Taxing Land Rents for Urban Livability and Sustainability
H. William Batt
[A paper presented at the 11th Global conference on
Environmental Taxation, Bangkok, Thailand; 3-5 November, 2010.
Reprinted from GroundSwell, November-December, 2010]
Introduction
In most cities of the world today ambience and livability are plagued
with two problems: traffic congestion and sprawl development. Yet
public bodies seem at a loss in solving them, even though at least
from a technical point of view they are demonstrably solvable.
Governments have at their command two means by which to address them -
two arrows in their quiver, so to speak: constitutionally known as
police powers and tax powers. More commonly referred to as
command-and-control approaches and fiscal approaches, they are the
only legitimate tools that the public has at its disposal.
All this must be borne in mind when designers of government policy
consider the efficacy of public programs, particularly with reference
to their scope, domain, and weight. Scope involves all those matters
or interests in which government concerns itself; the domain is the
area or number of people over which it has exercise; and the weight,
or intensity, is the degree to which a people or an area feels itself
imposed upon, heavily or only lightly. If a government in some way
over-extends itself, or imposes itself too much upon people, it will
prove to be ineffectual, illegitimate, and have a difficult time
maintaining itself. One can find instances in all governments where
what limited police powers are available are squandered, and where
laws are flouted or circumvented. It is even more the case for taxing
powers, where estimates are that as many as half the population
believes it is legitimate to cheat if they can do so. This is the case
in the United States; and it is higher in many other nations. Poor
design of government administration has the effect of undermining the
legitimacy of public authority and is costly in every sense of the
word. Authors David Osborne and Ted Gabler have such concerns in mind
when they exhort policy makers to employ measures that rest lightly on
society, that don't require so much "muscle," what they call
"Catalytic Government: Steering Rather than Rowing."
Skillful design husbands the resources of government.
What makes the challenges of public administration even more
difficult is the realization that both tools are better at
circumscribing, or even stifling, behavior it opposes rather than
promoting it. Bear in mind that any public policies typically have
costs - either in the public resources required to administer them or
by reducing general welfare. Care must therefore be taken to ensure
that their design should be considered and explained. Examples abound
where policies, typically with commendable goals, have been
implemented, but with consequences that are unanticipated and often
harmful and expensive. Often too it is the symptoms of problems that
are addressed rather than the underlying causes, the result being that
they momentarily or provisionally supply answers but which further
exacerbate situations in due course.
With respect to the two problems at hand, traffic congestion and
sprawl, most governments have failed to adequately deal with their
challenges because they have taken little pain to fully understand
their genesis and root causes. With respect to traffic, for example,
the solution has too often been to build more roads, or else to widen
them. Yet it has long been understood that such policies usually
foster greater traffic congestion. Among students of systems theory
this has come to be known as Braess's Paradox, after the brilliant
German mathematician who first explicated it. So it eventuates that
most city thoroughfares of the world are plagued with overuse that is
the direct consequence of foolish and counterproductive public
policies. Other illustrations of transportation mismanagement could
also be offered, but this example illustrates the point.
With respect to the matter of the centrifugal forces of sprawl
development, it is more directly a result of economic
misunderstanding. But the solutions seldom employ economics; rather
policy makers look to command-and-control approaches like zoning and
urban growth boundaries (UGBs). The earliest UGB was instituted
decades ago in Portland, Oregon, advocated mostly by farmers whose
land was threatened by the growing incursion of housing sprawl. A
girdle of protected greenspace was drawn around the city's perimeter,
intended to prevent development in identified areas and presumably
beyond it as well. In time, however, development leapfrogged the UGB
and led to more commuter traffic and congestion beyond the girdle.
Those property owners inside the perimeter were overjoyed with the
arrangement because the scarcity enhanced their site values. Since
locational values are a function of access and are reflected in
capitalized transportation costs people had the choice either of
paying more in site rent for the privilege of location or else in
travel costs from areas with more modest costs.
