Land value tax

From Free net encyclopedia

Land value taxation (LVT) is the policy of raising state revenues by charging each landholder a portion of the value of a site or parcel of land that would exist even if that site had no improvements. It is different from a property tax, which includes the value of buildings and other improvements on the land.

1 Background
2 Arguments/background for and against
- 2.1 Claimed advantages
- 2.2 Criticism/Arguments against
3 Implementation/Advocacy
4 Actual Land Value Tax Implementations
- 4.1 List of local governments which tax land at a different rate from improvements
5 References

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Background

One of the main arguments for LVT is that it encourages the efficient use of land, particularly in urban areas - one estimate of the efficiency gain puts it at £15,000 a year per person[1]. An additional argument for LVT is that land values are created mainly by changes that are not the result of the landowner's own effort; for example, the creation of new infrastructure, or a re-zoning, can dramatically change the value of a piece of land. An LVT provides a way of recouping some of the windfall changes to land values that occur as a result of investment by government, placing less of the burden on taxpayers who don't benefit. The tax works in reverse also. If a development has a negative impact (the closing of a nearby transport link, for example) on land values, the owner of a site is compensated by an automatic reduction of the charge on the property.

The tax is often said to be justified for economic reasons because, if it is implemented properly, it should not distort market mechanisms or otherwise damage the economy the way most taxes do. It is also said to be justified for reasons of fairness by asserting that the tax is equivalent to a fee for protection of land ownership, which is the primary activity of any state. It is a cheap (and therefore efficient) tax to administer because much less effort is required to track land ownership than to track income or sales transactions. Tax evasion on land is much more difficult than on financial wealth. For the same reason, it is also much more effective than a development or planning gain tax, which can be avoided by failing to develop.

As well as these pragmatic arguments LVT can be justified from the philosophical premise that the natural world was originally the common property of all persons, and therefore the LVT is not really a tax, but simply the collection of rent on behalf of the proper owners (the community). A consequence of this argument is that land should be taxed to the maximal extent and all proceeds should be equally distributed to each citizen as a citizen's dividend. This implementation of the LVT amounts to a moderate form of land reform. The most influential advocate of this position was the political economist and activist Henry George. Many contemporary American advocacy groups trace their heritage back to his thoughts and writings.

The biggest problem that has been found in practice with Land Value Tax lies in the valuation process. The notional value for taxation purposes is often allowed to diverge from the actual market value. When this is allowed to go too far, it leads either to people paying an unfairly high or low amount of tax, or to sudden large changes in the level of the tax owing to the politically unpopular revaluations to market value occurring in a single year after long periods of no change rather than small changes occurring every year in step with changes in the true market value.

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Arguments/background for and against

In the United Kingdom, LVT was an important part of the platform of the British Liberal Party during the early part of the twentieth century - David Lloyd George and H. H. Asquith proposed "to free the land that from this very hour is shackled with the chains of feudalism".[2] It was also advocated by Winston Churchill early in his career.[3] Labour's 1931 Budget included an LVT, but before it came into force it was repealed by the Conservative-dominated National Government that followed shortly after.

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Claimed advantages

There appears to be a correlation between high LVT and growing economic prosperity, as predicted by Georgist theory. [4]

In 1990, several leading economists – including 4 Nobel Prize winners – wrote to then President Mikhail Gorbachev suggesting that Russia use Land Value Taxation in its transition towards a free market economy.

Claimed advantages. (as per the [British Land Value Tax Campaign])

