination of fixed supply and never-ending demand which determines
how land behaves like a monopoly good, and which led Churchill to
declare, "It is quite true that land monopoly is not the only
monopoly which exists, but it is by far the greatest of monopolies -
it is a perpetual monopoly, and it is the mother of all other forms
of monopoly."[2]
3. Unlike capital, the value of land is not built up by the
occupier but by the community (principally through the increase in
presence of population and through the further provision of
tax-funded infrastructure). Herein lies the rationale for LVT, being
the charge by the community for community-created amenities. As will
be further detailed, it also explains the reason why our present
form of land tenure and taxation is supported by predatory
rent-seekers.
It is not the purpose of this paper to outline the detailed economic
means by which LVT operates in its unique manner, except to highlight
these foundations which may assist those wanting to examine the
theoretical side further. However, as much as brevity permits,
straightforward, non-technical explanations will be given to explain
some of the major benefits of LVT. A brief case study of a
best-selling environmental economics book is attached to this paper as
an appendix, noting the confusion which surrounds the authors'
identification of all major, desirable eco-taxes except LVT.
It should also be noted that the advantages of LVT extend far beyond
the immediate and direct contribution to environmental solutions -
they give rise to economic efficiency, social justice, individual
liberty, world peace, effective third world aid and more. An
understanding of the nature of economic rent and rent-seeking
behaviour would assist the appreciation of some points made here, but
an explanation of this extends beyond the immediate ambit of this
paper. This succinct summary, however, may assist: "For the
failure to make people pay rent for access, or possession of, natural
resources is at the heart of all major environmental problems, and is
the cause of some of the most fractious geo-political problems ....
There are no remedies for the ecocrises that do not include a
heightened awareness of the value of economic rent and the process of
the land market"[3]
II. The problem of sprawl
While taxes on labour and capital act as a deterrent to production
and employment, the unique qualities of land are such that a tax on
land values
encourages land to be put to its optimal use. Simply put, land
holders cannot afford to hold land unused or underused, for they are
compelled to pay the full LVT whether they use this scarce resource or
not. The resulting compact cityscape would consume far less resources
(in terms of land, infrastructure and ongoing energy costs) and would
be more amenable to the provision of public transport, walking and
riding.
Note that advocates of LVT, often nowadays called Geoists, call for
the full collection of the LVT and not the partial and misapplied
(with all manner of exemptions and thresholds) forms collected by some
local, state and federal governments in Australia and elsewhere. When
the land occupier is repaying his/her full dues (which is only
just, as they represent the value of the amenities of the land), then
land will have no market price. The improvements on the land
(buildings etc.) retain their market value as they are not being
taxed, so production is not penalised or discouraged. The social
justice implications of having land with no market price (i.e. all
humanity having their very birthright) are profound, but are again
outside the domain of this paper.
While all landholders will be encouraged to put their land to its
optimal use, land speculators will be particularly affected by LVT.
The former head of the Town Planning Department of the University of
Queensland, Philip Day, characterises the current lure of windfall
increases in land value operating as a standing invitation to "develop"
land by seeking approval for a change of use, irrespective of its
environmental significance and regardless of how such rezoning
repeatedly leads to the environmentally destructive process of urban
sprawl.[4]
While, at first sight, the prospect of sprawling cities with lots of
open space and possible greenery might be appealing from an
environmental perspective, a closer examination should lead to a
different conclusion. The inducement to collect windfall profits
(resulting from the failure of society to apply LVT) encourages some
landholders to withhold vacant land from the market and forces new
development to "leapfrog" this land and move further out.
Hence there is an unnecessary outlay in roads, pipelines, power
supplies and other infrastructure which must service a greater area.
Commuting journeys, similarly, must now consume greater resources.
Financially inducing land to be put to its optimal use is not "flogging"
the land, but is rather ensuring land is carefully used and that we
only exploit as much as we properly need.
