Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent

Land value taxation taps the geo-rent. Like today’s real property tax, a land value tax would have some tax rate that would tap some percentage of the land value or rent. I suggest 80 percent of the geo-rent be used for public revenue. The landowner would pay it from the rental he collects from the tenant, or if owner-occupied, from the implicit rental value he obtains from the site. The 80 percent rate would leave some of the land rent with the landowner to have a margin for assessment error and also to maintain a positive price for the land to facilitate its sale.

There are several methods of assessing land value or rent. One way is to calculate the replacement value of the existing improvements (unless they are historic), and then subtract the depreciation of the buildings. Then subtract the building value from the total property value. What is left is land value. For commercial property, one also can take the net income and subtract the return on the improvements (using some interest rate), the remainder being land rent. In some places there is vacant or bare land that has a market price, and sometimes there are separate owners for the land and the improvements, for which data can be derived from leases and sales. The assessors then smooth out the neighborhood land values, using computerized maps. It is not necessary to individually assess the values of most of the buildings in a neighborhood, since most lots in a locality will have a similar value per lot.

Assessors enter this data into computers, which generate neighborhood maps. The assessors interpolate or smooth out the prices of lots between those for which they have recent sales or rental data, since land values tend to be similar in a neighborhood unless there is some special feature such as corner lots or odd-sized lots. ... read the whole document

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894)

d. Effect of Confiscating Rent to Private Use.

By giving Rent to individuals society ignores this most just law, 99 thereby creating social disorder and inviting social disease. Upon society alone, therefore, and not upon divine Providence which has provided bountifully, nor upon the disinherited poor, rests the responsibility for poverty and fear of poverty.

99. "Whatever dispute arouses the passions of men, the conflict is sure to rage, not so much as to the question 'Is it wise?' as to the question 'Is it right?'

"This tendency of popular discussions to take an ethical form has a cause. It springs from a law of the human mind; it rests upon a vague and instinctive recognition of what is probably the deepest truth we can grasp. That alone is wise which is just; that alone is enduring which is right. In the narrow scale of individual actions and individual life this truth may be often obscured, but in the wider field of national life it everywhere stands out.

"I bow to this arbitrament, and accept this test." — Progress and Poverty, book vii, ch. i.

The reader who has been deceived into believing that Mr. George's proposition is in any respect unjust, will find profit in a perusal of the entire chapter from which the foregoing extract is taken.

Let us try to trace the connection by means of a chart, beginning with the white spaces on page 68. As before, the first-comers take possession of the best land. But instead of leaving for others what they do not themselves need for use, as in the previous illustrations, they appropriate the whole space, using only part, but claiming ownership of the rest. We may distinguish the used part with red color, and that which is appropriated without use with blue. Thus: [chart]

But what motive is there for appropriating more of the space than is used? Simply that the appropriators may secure the pecuniary benefit of future social growth. What will enable them to secure that? Our system of confiscating Rent from the community that earns it, and giving it to land-owners who, as such, earn nothing.100

100. It is reported from Iowa that a few years ago a workman in that State saw a meteorite fall, and. securing possession of it after much digging, he was offered $105 by a college for his "find." But the owner of the land on which the meteorite fell claimed the money, and the two went to law about it. After an appeal to the highest court of the State, it was finally decided that neither by right of discovery, nor by right of labor, could the workman have the money, because the title to the meteorite was in the man who owned the land upon which it fell.

Observe the effect now upon Rent and Wages. When other men come, instead of finding half of the best land still common and free, as in the corresponding chart on page 68, they find all of it owned, and are obliged either to go upon poorer land or to buy or rent from owners of the best. How much will they pay for the best? Not more than 1, if they want it for use and not to hold for a higher price in the future, for that represents the full difference between its productiveness and the productiveness of the next best. But if the first-comers, reasoning that the next best land will soon be scarce and theirs will then rise in value, refuse to sell or to rent at that valuation, the newcomers must resort to land of the second grade, though the best be as yet only partly used. Consequently land of the first grade commands Rent before it otherwise would.

