Land Value Taxation: Panacea or Placebo

Alanna Hartzok

[The following article is reprinted with permission. It was originally published in the Winter 2009/10 issue of The Land magazine [UK]. Reprinted from GroundSwell, March-April 2010]

Concentration of land ownership in the hands of a privileged class is blatantly unjust, and arguably is the mother of all other injustices. Century after century has witnessed bitter struggles over access to land between the haves and the have-nots. Revolutions have toppled land-owning elites, often only to set others up in their places. Land reform concessions have sometimes had a mitigating effect, without ever addressing the core of the problem; even in a wealthy country like Britain, the widening gap between rich and poor is the gap which separates those who own property from those who don't.

Over the past 150 years a growing body of opinion has maintained that the solution to land concentration and monopoly is not to fight it, but to tax it. Land Value Taxation (LVT) was first articulated in depth in Henry George's Progress and Poverty, and it now has many exponents and supporters around the world, ranging from municipal authorities in the US, to the UK Green Party.

Some advocates of LVT seem to believe that it is the answer to all social problems; to the uninitiated, on the other hand, LVT is an arcane economic mechanism which is hard to fully understand. The Land has therefore invited Alanna Hartzok of the Earth Rights Institute, in Pennsylvania, to address some of the most frequent queries and criticisms, after this brief introduction to the theory of LVT.

What is Land Value Taxation?

Unlike manufactured goods and services, land (which according to the original definition in classical economics is taken to include the sea, mineral deposits and all other gifts of nature) does not cost anything to produce; it is provided by Nature for free.

If there were limitless supplies of land then nobody would need to pay anything, or anybody for its use. However there are not limitless supplies — as Mark Twain said "they are not making any more of it." The supply of land is fixed, while the demand for it is growing. Owners of land, collectively, have a monopoly over a scarce resource, which everybody needs, but which costs them nothing to produce. They are charging the rest of us for the use of this resource. The object of LVT is to ensure that any payment for this resource goes to society as a whole, rather than into the bank accounts of landowners and mortgage lenders.

What gives land its value?

There is probably still some land in the world — miles away from anywhere and capable of producing very little — which can be had for nothing; and there is still some very isolated moorland in Britain which can be had very cheap, perhaps for £50 per acre. So what makes the rest of the land more expensive than this? There are two factors which increase the value of land above this rock bottom minimum.

(1) The land may be better endowed by nature: it may be very fertile, or on a south facing slope, or have just the right amount of rainfall, or be next to a river or natural harbour. This value is created by nature, independently of humans, and it is often (but not always) fairly constant.

(2) The value of land may be enhanced by all the human activities carried on around it. Land that can produce three tonnes of wheat to the acre is not worth much if there is no nearby community to eat the wheat, and no road to export it. A waterfall capable of generating 1,000 kilowatts is worthless for that purpose if there is no village nearby to use it. Land tends to increase in value the nearer it is to roads, railways, villages, towns, shops, good schools and "good neighbourhoods". This is the value that estate agents refer to when they cry "Location! Location! Location!" This value is created by society as a whole, rather than by the individual owner; and it tends to increase with population and human activity. The total value of the land as a result of its natural endowment and its social location is known as its "economic rent".

Economic rent is not the same as the rent that you might pay for a flat in London or a farm in Devon. When you pay rent for a flat or a farm you are not only paying for the land, but for the buildings and other improvements made to the land. If land is drained, or fenced or a barn is built on it, then that is an improvement made or paid for by the owner of the land, which will increase the value of the property. If a house is built, or twenty houses, or offices or a multiplex cinema, then that is likely to increase the value even more. These improvements, usually known as "development", are normally made or paid for by the owner of the land, and they are distinct from the "economic rent" relating to the natural endowment and social location of the land.

If someone puts up fencing, or builds a house it is reasonable that they should be rewarded for their work or expense. But it is not reasonable that they should be rewarded for owning land which was created by nature; nor that they should be rewarded for owning land that is valuable because society has built a high street, a secondary school, and a tube station, nearby.