That LVT deters urban sprawl is now becoming widely accepted even in
mainstream economics, with endorsements being expressed by such
luminaries as Ralph Nader[5] and Nobel prize-winning economist William
Vickery[6] .
It should be noted that environmentally-harmful sprawl also occurs as
suburbs sprawl over farmland, and underused farmland sprawls over what
should be left as national parks or wilderness. As Gaffney stresses, "Sprawl
in the urban environment is the kind most publicised, but there is
analogous sprawl in agriculture, forestry, mining, recreation and
other land uses and industries."[7]
III. Affordable and efficient public transport
But LVT has much more to contribute to the question of low-impact
urban function, in the form of affordable and efficient public
transport and other desirable infrastructure. The principle reason why
public transport options are presently so limited is because the
taxpayer-funded investment in this and other forms of infrastructure
effectively disappears, in an almost unseen manner, into the "Black
Hole" of landowners' pockets.
That is, not only is the resulting compact cityscape more amenable to
the provision of public transport (not to mention walking and riding),
but LVT makes the investment in such infrastructure affordable because
the resulting enhanced land values are "recycled" back into
public coffers. The extension of London's Jubilee line underground
network, which opened in 1999, provides a good case in point of how
desirable infrastructure can be self-funding if land values are
recaptured. An independent study was performed which assessed the
increase in land values extending to 800 yards from each of the 10
stations. The accumulated gain (to private landowners) was estimated
to be around £13 billion, courtesy of the £3.5 billion of
taxpayers funds it took to build the line![8]
It is the fact that such infrastructure has always been
potentially affordable that has led the United Nations Centre
for Human Settlements (Habitat) to include support of it in the 1996,
as well as the 1976, declarations. The 1996 Habitat agenda states and
recommends:
"Apply transparent, comprehensive and equitable
fiscal incentive mechanisms, as appropriate, to stimulate the
efficient, accessible and environmentally sound use of land, and
utilize land based and other forms of taxation in mobilizing
financial resources for service provision by local authorities"[9]
Furthermore, in 1976, Australia, along with other nations, endorsed
the so-called Vancouver Plan, being the recommendations of the United
Nations Habitat Conference on Human Settlements, which called for the
unearned increment in land values resulting from changes in land use
to be recouped by communities and applied to the provision of urban
infrastructure and services. However, as Day laments, "Nowhere in
the western world has this obligation to recoup betterment been fully
implemented".[10]
Nor does LVT merely hold open the possibility of partially
offsetting some of the investment costs. The impressive aforementioned
estimates relating to London's Jubilee line extension speak for
themselves, and William Vickrey made similar estimates for New York
which conclude that the collection of land rents as public revenue
would generate sufficient revenue to completely defray the capital
costs of investment in infrastructure.[11]
A simple model will serve to illustrate. Presently, rail/metro
infrastructure is almost prohibitively expensive because the windfall
benefits are effectively handed over to landowners. To partially
recoup the outlay, authorities are forced to set fares so high as to
act as a disincentive to potential low-impact commuters.
Enter LVT. Land values enhanced by the infrastructure are "recycled"
by LVT back into the public purse. This enables fares to be reduced,
which makes the adjacent land more valuable because it now has access
to cheaper public transport. These resulting enhanced land values are
again recycled back to the community coffers, which again allows low
fares which allow more recycled enhanced land values, which allow
lower fares which allow..... While illustrating the process, in
practice such iterations would be bypassed as authorities would cut to
the chase and set the most economically and environmentally desirable
fare structure, which equals the marginal cost of traveling, and not
have to dig into scarce public funds to finance such projects. A
further example of self-funding is given in the Appendix.