As the sellers' price, under these circumstances, is arbitrary it cannot be stated in the chart; but the buyers' price is limited by the superiority of the best land over that which can be had for nothing, and the chart may be made to show it: [chart]

And now, owing to the success of the appropriators of the best land in securing more than their fellows for the same expenditure of labor force, a rush is made for unappropriated land. It is not to use it that it is wanted, but to enable its appropriators to put Rent into their own pockets as soon as growing demand for land makes it valuable.101 We may, for illustration, suppose that all the remainder of the second space and the whole of the third are thus appropriated, and note the effect: [chart]

At this point Rent does not increase nor Wages fall, because there is no increased demand for land for use. The holding of inferior land for higher prices, when demand for use is at a standstill, is like owning lots in the moon — entertaining, perhaps, but not profitable. But let more land be needed for use, and matters promptly assume a different appearance. The new labor must either go to the space that yields but 1, or buy or rent from owners of better grades, or hire out. The effect would be the same in any case. Nobody for the given expenditure of labor force would get more than 1; the surplus of products would go to landowners as Rent, either directly in rent payments, or indirectly through lower Wages. Thus: [chart]

101. The text speaks of Rent only as a periodical or continuous payment — what would be called "ground rent." But actual or potential Rent may always be, and frequently is, capitalized for the purpose of selling the right to enjoy it, and it is to selling value that we usually refer when dealing in land.

Land which has the power of yielding Rent to its owner will have a selling value, whether it be used or not, and whether Rent is actually derived from it or not. This selling value will be the capitalization of its present or prospective power of producing Rent. In fact, much the larger proportion of laud that has a selling value is wholly or partly unused, producing no Rent at all, or less than it would if fully used. This condition is expressed in the chart by the blue color.

"The capitalized value of land is the actuarial 'discounted' value of all the net incomes which it is likely to afford, allowance being made on the one hand for all incidental expenses, including those of collecting the rents, and on the other for its mineral wealth, its capabilities of development for any kind of business, and its advantages, material, social, and aesthetic, for the purposes of residence." — Marshall's Prin., book vi, ch. ix, sec. 9.

"The value of land is commonly expressed as a certain number of times the current money rental, or in other words, a certain 'number of years' purchase' of that rental; and other things being equal, it will be the higher the more important these direct gratifications are, as well as the greater the chance that they and the money income afforded by the land will rise." — Id., note.

"Value . . . means not utility, not any quality inhering in the thing itself, but a quality which gives to the possession of a thing the power of obtaining other things, in return for it or for its use. . . Value in this sense — the usual sense — is purely relative. It exists from and is measured by the power of obtaining things for things by exchanging them. . . Utility is necessary to value, for nothing can be valuable unless it has the quality of gratifying some physical or mental desire of man, though it be but a fancy or whim. But utility of itself does not give value. . . If we ask ourselves the reason of . . . variations in . . . value . . . we see that things having some form of utility or desirability, are valuable or not valuable, as they are hard or easy to get. And if we ask further, we may see that with most of the things that have value this difficulty or ease of getting them, which determines value, depends on the amount of labor which must be expended in producing them ; i.e., bringing them into the place, form and condition in which they are desired. . . Value is simply an expression of the labor required for the production of such a thing. But there are some things as to which this is not so clear. Land is not produced by labor, yet land, irrespective of any improvements that labor has made on it, often has value. . . Yet a little examination will show that such facts are but exemplifications of the general principle, just as the rise of a balloon and the fall of a stone both exemplify the universal law of gravitation. . . The value of everything produced by labor, from a pound of chalk or a paper of pins to the elaborate structure and appurtenances of a first-class ocean steamer, is resolvable on analysis into an equivalent of the labor required to produce such a thing in form and place; while the value of things not produced by labor, but nevertheless susceptible of ownership, is in the same way resolvable into an equivalent of the labor which the ownership of such a thing enables the owner to obtain or save." — Perplexed Philosopher, ch. v.

The figure 1 in parenthesis, as an item of Rent, indicates potential Rent. Labor would give that much for the privilege of using the space, but the owners hold out for better terms; therefore neither Rent nor Wages is actually produced, though but for this both might be.

In this chart, notwithstanding that but little space is used, indicated with red, Wages are reduced to the same low point by the mere appropriation of space, indicated with blue, that they would reach if all the space above the poorest were fully used. It thereby appears that under a system which confiscates Rent to private uses, the demand for land for speculative purposes becomes so great that Wages fall to a minimum long before they would if land were appropriated only for use.