Ultimately the disequilibrium pressures of the site values inside and
outside the UGB became so disparate that the system burst. Political
forces reached a point wherein the disparities could not be maintained
and the UGB could not hold. Other cities have also attempted to
delimit their suburban growth but have in one way or another faced
similar problems. California's Bay Area outlined a growth boundary
demarcated so far from urban cores that the projected infill would
take a century. Political resistance made it impossible to impose it
closer in where it would have greater bite. It encompasses an area
larger than that of the US states of Connecticut and Rhode Island
combined! So it is a meaningless pretense. Melbourne, Australia, has
just reported a similar failure to curtail sprawl development, having
relied upon a UGB pattern that has now been shown to have encouraged
land speculation.
Each of these examples reflects poorly conceived public policies, in
the first instance an attempt to invest in greater infrastructure and
essentially "buy" a way out of the problem, and in the
second case a misuse of a police-power-based command-and-control
approach that simply postponed and amplified the problem. A better
sense of economics, especially land economics, could have successfully
addressed the challenge. Proper use of constitutionally permitted tax
powers, or fiscal approaches, can not only correct the distortions
that result from market disequilibriums; they can also raise revenue
for the support of public services and obviate reliance upon revenue
streams that have more negative impact and downside consequences. In
exploring the problems at hand, the best solutions are in institution
of a variant of the conventional property tax, what is most commonly
known as land value taxation.
A Better Solution is a Tax on Land Values Alone
The conventional real property tax as known in most English-speaking
countries is really two separate taxes from an economic point of view:
a tax on land values and a tax on improvement values. Each has very
different dynamics and each influences behavior in a different way.
Any tax on improvements, essentially buildings, penalizes upkeep and
construction initiatives. Titleholders maintaining and improving
property to the full extent that sites warrant are penalized with a
higher tax. Owners that let property go to wrack and ruin are rewarded
with lower assessments and hence lower taxes. Just as taxing wages
discourages work, as taxing interest discourages savings, and taxing
sales discourages consumption, taxing improvements to real estate
rewards the wrong behavior. There are long histories of tax folly from
the time trees were taxed effecting deserts, when taxing windows led
to darkness, and taxing lot frontage led to outlandish "shotgun
houses" in the old American West.
On the other hand, the tax on the assessed value of the land
component of a parcel encourages investment and development. The
higher the tax the more the owner is encouraged to build on the site
so as to recover his carrying costs. Heavier taxing of underused and
vacant parcels generates improvements, especially in high value urban
cores. This development then fosters the necessary density to make
localities walkable and less vehicle dependent. What vehicles then
service the areas tend to be public transit. The tax on land values
and the tax on improvement values are like a train with an engine on
each end: they work in opposite ways and negate what powerfully
beneficial effects a tax on land value alone has.
Since the primary concern of this conference is environmental policy
and the use to which revenue streams can be put to accomplish sound
environmental goals, I will return to this line of thought shortly. It
is important, however, to recognize that a tax on land values comports
perfectly with all the principles of sound tax theory. Among them are
efficiency, neutrality, equity, administrability, stability, and
simplicity. An ideal tax is neutral and efficient with respect to
markets and progressive in so far as those who have fewer resources
will pay less. A soundly based land tax is also easily administered,
simple to understand, and provides a stable and reliable revenue
stream. It is certain in the face of any attempts at evasion. One
can't escape a land tax by taking it to the Isle of Man or the Cayman
Islands. Many students hold the view that all taxes have downside
attributes so that any revenue system must necessarily make
compromises and trade-offs. This claim is very much open to challenge.
It is important here only to emphasize that taxes impact behavior in
ways that go far beyond their purposes of supporting public services.
To this extent, their architecture needs to be carefully designed and
understood.