IV. Agricultural benefits
The application of LVT to agricultural land, with the assessment
being based on "maximum sustainable yield", forces farmers
to think long-term and provides much-needed financial incentives for
organic farming. That is, farmers will be saddled with the same annual
LVT dues whatever their yield (in addition to climatic considerations
in assessing LVT) and will now have a powerful incentive to farm with
a long-term perspective. If, for example, the land is degraded and
yields consequently drop, then the financial consequences will
properly be borne by the farmer. This is merely the briefest of
explanations of an important adaptation of LVT, which calls for other
measures such as the requirement for any user of the Global Commons to
pay an appropriate Ecological Security Deposit and a transition period
to allow farmers to unhook themselves from the conventional chemical
circuit.[12]
The LVT assessment process shifts and refines our focus from
monitoring human activity, onto our use and abuse of natural
resources, as any responsible form of stewardship should. The
potential effect of such a focus on everyday attitudes is inestimable.
The process of monitoring and assessing LVT itself leads to a more
subtle, more environmentally-appreciative understanding of how best to
prioritise conflicting demands on land. Should a tract of land best be
used for green space for local residents, a light rail corridor or
employment providing development? LVT assessment inherently weighs the
pros and cons of a whole range of intangible costs and benefits for
the wider community now and into the future, and eliminates corrupting
"NIMBY" motives and rent-seeking behaviour that influence
existing planning and development decisions. In response to the
accusation that LVT assessment is little more than a best guess at
quantifying values that are inherently unquantifiable, LVT advocates
respond "Guilty as charged!" However, they then add, "Our
good guesses are based on solid, objective methodology and are better
than wild guesses, and even most wild guesses are better than the
decisions made today. Currently, many natural resources are almost
assigned a worthless value because, not entering the mainstream
marketplace, they usually have no $ tags hanging off them - hence the
existence of externalities whereby the environment is plundered as
near worthless. So even wild guesses at the value of land and other
natural resources are better than the present situation, in which the
"no guess" decision effectively assigns natural and
community resources a zero value.
One way or another, it is necessary to quantify and prioritise the
real value (in a broad sense) of natural resources to better account
for economic externalities. In the end, only if a prospective resource
user is prepared to pay the
full cost of utilising land and other natural resources will
resource extraction or development go ahead. The intrinsic nature of
the LVT assessment process considerably assists in such cost
estimation.
LVT's foundation of detailed land use assessments will also help
expose the true costs of subsidies for natural resources, which
effectively amount to negative eco-taxes. Subsidies come in
all shapes and sizes, often barely visible, and urgently need to be
exposed and evaluated. Even some harmful subsidies which are labeled
land taxes have nothing to do with genuine LVT. Banks gives the
example of a Brazilian tax which was levied on unimproved land but was
reduced by up to 90% on land used for crops or pasture. Forests were
classified as unimproved land and were therefore taxed at the full
rate, which induced settlers to chop down the trees to reduce their
tax liability."[13]
The major dynamic behind such over-exploitation of parts of the
environment is the process by which hundreds of millions of people are
displaced onto marginal land by current tax-and-tenure systems. In
desperation they overwork resources that ought to be carefully
nurtured. Yet the practices of such desperate peasants can be largely
halted when the principles of LVT are implemented and made clear. Daly
makes the case that taking away by taxation the value added by
individuals from applying their own labor and capital creates
resentment but "taxing away value that no one added, scarcity
rents on nature's contribution, does not create resentment. In fact,
failing to tax away the scarcity rents to nature and letting them
accrue as unearned income to favored individuals has long been a
primary source of resentment and social conflict."[14]
For reasons similar to those we've seen with the example of
landowners benefiting from investment in infrastructure, much aid to
developing countries does little to alleviate the plight and
environmentally-destructive practices of the desperate landless, who
can only work on the conditions demanded by the landowners because of
the aforementioned monopolistic qualities of land. Improvements to
infrastructure simply boost land values and the rents demanded of the
landless. Furthermore, as Banks notes, "Canceling part of the
debt amounts to the infusion of billions of dollars into these less
developed countries which, under the existing tenure and tax regimes,
would benefit the price of land rather than provide work for the
landless"[15]
V. Financial concerns
That public finance can be raised is a way that doesn't undervalue
natural resources is, of course, a principle of all eco-taxes. But the
amount of revenue that can be raised, while still sending
these strong price signals, is also important to build infrastructure,
social welfare, education, environmental rehabilitation etc. The funds
that can be raised (or have been forgone thus far) from LVT are
colossal by any estimate. Beck notes the Worldwatch Institute claim
that if property taxes in North America and Japan were replaced with
pure land value taxes and if land value taxes reached the same level
in the rest of the world, they could generate 12 percent of global tax
revenue, or $900 billion a year.[16]
A more detailed estimate of potential LVT has been made for Australia
- an estimated A$132.7 billion for Australia in 1998-99[17] . One
could argue that, in terms of potential revenue alone, LVT deserves
resolute investigation.