In illustrating the effect of confiscating Rent to private use we have as yet ignored the element of social growth. Let us now assume as before (page 73), that social growth increases the productive power of the given expenditure of labor force to 100 when applied to the best land, 50 when applied to the next best, 10 to the next, 3 to the next, and 1 to the poorest. Labor would not be benefited now, as it appeared to be when on page 73 we illustrated the appropriation of land for use only, although much less land is actually used. The prizes which expectation of future social growth dangles before men as the rewards of owning land, would raise demand so as to make it more than ever difficult to get land. All of the fourth grade would be taken up in expectation of future demand; and "surplus labor" would be crowded out to the open space that originally yielded nothing, but which in consequence of increased labor power now yields as much as the poorest closed space originally yielded, namely, 1 to the given expenditure of labor force.102 Wages would then be reduced to the present productiveness of the open space. Thus: [chart]

102. The paradise to which the youth of our country have so long been directed in the advice, "Go West, young man, go West," is truthfully described in "Progress and Poverty," book iv, ch. iv, as follows :

"The man who sets out from the eastern seaboard in search of the margin of cultivation, where he may obtain land without paying rent, must, like the man who swam the river to get a drink, pass for long distances through half-titled farms, and traverse vast areas of virgin soil, before he reaches the point where land can be had free of rent — i.e., by homestead entry or preemption."

If we assume that 1 for the given expenditure of labor force is the least that labor can take while exerting the same force, the downward movement of Wages will be here held in equilibrium. They cannot fall below 1; but neither can they rise above it, no matter how much productive power may increase, so long as it pays to hold land for higher values. Some laborers would continually be pushed back to land which increased productive power would have brought up in productiveness from 0 to 1, and by perpetual competition for work would so regulate the labor market that the given expenditure of labor force, however much it produced, could nowhere secure more than 1 in Wages.103 And this tendency would persist until some labor was forced upon land which, despite increase in productive power, would not yield the accustomed living without increase of labor force. Competition for work would then compel all laborers to increase their expenditure of labor force, and to do it over and over again as progress went on and lower and lower grades of land were monopolized, until human endurance could go no further.104 Either that, or they would be obliged to adapt themselves to a lower scale of living.105

103. Henry Fawcett, in his work on "Political Economy," book ii, ch. iii, observes with reference to improvements in agricultural implements which diminish the expense of cultivation, that they do not increase the profits of the farmer or the wages of his laborers, but that "the landlord will receive in addition to the rent already paid to him, all that is saved in the expense of cultivation." This is true not alone of improvements in agriculture, but also of improvements in all other branches of industry.

104. "The cause which limits speculation in commodities, the tendency of increasing price to draw forth additional supplies, cannot limit the speculative advance in land values, as land is a fixed quantity, which human agency can neither increase nor diminish; but there is nevertheless a limit to the price of land, in the minimum required by labor and capital as the condition of engaging in production. If it were possible to continuously reduce wages until zero were reached, it would be possible to continuously increase rent until it swallowed up the whole produce. But as wages cannot be permanently reduced below the point at which laborers will consent to work and reproduce, nor interest below the point at which capital will be devoted to production, there is a limit which restrains the speculative advance of rent. Hence, speculation cannot have the same scope to advance rent in countries where wages and interest are already near the minimum, as in countries where they are considerably above it. Yet that there is in all progressive countries a constant tendency in the speculative advance of rent to overpass the limit where production would cease, is, I think, shown by recurring seasons of industrial paralysis." — Progress and Poverty, book iv, ch. iv.

105. As Puck once put it, "the man who makes two blades of grass to grow where but one grew before, must not be surprised when ordered to 'keep off the grass.' "

They in fact do both, and the incidental disturbances of general readjustment are what we call "hard times." 106 These culminate in forcing unused land into the market, thereby reducing Rent and reviving industry. Thus increase of labor force, a lowering of the scale of living, and depression of Rent, co-operate to bring on what we call "good times." But no sooner do "good times" return than renewed demands for land set in, Rent rises again, Wages fall again, and "hard times" duly reappear. The end of every period of "hard times" finds Rent higher and Wages lower than at the end of the previous period.107

106. "That a speculative advance in rent or land values invariably precedes each of these seasons of industrial depression is everywhere clear. That they bear to each other the relation of cause and effect, is obvious to whoever considers the necessary relation between land and labor." — Progress and Poverty, book v, ch. i.

107. What are called "good times" reach a point at which an upward land market sets in. From that point there is a downward tendency of wages (or a rise in the cost of living, which is the same thing) in all departments of labor and with all grades of laborers. This tendency continues until the fictitious values of land give way. So long as the tendency is felt only by that class which is hired for wages, it is poverty merely; when the same tendency is felt by the class of labor that is distinguished as "the business interests of the country," it is "hard times." And "hard times" are periodical because land values, by falling, allow "good times" to set it, and by rising with "good times" bring "hard times" on again. The effect of "hard times" may be overcome, without much, if any, fall in land values, by sufficient increase in productive power to overtake the fictitious value of land.