The object of land value taxation is to ensure that the rent attributable to the natural value of the land, and to the value created by its fortunate location, is paid to society as a whole, and not to individual landowners who have not earnt it.

The Advantages of LVT

What happens if society taxes the economic rent of land? Consider a piece of land valued at £100,000, and which has a rental value on the market of £5,000 per year. If the government or local authority imposed a land value tax of 40 per cent, the owner would have to pay £2000 tax per year, and would only receive £3000 in rent. The market value of the site would therefore go down, and if the owner sold it he would only get £60,000 for it instead of £100,000. Similarly if the land value tax were 60 per cent, the owner would pay £3,000 per year in tax, receive just £2,000 in rent, and the capital or resale value of the land would be only £40,000. In other words, when a land value tax is introduced, the capital value of land, and hence the cost of buying it, tends to decline in proportion to the rate of tax, while the total rent paid (either to the owner or as tax ) remains the same.

There are three main advantages to introducing a land value tax system.

1. Money that was formerly paid to landowners would instead be paid to the local authority or national government. This would mean that the government could reduce other taxes, such as income tax and VAT, correspondingly. Someone who was formerly paying rent and income tax and VAT, would still be paying the same amount of rent, but less or even nothing in income tax and purchase tax (Henry George advocated abolishing all taxation save that on land values). Everybody would be better off, except land speculators and those who had been living off the rent of land.

2. Reducing income tax and purchase tax would encourage industry and manufacturing. In Henry George's words: "Tax manufactures, and the effect is to check manufacturing; tax improvements and the effect is to lessen improvement; tax commerce, and the effect is to prevent exchange; tax capital and the effect is to drive it away. But the whole value of land may be taken in taxation, and the only effect will be to stimulate industry, to open new opportunities to capital, and to increase the production of wealth."

3. Land tax would do away with land speculation. Landowners would get no advantage from sitting on land and waiting for its value to increase before selling it, because all the time the land was doing nothing, they would have to pay LVT. They would be under financial pressure to do something with the land or sell it to someone else who wanted to do something with it. This would put an end to land speculation, empty city office blocks etc.

A further advantage is that LVT is relatively easy to collect. You can't hide land the way you can hide income. "Non-doms" can stash dollars in the Cayman Islands, but they can't take acres there. In summary, a land value tax would encourage the production of wealth, while at the same time ensuring that wealth was better distributed.

Questions and Answers about LVT

Alanna Hartzog and colleagues respond to questions from Simon Fairlie of The Land.

SF: The system of Land Taxation, as expounded by Henry George in Progress and Poverty seems to be designed to address poverty in two ways: (a) by taxing landowners so as to distribute wealth more fairly and (b) by removing tax from industry so as to create more wealth. I don't think many readers of The Land would have much quarrel with objective (a) (though they might have queries as to how it would work); but there are several concerns about objective (b).

AH: Regarding objective (a): while the policy proposed by Henry George is often called "land value taxation" the concept is more precisely understood as the capture of "land rent" which is a measure of socially generated surplus value. When retained by the landowner, land rent is an unearned income, which can be captured by the state for the benefit of all. In Australia, profits from land rent have increased disproportionately as the economy has grown.

How Land Rent has Eaten into the Australian Economy

In 1911, when land was plentiful in Australia, 85 percent of income went to labour and capital, and only tiny amounts were taken as tax or went to landowners. By the 1950s, the amount of tax taken had tripled, but land rents were still low. However, over the last three decades land rent has grown to occupy 32.5 percent of the economy, yet only 4 percent of this is captured through taxes for the public.

Objective (b) has two parts as stated, so let us consider these separately. First, "removing tax from industry" does not mean removing taxes from big polluting factories. What George meant by industry was labour, as in "this person is very industrious." As for the second part of (b) "so as to create more wealth", this phrase might conjure up the image of everyone insatiably accumulating piles of material stuff. But George uses it in the sense of common weal: "a condition of society in which no one need fear poverty, no one would desire great wealth - at least, no one would take the trouble to strive and to strain for it as men do now."