The whole field of eco-taxes cannot be viewed in isolation of the
fiscal imperatives to raise sufficient public finance, and here we see
another of the virtues of LVT. If people were required to pay the
rental value of most natural resources they used (as many, in fact,
already do - to private owners) an adjustment in patterns of
consumption would follow. The environmental goals would be achieved -
at the cost of fiscal goals.
However, under our present fiscal regime, governments are locked into
a dependency on revenue from socially-harmful sources such as tobacco
and gambling, and cannot raise the taxes on them to levels that would
"kill the golden goose". Would such political realities
change with eco-taxes? Because of the inherent problem with most
eco-taxes that they reduce consumption of natural resources and
therefore the tax base, they give rise to a financial inducement to
hold the tax rate at a low enough rate so that a degree of pollution
and wasteful consumption can continue.
The effects of conventional eco-taxes sharply contrast with LVT which
instead is a renewable and naturally-escalating source of revenue
which arises when people are willing to pay for the use of land the
value of which is enhanced by natural resources which sustain
healthy lives. In other words, the success of a cleaner and more
secure environment would feed through to the land market, which
measures the attraction of the natural environment for living and
working. Because people are willing to pay higher rents for such
benefits LVT, instead of eroding revenue, expands the public's
revenue base so that everybody enjoys the benefits of cleaning up and
conserving the natural environment. Under the current system of
land tenure, the financial benefits of a cleaner environment accrue to
landowners.
VI. Conclusion: A greater perspective
LVT and its 19th-century champion, Henry George, achieved huge
acclaim before being buried by the "purpose-built" body of
neoclassical economics financed largely by rent-seeking American
plutocrats . In one form or another, Henry George's writings on the
need to tax land values was preceded or endorsed by various biblical
prophets, and by Carlyle, Churchill, Einstein, Franklin, Aldous
Huxley, Jefferson, Lincoln, Locke, J.S. Mill, Paine, Penn, Rousseau,
Bertrand Russell, Adam Smith, Spencer, Spinoza, Sun Yat Sen, James
Tobin, Tolstoy, Twain, Voltaire, Winstanley, F.L.Wright and many more
. Just how this wisdom has been lost sight of is a long - too long for
this paper - and tragic story.
Here, for this conference, is the quirk - environmental
considerations played almost no part in the compelling endorsements
lavished on LVT! The main bill, then and now, is its powerful
explanation of the great causes of social injustice, with the second
billing going to an exposure of a whole range of economic
inefficiencies and deadweight losses of our present economic system,
which should more accurately be termed land-monopoly capitalism.
Support acts include libertarian ideals (non-intrusive tax systems),
effective Third World Aid, an end to tax evasion, contributions to
world peace, and an end to boom & bust cycles.
The appeal of LVT to some others is more its philosophical basis and
how its implementation must turn the economy the right way up, such
that the cause of the "madness" (because completely
unnecessary) of involuntary unemployment is eliminated, which of
necessity then leads to the range of benefits just mentioned.
