The Essential Reform:
Land Value Taxation
In Theory and Practice
C. H. Chomley and R. L. Outhwaite
[Part 3 of 15]
Having discussed the numerous and varied forms in which land value
appears, and having shown that as a socially created product it is the
most just subject of taxation, it remains to consider the objects for
which this taxation may be enforced and the limits which equity
imposes upon its extent.
The object of taxation is to raise revenue either for national or for
municipal purposes, and as the municipality and the State are equally
representative of the people -- the one in their aspect as a whole,
and the other in their aspect as grouped for special purposes -- it
follows that both State and municipality have a claim on land values
which we have seen to be socially created. This double obligation is
already recognised to some extent in New Zealand, where land values
are both rated by the municipality and taxed by the State. In many
municipalities of New Zealand, in the whole of Queensland, and in
almost the whole of New South Wales land values are the sole source of
municipal rate revenue, improvements being entirely exempted from
rating.
The method followed in these countries and equally applicable to the
United Kingdom is of extreme simplicity. The capital value of all land
within a rating area, whether occupied or unoccupied, whether used or
unused, is assessed, a separate valuation being put upon the land and
the improvements. Upon the capital value of the land -- that is to
say, the price which it is estimated that a willing buyer would pay to
a willing seller for the laud without improvements --a rate is levied
of sufficient amount to meet the municipal expenses. Two men may own
adjoining sites of equal area and equal value, worth, let us say, £1000
each. One of the sites may carry a building worth £1000; the
other may be vacant and unimproved. The two sites will be equally
assessed, both paying for each penny in the pound of capital value --
equivalent to 2s. ld. in the pound of annual value - 1000 pence or £4,
3s. 4d. annually.
The effects of this system will be discussed later on in dealing with
the similar effects of national taxation on land values. Here it is
sufficient to point out the facts which recommend it and condemn the
system generally followed of rating landed property according to its
rental. It is obvious that to rate or tax buildings and other
improvements is pro tanto to discourage the expenditure of
money and labour in making them. The man who pays no rates while he
holds his land vacant, and has to pay a considerable sum if he erects
a shop or factory, is in fact fined annually for being socially
useful, and the greater the employment he gives to capital and labour
the heavier is his fine. This on the face of it is hurtful and absurd,
but the apology usually made for it is that the roads, bridges, street
lighting, and other municipal services provided from the rates
increase the value of property, e.g. of houses, and that it is
therefore fair to make the owners or occupiers of houses pay for what
is done. It is, however, untrue that municipal services add to the
value of houses and buildings. They give increased value to the land,
whether built upon or not, and consequently to properties which
include land and buildings; but the latter, while never appreciated in
value are sometimes depreciated by expenditure for which they are
rated. To be clear upon this point one has only to remember that the
value of a house depends upon the cost of replacing it with one
equally useful. The making of a road or the building of a bridge will
not add to the cost of replacing an existing structure, and therefore
will not enhance its value; in other words, will not make any person
willing to pay more for it than he would have done before the road or
bridge was constructed. On the contrary, such improved means of
communication may reduce the price or value of a building by making it
possible to erect another quite as good at less cost. Suppose that
building materials ferried across a river have cost £100 for
carriage, and let us suppose that the river is subsequently spanned by
a bridge, whereupon the cost of delivering the same materials is
brought down to £50. The effect of the change must inevitably be
to take £50 off the value of the house embodying these materials,
for it would now cost £50 less to put it up than the builder had
to pay. We are apt to lose sight of this frequent depreciation of the
value of improvements by municipal and public works because we regard
the property as a whole and fail to separate the building from the
land in our thoughts. We see that a property will bring a better price
or a better rent, owing to its being made more accessible, for
instance, and carelessly assume that the house which forms part of the
property has become more valuable. Analysis shows that the whole of
the enhanced value attaches to the land on which the house stands; a
vacant site adjacent to that built upon will share equally with the
latter in the added value given by increased demand arising out of
increased accessibility. Rating on unimproved land value alone is just
because it takes cognisance of this fact, making the burden
proportionate to the advantage derived from municipal outlay; the
British rating system is unjust, because it exempts the vacant site
which is wholly appreciated in value, and puts all the burden upon
properties consisting in part only of land which is appreciated and in
part of improvements which are depreciated in value.
That this system has evil consequences, as all injustice must have,
and that the just system of rating unimproved land values has salutary
consequences is the conclusion of both reason and experience. Reason
tells us that rating of improvements will discourage building; the
experience of New South Wales, of Queensland, and New Zealand has been
that the removal of rates from improvements has encouraged building in
a twofold manner. First, the man who could not afford to erect a house
when it would be subject to an annual rate can do so with profit when
he is not thus punished for his enterprise. Second, the owner of
vacant land cannot so well afford to keep it idle when he must pay
rates upon it every year. Thus more buildings go up, and, the supply
of houses being increased, rents fall. At the same time the rates of
the poor are reduced and those of the rich are increased for while the
artisan's house is usually of greater value than the land it occupies,
the houses and business premises of the wealthy, which are situated in
the best portions of a city, are, as a rule, less valuable than the
land required for them. A freeholder with a house worth £200
standing on £100 worth of ground would be rated upon £100 or
one-third of his property, while the big land-owner, with a building
worth £50,000 and occupying land worth £100,000, would pay
rates upon the latter amounting to two-thirds of his property in house
and land. Some striking examples in actual practice of this reduction
of rating to the poorer classes by putting the rates upon unimproved
values are detailed in a later chapter dealing specially with
Australasia.
In the country as well as in the town the rating of land values is an
incentive to enterprise and production. Land capable of use tends to
be used to its best purpose, because it becomes more expensive to keep
land idle at the same time that it becomes cheaper to improve and
develop it. The secondary effects of increased activity in building,
cultivation, and otherwise are impossible to over-estimate. Among
them, in addition to lower rents, already mentioned, are increased
employment, higher wages, and the improvement of social conditions in
many ways which are fully discussed in the chapters relating to the
national taxation of land values.
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