Tax principles as enumerated above have been recognized in various
ways since first set forth by Adam Smith. But in recent years there
are considerations above and beyond those relevant to revenue design
itself. Environmental concerns are equally important, particularly as
they address land use configurations. Taxing land parcels according to
their market value fosters land use patterns that best suit the
demands of the community as a whole. Those sites that reflect where
people want to be command the highest land values; those sites that
are of marginal use or concern from a pricing perspective are taxed
less and reflect less pressure to improve. Business and commercial
parcels tend to cluster in high value areas, residential parcels
develop at the edges, and agricultural and forest property is relieved
of pressure to develop and consume land.
Taxation of Natural Resource Rents
The market value of land parcels reflects what classical economists
called rent, also called ground rent or economic rent. Although
originally thought of as applying to the productivity of farmland,
rent is today identified far more with urban space. This is a
different meaning of the word rent than when paying someone for the
use of some property, whether for things like tools or for real estate
purposes. Land rent is a flow of value through any natural resources
that command a market price on account of their demand. Classically,
rent is the market price any such commodity beyond what is needed to
bring that factor into use. It applies as much to air or water or
mineral and petroleum resources as it does to locations. Any items
that have a market price not created by human hands or minds can have
rental value-even airport timeslots, electronic signals, and satellite
orbits. Because their value results not from any human efforts,
resource rents can be understood as socially created wealth; they are
the mutual result of common enterprise and such rents flow through
property more than they are generated by it.
Site rent can also be construed as capitalized transportation costs.
Sites with high market value are easily accessible; by whatever
mobility means are at hand. Land sites reflect all such costs - those
borne by individual members of society as well as those borne
collectively. Site rents and transportation costs in a metropolitan
area are essentially reciprocal: parcels in urban cores have high
access and rental value whereas parcels in remote areas have high
transportation costs and low rental value. One way or another the
people have to pay for access to market exchanges, whatever sort or
style they have: one pays either for the privilege of occupying a
location or for the cost of getting there. But since transportation
costs reflect the use of materials and energy, it makes sense that
they be efficiently consumed, important for a well-designed locality.
German economic geographer Heinrich von Thunen worked out this theory
almost two centuries ago. He calculated the costs of bringing farm
goods to market and as they related to the most suitable distance from
the market on which to grow them. The reciprocal of this was his
understanding the value of the market sites themselves. He appreciated
that locations in urban cores had site prices many times those in
agricultural areas. He further understood the relationship between
site rents and access. When von Thunen lived there was little use of
fossil fuels for transportation purposes; he died before the carbon
age was fully upon us and before transportation costs became for the
moment almost inconsequential. We live today in a time of temporary
luxury when it comes to energy consumption, an age which most believe
will soon pass. Given how intractable land use configurations are once
set in place, societies are foolish to develop a permanence that make
them far less livable once the petroleum age largely passes.
Returning once more to the matter of the flow of ground rents through
locations, one needs to understand that if the public does not
recapture the socially created rent it is capitalized in lump-sum
market prices. For titleholders to such sites this constitutes
windfall gains, what John Stuart Mill called an "unearned
increment." This is surplus wealth reflecting social productivity
that becomes effectively frozen and unavailable as resource capital.
It is a leaden drag on economic enterprise so long as this wealth is
not put back in circulation. Moreover, if this flow of ground rent is
not taxed and restored to the economy, the public then is forced to
rely on other taxes that have more downside impacts. As earlier noted
taxes on wages and goods discourage economic vitality, distort market
choices, and are administratively expensive to collect and enforce.
Lastly, when entrepreneurs or households make real estate investments
they are usually forced to pay artificially inflated prices for
locations where value is fed by speculative practices. Members of
society pay twice as a result, first for real estate investment loans
and then again in taxes to support public services. The only winners
are speculators and bankers.