The dishonest and disorderly system under which society confiscates Rent from common to individual uses, produces this result. That maladjustment is the fundamental cause of poverty. And progress, so long as the maladjustment continues, instead of tending to remove poverty as naturally it should, actually generates and intensifies it. Poverty persists with increase of productive power because land values, when Rent is privately appropriated, tend to even greater increase. There can be but one outcome if this continues: for individuals suffering and degradation, and for society destruction.

... read the book

Michael Hudson: The Lies of the Land: How and why land gets undervalued

PROPERTY IS APPRAISED in two ways. Both start by estimating its market value.

• The land-residual approach subtracts the value of buildings from this overall value, designating the remainder as the value of land. Building values may be estimated in terms of their replacement cost (which usually produces a very high estimate, leaving little land value) or their depreciated value (which gives an unrealistically low building estimate, inasmuch as maintenance and repairs save most buildings from deteriorating through wear and tear). Using the depreciated value method leaves a higher residual land value. The Federal Reserve Board recently has experimented with a hybrid intermediate method that values buildings on the basis of their "historical costs".
• The building-residual approach starts by valuing the land, and treats the difference as representing the building's value. The first step in this approach is to construct a land-value map for the district or city. This displays fairly smooth contours for land values. Overlays would show zoning variations. Most of the variations in property prices around this normalized map will be for structures, along with a sizable component of "errors and omissions." This approach rarely is used, and most assessed land values vary drastically from one parcel to the next. The problem is especially apparent in the case of parking lots or one-story "taxpayers," that is, inexpensive buildings in neighbourhoods that are heavily built up. Their purpose is simply to be rented out at enough to carry the property's tax bill, not to maximise the site's current economic value.

Note that the Fed's land-residual appraisal methods do not acknowledge the possibility that the land itself may be rising in price. Site values appear as the passive derivative, not as the driving force. Yet low-rise or vacant land sites tend to appreciate as much as (or in many cases, even more than) the improved properties around them. Hence this price appreciation cannot be attributed to rising construction costs. If every property in the country were built last year, the problem would be simple enough. The land acquisition prices and construction costs would be recorded, adding up to the property's value. But many structures were erected as long ago as the 19th century. How do we decide how much their value has changed in comparison to the property's overall value?

The Federal Reserve multiplies the building's original cost by the rise in the construction price index since its completion. The implication is that when a property is sold at a higher price (which usually happens), it is because the building itself has risen in value, not the land site. However, if the property must be sold at a lower price, falling land prices are blamed.

If it is agreed that any explanation of land/building relations should be symmetrical through boom and bust periods alike, then the same appraisal methodology should be able to explain the decline of property values as well as their rise. The methodology should be as uniform and homogeneous as possible. By that, I mean that similar land should be valued at a homogeneous price, and buildings of equivalent worth should be valued accordingly.

If these two criteria are accepted, then I believe that economists would treat buildings as the residual, not the land. Yet just the opposite usually is done. ...

Land comprises all natural resources, not just ‘terra firma.’ It is the universe minus man’s products. Even the simplest of human activities, sleep, requires each of us to occupy exclusively a space, a location, preferably a bed in a home of our own. But that word ‘own’ conjures emotions and political postures.

As everyone who deals in real estate knows, there are three most important things about their stock in trade: location, location and location! Because the market value attached to locations varies over space and time, our real world conceals a shifting and invisible ‘land-value-scape’. We can see the roof-tops and admire (or deplore) the physical view. We can measure the bricks and timber in three dimensions. We cannot see the fourth dimension, the fourth factor that comprises 20% to 60% of the market value of our homes: ‘v’ or value of land per unit area. But we know it is there.

Just as every point on the surface of planet Earth has a ‘z’ that defines its place in the landscape, so every location has a value in the global economy. This value is a function of three things:

• content (soil, air or water quality; metallic composition of rock);
• accessibility (position in relation to human society); and
• the wealth of that particular community.

For example, the discovery of a new continent immediately gives value to the place in the minds of the crew of the ship that discovers it – as does the discovery of the mysteries of the genetic code in a plant species or the broadcast spectrum. Unless the ship’s captain charts the discovery and brings the chart safely back to port – with the plants of the continent – or transmits the information about it through the air-waves, ‘discovery’ has no value in any market place. Whether we talk about value in exchange or value in use, the measure of ‘v’ given to a location depends on social context.