A NATURAL SOURCE OF PUBLIC REVENUE. All land makes its full contribution to the Exchequer, allowing reductions in existing taxes on labour and enterprise.
A STRONGER ECONOMY. If we tax labour, buildings or machinery and plant, we discourage people from constructive and beneficial activities and penalise enterprise and efficiency. The reverse is the case with a tax on land values, which is payable regardless of whether or how well the land is actually used. It is a payment, based on current market value, for the exclusive occupation of a piece of land. In the longer term, this fundamentally new and different approach to revenue raising will stimulate new business and new employment, reducing the need for costly government welfare.
MARGINAL AREAS REVITALISED. Economic activities are handicapped by distance from the major centres of population. Conventional taxes such as VAT and those on transport fuels cause particular damage to the remoter areas of the country. Land Value Tax, by definition, bears lightly or not at all where land has little or no value, thereby stimulating economic activity away from the centre - it creates what are in effect tax havens exactly where they are most needed.
A MORE EFFICIENT LAND MARKET. The necessity to pay the tax obliges landowners to develop vacant and under-used land properly or to make way for others who will.
LESS URBAN SPRAWL. Land Value Taxation deters speculative land holding. Thus dilapidated inner-city areas are returned to good use, reducing the pressure for building on green-field sites.
LESS BUREAUCRACY. The complexities of Income Tax, Inheritance Tax, Capital Gains Tax and VAT are well known. By contrast, Land Value Tax is straightforward. Once the system has settled down, landholders will not be faced with complicated forms and demands for information. Revaluation will become relatively simple.
NO AVOIDANCE OR EVASION. Land cannot be hidden, removed to a tax haven or concealed in an electronic data system.
AN END TO BOOM-SLUMP CYCLES. Speculation in land value - frequently misrepresented and disguised as "property" or "asset" speculation - is the root cause of unsustainable booms which result periodically in damaging corrective slumps. Land Value Taxation, fully and properly applied, knocks the speculative element out of land pricing.
IMPOSSIBLE TO PASS ON IN HIGHER PRICES, LOWER WAGES OR HIGHER RENTS. Competition makes it impossible for a business producing goods on a valuable site to charge more per item than one producing similar goods on less valuable land - after all, producers and traders at different locations are paying different rents to landlords now, yet like goods generally sell for much the same price and employers pay their workers comparable wages. The tax cannot be passed on to a tenant who is already paying the full market rent.
AN ESTABLISHED AND PROVEN SYSTEM. Local government variants of Land Value Taxation, known as Site Value Rating, are accepted practice in, for example, Denmark and Australia.

And is it fair? Land (unlike goods and services) has no cost of production. If an ample supply of land of equal desirability were available everywhere, there would be nothing to pay for its use. In reality land acquires a scarcity value owing to the competing needs of the community for living, working and leisure space. Thus land value owes nothing to individual effort and everything to the community at large. It belongs justly and uniquely to the community. Conversely, the reward for individual effort can belong only to the one who earns it, to spend, save or give away as he or she may see fit. Because of differences in positional advantages, fertility or natural resources, some locations are more desirable than others. Demand for access to these features gives land its rental value. Land Value Taxation, being assessed on these values, is fair in its incidence.

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Criticism/Arguments against

"If it's so good, why is it used in so few places?"

Marx's criticism of land tax (as anything more than one of the measures to be imposed during the move to communism) was relatively influential - he argues that "The whole thing is...simply an attempt, decked out with socialism, to save capitalist domination and indeed to establish it afresh on an even wider basis than its present one." He also opposes the way that land value tax emphasises the value of land - arguing that "Theoretically the man [Henry George] is utterly backward! He understands nothing about the nature of surplus value and so wanders about in speculations which follow the English model but have now been superseded even among the English, about the different portions of surplus value to which independent existence is attributed--about the relations of profit, rent, interest, etc. His fundamental dogma is that everything would be all right if ground rent were paid to the state." See Marx's letter at [5]

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Implementation/Advocacy

LVT is charged in Estonia, Taiwan, Singapore and Hong Kong, and many more countries have used it in the past, particularly Denmark and Japan. It is currently being introduced in Namibia, and there are campaigns for its introduction to South Korea and Scotland. Several cities around the world also use LVT, including Sydney, Canberra, Mexicali and Fairhope, Alabama. In addition, some governments like Saudi Arabia and Alaska raise a large part of government revenues from fees related to extraction of minerals or oil.

Some cities in the USA employ a two-rate property tax, which can be seen as a compromise between pure LVT and an ordinary asset-value property tax. Pittsburgh used this system from 1913 to 2001 [6] when an ineffective property assessment system led to a drastic increase in assessed land values during 2001 after years of underassessment, and the system was abandoned in favor of a single-rate property tax. Pittsburgh's tax on land was about 5.77 times the tax on improvements. Harrisburg, Pennsylvania has taxed land at a rate six times that of improvements since 1975, and this policy is credited with reducing the number of vacant structures in downtown Harrisburg from about 4,200 in 1982 to less than 500.

The United States and some other countries have also started charging fees for use of spectrum or fees related to pollution; non-traditional variations on Land Value Taxation. (Note that in economics, land is also used as a generic term for certain kinds of natural resources other than areas of ground.)

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