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.
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.
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.