The most important difference between measuring ‘v’ and measuring ‘z’ is that there is no single objective value of any location, other than at those somewhat rare points in time when real estate is traded, when market price is the surrogate for market value. Even then, transactions that are to form the basis of market valuations need, in theory, to be made in certain idealised conditions, such as open competition between buyers and sellers. All potential parties to the transaction should have perfect information about other similar contemporaneous transactions – and be in an ‘arms length’ relationship. Contracting parties are assumed to be of sound mind! No two transactions in real estate are ever identical in every respect and the number of factors than can affect price or value is enormous.

Valuation of real estate is tricky. Separation of the value of land/location from the value of land-and-buildings combined is even more tricky. So is it worth the effort involved in replacing ‘z’ with ‘v’ in a three-dimensional model of landvaluescape, in order to visualise what is going on in economies in the geo-spatial sense? Are value maps valuable?

The unavoidable subjectivity in assigning value to land or locations is what many geographers, more used to mapping physical features, find discomforting about value mapping (Dale, 2002). Mapping things of less importance that can be measured more precisely and objectively, is preferred to mapping property values (accounting for at least twenty percent of the global economy) that cannot objectively be measured at all.

Yet value maps have been attempted for various reasons for about one hundred years and are becoming a fairly common feature of the property industry in some advanced countries. The last known comprehensive survey of global practice in value mapping was over twenty years ago, before the widespread use of the personal computer (PC), computer aided mass assessment (CAMA) of property values and geographic information systems (GIS). The author concluded:-

“Value maps will increasingly play a major part in research into the causes and effects of changes in land and property values.” (Howes, 1980)  Read the whole article

Case 1: Ithaca, New York: Tompkins County, where the city of Ithaca sits at the center, has land values many times those within a short walk. Dividing the county land parcels into quintiles, the highest fifth have values of $56,000 per acre and above. The lowest fifth have a value of less than $3,000 per acre. The high value area collectively constitutes only a minute proportion of the total number of square miles because most of it is farm or forest land. [see map]

... The failure to collect site rent leads to a distortion in land use configurations. If patterns unfolded along the lines of both social preference and economic efficiency, high value landsites would tend to have high value buildings, and low value landsites would tend to be vacant or have very modest buildings. Consistent with this, urban centers sites would tend to have office and commercial use, surrounded by lower-value residential land uses, and still further out would be farms and forests. The ratio of building to land value, land to total value (or for that matter any other ratio between buildings, land, and total values) would be relatively constant throughout a region. Instead, the ratio of land value to total value consistently tends to reveal a patchwork of random development. This inefficient settlement of land sites is what we know as sprawl. ... read the whole article

Land Rent

From the standpoint of an economic geographer and for some land economists, land rent is simply capitalized transportation cost. Land rent is the surplus generated by social activity on or in the vicinity of locational sites that accrues to titleholders of those parcels. Whether or not it is recaptured by public policy, rent is a natural factor deriving from the intensive use of natural capital. One must return to nineteenth-century classical economics to appreciate the importance of economic rent or land rent; neoclassical economic frameworks have largely discarded it.[13] More intensive use of high-value land sites leads to site configurations that are less dependent on transportation services. Land rent is highest where the greatest traffic and market exchanges occur, that being at the center of large conurbations. Comparing land values of urban property parcels, the highest land rent in the urban cores and traffic junctures are analogous to the contours of land elevations. Mountain peaks gradually slope down to valleys and flatland regions and continue outward until at distant points — perhaps at the poles of the earth — land sites have no market value at all.