It needs to be emphasized once more that when land sites are
artificially inflated in price by speculators keeping them off the
market waiting for a gain, those who would elect to use those sites if
they were available are forced to choose second-best and sub-optimal
locations instead. Rather than market-clearing efficiencies assuring
the rational development of social spaces, one finds leapfrog and
haphazard unfolding settlement. All this adds to extra costs in
infrastructure - roads, utility services, public amenities and
community services - that are also less than optimal in their
provision. Spatial arrangements thereby impose their social costs
several times over, all of which lead to community well being that is
far below what could be optimally obtained. Its costs are reflected
especially in the consumption and waste of natural resources and human
effort.
Chances for private capture of socially created rental value of land
arose only during the past four centuries of the "great land
rush." From roughly 1650 on, natural resources that earlier were
regarded as part of the public commons were turned into a marketable
commodity and privatized for selfish gain. Although it has been best
chronicled in the history of the Americas, this was a worldwide
phenomenon. Moreover it was rationalized and justified in numerous
arguments and judicial decisions. The world is only now beginning to
appreciate the implications of this rush to privatization. The loss of
natural resources consequent upon treating them either as "free
goods" or commodities captured by whatever parties have secured
legal titles has resulted in the impoverishment of everyone, and even
jeopardizes the sustainability of the earth.
We are now far down the road to privatization of the common natural
resources of the earth, a process that has been traced to what is
known as the "enclosure movement" first initiated in the
early Tudor era of English history. It is difficult now to recapture
and restore much of this property to the public realm, A more
promising solution is to collect the rent from land parcels based upon
their market price, treating land not as a commodity to be owned by
title in fee-simple but rather as a usufruct. As earlier explained,
since economic rent is a socially created product, there is every
moral ground for its public recapture. This policy not only encourages
the economy to perform far more efficiently, it also restores a sound
moral basis to the economy and offers a clear theory of distributive
justice. That which is rightfully the public's is returned to the
public; that which is created by one's own mind or body is one's own
to possess. The commons and the private realms are restored to a
comprehensible moral framework.
The concept of usufruct ownership, in contrast to fee-simple title,
is a term that needs to be restored to contemporary discourse. It
constitutes the legal right to use and benefit from property,
typically natural resource property, that other persons, institutions,
or the general public have formal title to, at least so long as the
property is not damaged or degraded. The English word usufruct derives
from the Latin expression usus et fructus, meaning "use
and enjoyment," cognate to English "use and fruits."
The concept of usufruct goes back to ancient times, and has been far
more evident in societies of the world than the notion that elements
of nature can be owned as commodities. Just as the terms usufruct and
fee-simple are typically opposites, so are the terms leasehold and
freehold. Thomas Jefferson wrote, citing John Locke, that "the
land belongs in usufruct to the living," a quote that Henry
George often repeated, as in his noted speech, "The Crime of
Poverty." George also held that private capture of that which was
God-given constituted theft, pure and simple: "Thou Shalt Not
Steal!" he told the Anti-Poverty Society of New York in 1887.
Native American people put the same principle differently: we do not
inherit the earth from our ancestors; we borrow it from our children.
Even in American society where private property in land and nature is
a sacrosanct hallmark of capitalism, the law doesn't talk about it in
such terms. Rather it talks about property ownership as a "bundle
of rights."
Prior to the enclosure movement and the advent of "the great
land grab" and its privatization, the use of land was typically
paid for in various forms of rent. One can trace the origins of such
payments to earliest times and show that such practices were almost
universal prior to the modern era. Payments were made to society, or
to nobility acting in its name, in rent whether it be in the form of
tribute goods, labor, or in yields from the land itself. Fee simple
ownership of land in any form was unique to the rise of Western
civilization and its spread. One could argue from an economic
perspective that the leasehold arrangements that characterized classic
civilizations were equal to or better equilibrated than are the tax
regimes employed in nations today.
Land Rent in a Modern Economy
There is growing appreciation among some economists, urbanologists,
tax theorists, and land use planners that the disregard or
trivialization of land as a factor of production has had profound
consequences for many aspects of social and economic evolution.