SF: When Henry George wrote Progress and Poverty in 1879 he was living in the USA which was still a young country with an expanding frontier, and seemingly limitless resources. He could write with confidence: "All things that furnish man's subsistence have the power to multiply manifold . . . How is it that this globe of ours, after all the millions of years that man has been on the earth is so thinly populated? . . . The increase of population will never exceed subsistence.

But now the context is different: we may not have exceeded subsistence but we are stretching the bounds of extravagance. Resources such as land, energy, water and pollution sinks appear to be limited, and many people wonder whether, in rich countries such as the UK and the USA, we shouldn't be putting a brake on economic growth.

I can see that when absentee landlords are sitting on land that could be cultivated, or when speculators leave buildings empty so that they can make a profit, yes, it is a good idea to tax them. But wouldn't the same tax mean that every landowner, however small, and even if they weren't trying to speculate, would be under pressure to extract as much profit from their land as it was capable of?

AH: For many environmentally aware people, alarm bells start to ring when George says that under a system of Land Value Taxation (LVT) "no one would care to hold land unless to use it, and land now withheld from use would everywhere be thrown open to improvement."

It is important to read statements like this from the perspective of Henry George and the problem he is trying to solve, namely, want amidst wealth, poverty, hunger and material deprivation alongside abundance. George never advocated economic growth for growth's sake. When he talked of productivity increase it was always with the view that those who were poor and hungry consumer were being locked out of natural opportunities to apply their labour to land in order to secure their basic needs. He saw that a few had appropriated the gifts of nature and vast lands were enclosed for no other reason than for land speculation and the over-accumulation of wealth by the few, while great numbers were penniless and poor. A statement like "land now withheld from use would everywhere be thrown open to improvement" is the way George expressed his enthusiasm for a just society where the rights of all to the gifts of nature was made manifest.

SF: Yes, I appreciate that. But nowadays, when we ransack the earth for luxury goods, how does LVT avoid creating an incentive for excessive, undesirable or unecological development? Under LVT, where land is taxed according to its productive potential, wouldn't owners of quarries, mines, peat bogs, forests, fisheries, irrigation rights and so on be under pressure to extract the maximum return from their land even if it wasn't ecologically wise?

AH: Rights to use each natural resource domain should be determined by the community in what we might call democratic, participatory zoning (or in England "land use planning"). Thus the allocation of water usage rights might be determined by water table level, annual rainfall, base level use needs, and so forth. Imagine that with full democratic land use planning, the citizens of a uranium rich area might decide that the best use was no use. Their community could still thrive from other forms of publicly captured resource rent and thus not have the pressure to mine uranium. If mining or quarrying was permitted, this use would be conditional on payment of a security deposit to guarantee that the land would be reclaimed and not simply left in a degraded condition.

SF: So if I had a uranium mine, or more likely a gravel pit, with permission to extract, but didn't implement the permission and just kept sheep, would I have to pay LVT for the value of that permission, or would I just pay for the value of agricultural land?

AH: I'll let two Georgist economists, Nic Tideman and Fred Foldvary, respond to this one.

NT: If the site is more valuable as a gravel pit than as a sheep farm, it is the value as a gravel pit that goes into the calculation. But the question is concerned both about the possibility of excessive development and about the possible unfairness to the person who has been keeping sheep. Thus one should note:

1. There should be not just a question of permission, but also charges for any adverse consequences of a chosen land use.

2. It is possible that running sheep adds scenic value or adds in some other way to the community. The best system of land use rules will reward those land uses that add value to their surroundings, according to the value added.

3. There is a question of the fairness of telling someone who only knows running sheep that she now needs to pay according to the value of using her land for something that she has no interest in doing and no capacity to do. When such "accidents" cannot reasonably be foreseen, equity may require that landowners be awarded one-time, lump-sum compensation for the loss associated with adapting to the unforeseen new use for the land (e.g. moving the sheep operation).