This is not a meandering departure from the subject of this
conference. No significant, effectual solutions can be made to our
environment if the all-embracing economic system is only nibbled at,
piecemeal, from the angle of taxation alone.
LVT is not a mere taxation solution, but an integrated economic
solution, impacting on land management and cutting at the heart of
privilege and injustice. Yes, environmental tax reformers must indeed
address the looting of undervalued natural resources driven by
bourgeois habits of overconsumption. Let us not, however, overlook the
destruction resulting from short-term perspectives driven by poverty
and desperation. LVT deals with both worlds.
APPENDIX: "NATURAL CAPITALISM" - A CASE STUDY IN
BLINDNESS TO LAND VALUE TAXATION
This book by Hawken & Lovins is meticulously researched,
well-argued and rather deserving of its best-selling status, yet it
completely misses the need for LVT. As such, it is illustrative of how
so many major advantages of LVT can be momentarily grasped and then
mislaid.
At the very beginning[20] the authors make a exhaustive list of
natural resources (which they term
natural capital) used by humankind, yet fail to mention the
one on which we all need to stand! In the wide-ranging review which
follows, the authors appear to come tantalizingly close to grasping
many of the direct benefits of LVT, only to lose the thread and
conclude the book, no closer to a realisation of the monumental impact
LVT would bring about.
The authors devote a full 17 pages[21] to the Brazilian city of
Curitiba, holding it up as emblematic of an enlightened municipality
which has overcome a whole raft of economic, social and environmental
problems. Yet, even though the authors explicitly state that "The
city runs mainly on property taxes"[22] and acknowledge how
property taxpayers are intimately involved in the decision-making
process[23] , they investigate these matters no further. Had they
understood how LVT allows environmental custodianship to be
self-funding by recycling enhanced land values, they would have seized
the significance of LVT in their account of Curitiba's green renewal
which concludes "And green begets green; land values around the
new parks have risen sharply, and with them tax revenues."[24]
Elsewhere, they see the small picture, but not the big. A solid case
is mounted to make driving and parking vehicles bear their true
costs[25] (this is, of course, LVT in the form of renting of temporary
or "moving" parcels of land), but cannot see the wood for
the trees.
Urban sprawl deservedly receives much attention, yet the powerful
impetus LVT gives to put land to its optimal use and bring about a
more compact cityscape remains unnoticed. Toronto's inducement to
clustering around urban corridors is praised, but no inquiry is made
into its "density bonuses and penalties".[26] Also left
tantalizingly unexplained is the statement "Mortgage and tax
rules that subsidize dispersed suburbs are another long-standing cause
of sprawl."[27]
Geoism eliminates the curse of land speculation by making it
economically unaffordable to hold onto land that is not put to its
optimal use. In the study of Curitiba, the authors recognise the ills
of speculation[28] , but demonstrate their limited vision by stating "A
good start to correcting these costly distortions would be to make
developers bear the expenses they impose on the community."[29]
Of course, we ALL should pay for costs we impose on the community,
just as the authors rightly say elsewhere that we should all pay for
costs imposed on the environment. In terms of LVT, "in proportion
to what we take from the community (in terms of the exclusive use we
make of land), we should repay." Or, in more general terms, "Pay
for what we take, not what we make." On this point (the present
practice of taxing production), the authors have clearly seen the
inequity and economic disadvantages of such punitive taxes[30] , as
well as the folly of subsidising the use of natural resources (surely
such subsidies should be seen as negative eco-taxes?!)[31] .
The authors' otherwise first-rate survey and set of proposals ends on
a disappointing and baffling note when take the conventional approach
of viewing the Earth as a speculative commodity and bemoan plummeting
real estate prices in Southern California[32] . While the case for
adopting a wide range of technical innovations has been convincingly
argued, until the Geoist perspective has been taken, there is little
to substantiate the authors claim that this a "revolutionary
paradigm for the industrial economy".[33]
[NOTE: Footnotes provided in the original paper are not reproduced
here.]
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