Failure to recognize the significance of the flow of rents from land
and other natural resources has led to distortions in many realms of
society and their economies. It was possible to overlook this
distortion so long as there lacked the means by which to identify and
quantify it; rent was posited and discussed largely in economic
theory, and what tools were available to identify and quantify it were
for the most part derivative and inferential. Computer power and the
availability of quantifiable data now offer greater opportunity to
redress this failing, and evidence of its existence and impact mounts.
One first needs to ask how much rent is there in a modern nation's
economy. Is it a significant enough surplus that taxing it to support
government would be adequate? With all the advantages to be had by
financing government from the taxing of rents, and removing rent from
the markets, how much of a productivity surplus does it constitute?
Estimates are difficult, because even with the advent of computers and
data mainstream economists have not pressed governments for the
financial data compilation that would allow us to adequately measure
it. The US National Income and Product Accounts puts the figure at
roughly 1 or 2 percent of GDP, a figure that we know is ridiculous.
Even back-of-the envelope calculations suggest that it is many times
this. If taxes on labor and capital goods could be supplanted by taxes
on rents, economic performance would be substantially improved.
Capturing socially created resource rents ultimately restores to
liquidity elements of the economy that are otherwise "frozen
capital;" this can improve market efficiency. We know also that
absent taxes on labor and goods the amount of rent would be much
greater: after all their shifts through the economy, all taxes
ultimately come out of rent. This is an axiom that has come to be
known by the acronym ATCOR. Sometimes it is explained it a bit
differently, in one case by the acronym ATAAER: All taxes are at the
expense of rent. Put still another way, total rent is that remaining
net of taxes. Moving beyond contemporary attempts at its
identification, one finds ample references counting rent payments in
other societies and times. Historically rent payments were usually a
proportion of a farmer's yield or a specified number of days of corvée
labor. Based on practices of the period, classical economic theory
took largely as a given that rent surplus constituted about a third of
a society's economy. An old English nursery rhyme reflects this common
practice in feudal arrangements:
Bah, Bah black Sheep, Have you any Wool?
Yes Sir, Yes Sir, Three Bags full.
One for my Master, One for my Dame,
One for the little Boy That lives down the lane.
One quick study, based on the potential of a full land tax but
excluding the rents from pollution rights, the spectrum, landing
slots, corporate charters, internet addresses, and other sources,
suggests that this rent alone amounts to about 28 percent of GDP, and
a far more detailed and sophisticated study of the total land rent in
Australia estimates that the total is well above thirty percent of
GDP. It concluded that "the 'bottom line' reinforces the overall
conclusion
that land-based tax revenues are indeed sufficient
to allow total abolition of company and personal income tax." A
full enumeration of sites where additional rents situate would take
enormous work, but Mason Gaffney has suggested fifteen major sources
as a start, all of which by their private capture now reduce economic
productivity. When all is said and done, he suggests that "The
Hidden Taxable Capacity of Land [is] Enough and to Spare" in
supporting government and supplanting all present taxes.
This is a significant finding, because we know from various studies
how much the deadweight loss from the current taxes is. Harvard
economist Martin Feldstein estimated that the burden from the income
tax alone is more than 30 percent of the yield, and about 50 percent
if social security taxes are added. The sales tax is in all likelihood
just as inefficient. Looked at another way, substantial proof has now
been developed to show, as George himself originally argued, that.
In every civilized country, even the newest, the value of the land
[i.e. the amount of taxable rent] taken as a whole is sufficient to
bear the entire expenses of government. In the better-developed
countries it is much more than sufficient. Hence it will not be enough
merely to place all taxes upon the value of land. It will be
necessary, where rent exceeds the present government revenues,
commensurately to increase the amount demanded in taxation, and to
continue this increase as society progresses and rent advances.