FF: If the economic rent of the gravel extraction is greater than sheep ranching, the sheep ranch would pay the LVT of the gravel pit. That would indeed promote the development of the gravel pit. However, the gravel pit has a secondary consideration. If the gravel pit is ugly or noisy, then it would reduce the rent of the neighbourhood. Also, folks might enjoy seeing the sheep.

So I would use "demand revaluation" to determine the subjective values of the sheep versus the mining. If the gravel mining produces £X more economic rent in total, aside from the aesthetics, ask everyone the most they would be willing to pay to keep the location in sheep. Any person whose stated value changes the outcome would pay compensation for doing so, equal to the negative effect on others. If the total willingness to pay is greater than £X, the sheep would stay.

Atmosphere and Pollution

SF: How would LVT be applied to govern use of the atmosphere and to combat global warming? Is LVT sufficient or do you see some other mechanism being necessary?

AH: The cutting edge of Georgist economics is the blending of the new field of ecological economics to fully cost the commons. The mechanism to capture rent, set pollution fees or define environmentally sane land use policy would vary depending upon the specific common heritage domain – surface land, water, minerals, spectrum, etc. In some cases the "highest and best" use might very well be "no use." Overall, an "integrated green tax shift" would "tax bads, not goods."

Regarding use of the atmosphere, most Georgists would advocate direct pollution taxes rather than carbon-trading which would create a market for pollution "rights" and administration of which would assuredly be riddled with special privileges and corruption. Polluters refusing to pay-up their pollution taxes would risk having their companies shut down. But taxation has to be set at a sufficiently high rate to incenivize pollution reduction.


SF: I also worry about pressure from LVT to improve property would result in denser developments in urban and suburban areas. This might be helpful for reducing suburban sprawl (which you have lots of in the USA), but in high value areas isn't there a danger it would result in "town cramming" (which is more of a problem in a small country like England) involving excessive infill, the disappearance of gardens and the replacement of human-scale housing by high rise flats? What is to stop urban development becoming too dense?

AH: "Too dense" means that people would not want to live there and so they would go elsewhere. They would have other pleasant options for living space and they would have the purchasing capacity to choose them. Thus, nowhere would be "too dense". The problem of "too dense" is a manisfestation of the current unjust land tenure and tax system. Here is Henry George's vision of how it would work, (and note that detailed studies of this policy where it has been even partially implemented show that the facts correspond to his vision):

"The destruction of speculative land value would tend to diffuse population where it is too dense and to concentrate it where it is too sparse; to substitute for the tenement houses, homes surrounded by gardens, and to fully settle agricultural districts before people were driven far from neighbours to look for land. The people of the cities would thus get more of the fresh air and sunshine of the country, the people of the country more of the economies and social life of the city."

SF: I don't understand how LVT would promote houses with gardens. Surely owners of small plats of green land in cities would be under pressure from the land tax to build on them. How do you find space for low value uses like local urban food production?

AH: Even without zoning, land value tax harnesses positive incentives. For example, if the city had no parks or green space for recreation, people would likely move to more pleasant cities. The parkless, greenless city, with lower land rent being generated for public purposes would soon find a way to increase green space.

As for urban agriculture, a pure resource rent system, without zoning or planning restrictions would probably not yield bushels of tomatoes grown on lots in the centre of the city. But if a community wanted to grow tomatoes in an area of high land value, they should be entitled to make that choice. So we are back to democratic participatory zoning and planning for this one.

Keep in mind that the land records, transparently available on websites, would show that the lot zoned for tomato growing is only yielding a tiny percentage of the potential land rent that the community could otherwise collect LVT to pay for public education, healthcare and other public needs. The community might at some point change its mind, in which case urban agriculture could do one of two things – move out a bit towards the edge of the urban area, maybe converting some suburban house lots to micro-farms and/or move up to the rooftops.

This common sense approach would be possible because of the resource rent for public revenue system would be transparent and easy to understand with all the information posted on free access websites. Backroom rent-seeking dealings of politicans and land speculators would cease to exist, public officials would increasingly serve the people because the people would have gained the power of economic democracy; the power-mongering of the super rich, who have gained the upper hand via massive privatized rent and other unearned income, would decline as a consequence.

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