In the past thirty years, economists of major stature have
demonstrated the validity of what claim has come to be called the
Henry George Theorem. Gilbert Tucker, a self-taught student of Henry
George, foretold the case decades earlier in a short book titled The
Self-Supporting City. In it, he boldly begins by arguing,
Municipal taxation as now levied can and should be a thing of the
past: the American city can be a self-supporting corporation, meeting
its expenses from its rightful income. Taxation is unnecessary,
because the city has, in its physical properties, acquired through the
years, by the expenditure of its people's moneys, a huge capital
investment from which it collects only a very small part of the return
earned.
The virtue of taxing rent is that it captures unearned income that is
otherwise windfall gains to households and businesses. It is typically
the wealthier elements of the population that have title to property
resources, so that to them the capture of untaxed but socially-created
rent constitutes a "free lunch." The component of the
population that owns no land of any sort, typically the poorest
elements of society, pay no rent taxes at all for the reason that
resource rents, coming from sources with inelastic supply, cannot be
passed forward. This makes the taxation of land rents highly
progressive, besides their possessing all the other attributes of a
sound tax structure.
Most of the literature exploring the nature and sources of economic
rent tends to focus on what flows through surface locations of the
earth, what is known as ground rent or land rent. Very little
attention has been given to rent sources from other elements of
nature, since ground rent now seems to be the largest single
component. But a significant additional source of resource rent is
generated from minerals and fossil fuel extraction. Consider also the
wealth of the world's oceans, mostly used today as a source of fish.
The electromagnetic spectrum, the frequencies on which radio,
television, mobile phone and other signals travel in today's world,
all yield economic rents. And especially now, the air sink itself must
be recognized for its rental value to the extent that it is used for
pollution emissions, and to the extent that it is capable of absorbing
them. The air, after all is rightfully the birthright of all humanity,
and its sale to polluters to use as a dump is the penultimate travesty
in the privatization of the commons.
A Technical Detail: Assessing Price and Value
An objection is often raised concerning the ability of assessors to
assign a value to the base of any resource that might be targeted for
its taxable rent. For those resources that are fungible, their value
can be auctioned off on a regular and periodic basis. This applies to
mining sites, fishing grounds, petroleum fields, spectrum frequencies,
and air pollution sinks. As to land parcel values, especially since
cities are where most of the land value lies, concern is often
expressed that one cannot know with confidence how much of an improved
parcel is land value and how much value lies in the improvement. This
is because land parcels are much less fungible and because sales are
far less frequent. Fortunately, computer technology is quickly
overcoming this obstacle, even though many assessors have always held
the view that the valuing land sites is far easier than valuing
buildings.
Much of the earlier difficulty seems to be explained by the inertia
of the economics to taxation approaches and to the fact that sales
records contain the price of land and improvements totaled together.
Since improved parcels are sold far more frequently than unimproved
land parcels, these have become the benchmark of valuation quality.
Residential parcels change ownership frequently, as often as once
every five years, whereas industrial, commercial, and agricultural
parcels tend to have very stable ownership. Therefore the standard of
valuation for non-residential parcels is far more relaxed.
The official
Handbook of The International Association of Assessing
Officers (IAAO) states that "the chief measure of uniformity [in
aggregate analysis] is the coefficient of dispersion (COD), which,
depending on the nature of the properties involved, should not exceed
10.0-15.0 for residential properties, 15.0-20.0 for commercial
properties, and 20.0 for vacant [i.e., rural] land." The
limitations of this "eyeball method" have left property
owners believing that property taxation is based on subjective
judgments and is therefore questionably equitable. In contrast,
triangulation algorithms being developed for computer applications,
especially when coupled with available aggregate sales data and
regression calculations, now allow a higher degree of confidence in
the assignment of bills for land use than other tax regimes are able
to claim.
Footnotes are available from Bill Batt. He may be emailed at
hwbatt@gmail.com.)
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