The differentials in land values are profound, even more than most people realize. In 1995, in the small city of Ithaca, New York, the highest quintile of land had a value of over $56,000 per acre in the downtown center, whereas the lowest quintile only a mile away falls to less than $3,000.[14] Large city centers have far higher site prices. Even in Polk County, Iowa (which includes Des Moines), in the middle of cornfields where I did a study two years ago, the highest urban value land site was $31.3 million per acre, which quickly declined to about $20,000 per acre only about a mile away. In the spring of 1998, one land parcel (the building was to be razed) of less than an acre in New York City's Times Square and split in two pieces by Broadway was sold by Prudential Life to Disney for roughly $240 million.[15] To take another instance, a nine-acre tract on the East River in New York City occupied by an obsolete power plant was purchased by Mort Zuckerman to build high-rise condominiums two years ago. The sale price was in the neighborhood of $680 million and would have been higher were it not for some enormous costs associated with the demolition of the old structures.[16] It should be noted that the overwhelming proportion of land value is in cities; relatively speaking, the site values of peripheral lands, typically used for agriculture and timber growth, are negligible. Land values are high in urban areas because, over time, rent accrues to a site. Each improvement in proximity to a property parcel enhances the value of all other parcels. This makes even unimproved sites attractive objects for speculation, particularly when land sites surrounding it are to be improved by adding either transportation service or new structures. One nine-mile stretch of interstate highway in Albany, New York, costing $125 million to construct, has yielded $3.8 billion in increased land values (constant dollars) within just two miles of its corridor in the forty years of its existence.[17] This is a thirty-fold return in a time span typically used for bond repayment! The Washington Metro created increments in land value along much of the 101-mile system completed by 1980 that easily exceeded $3.5 billion, compared with the $2.7 billion of federal funds invested in Metro up until that time.[18] Any major building construction project, private or public, will have a similar effect on adjacent land sites. Differentials in land value can have a profound effect on decisions made by titleholders, either positively by inducing appropriate development in urban cores or negatively by giving monopoly titleholders power to hold sites out of use for long-term speculative gain. Such decisions of course determine the character of urban configurations and society as well. ... read the whole article

Bill Batt: Who Says Cities are Poor? They Just Don't Know How to Tax Their Wealth!

This is relatively easy to understand by considering a vacant expanse of land that has imposed upon it a grid of roads like a tic-tac-toe board. Suppose each of the squares were privately owned, and development of those sites were to ensue, the economic surplus generated by that market activity would raise the value of each of those locations. Let's further suppose that every site were developed except the center square, that titleholder choosing instead to just hold his title vacant. Which land site, discounting the building values, would command the greatest market price after a short time? The center square, of course — even though that owner made no effort to earn that increase in price. The center square would see the greatest accretion of economic rent because of its strategic access. It would be the passive beneficiary of the surplus generated by the common enterprise of all the market exchanges resulting from the other locations. In just this way rent becomes the social creation of the community and not the result of any private individual's enterprise. The more the economic activity, the more the surplus generated comes to settle on land in the form of rent. Rent accretes to land sites and raises their market value, directly reflecting the varying levels of productive economic surplus generated over time throughout a community. High economic productivity yields high surplus rent.

If one plots the land value per unit area, whether by square foot, acre, hectare, or square mile, as is now possible to easily do using modern computer programs, the differential land values are easy to approximate. Typically the center of a city experiences the peak land value, with a precipitous decline as one leaves the center and departs to its outer edge. The highest value locations are the commercial cores, falling quickly as one travels out to residential locations, and with agricultural and forest lands having only a small fraction of the value commanded at the center. In areas of New York City, the market price of locations has been shown to be in the vicinity of $500 million per acre. Even in smaller cities, there is little realization of the enormous cost of sites in core areas: in downtown Des Moines, the price per acre was $31.5 million. Other illustrations are easily available, particularly in urban areas on the east and west coasts of the US. Taking another perspective, the urbanized center of Tompkins County, New York (Ithaca) is five percent of the land area but contains ninety-five percent of the land value.[8] To see where the land values are highest, it is easiest to look at a city's skyline.[9] The tallest buildings sit on the most expensive land parcels. Typically the aggregate land value of a city is about 40 percent of the combined market value of land and improvements. The proportion of overall land value to building value is revealed by that profile, known as a landvaluescape.[10] Some buildings will exceed that proportion — a large investment on a small footprint; other sites may be vacant or depreciated buildings with a far smaller land to building ratio. The dynamic at work here is easily understood: the greater a land site's value the greater the incentive to take advantage of its location; following the same logic, the more intensive the investments in particular neighborhoods the greater market value of remaining or underused land sites, making any locations that are underutilized good candidates for improvement. So it is that downtowns generate land values many times those of farther reaches; each investment development fosters others. ... read the whole article

Ted Gwartney: Estimating Land Values

Bill Batt: Comment on Parts of the NYS Legislative Tax Study Commission's 1985 study “Who Pays New York Taxes?”

Little justification exists for taxing buildings, or improvements of any sort, so this question is easily disposed of. The practice is explained largely as a matter of historical inertia. Only in the recent century or two have buildings represented any significant capital value; prior to the rise of major cities, the value of real property lay essentially in land. American cities today typically record aggregate assessed land values – at least when the valuations are well-done – at about 40% to 60% of total taxable value, that is, of land and buildings taken together.31 Skyscrapers reflect enormous capital investment, and this expenditure is warranted because of the enormous value of locational sites. Each site gets its market price from the fact that the total neighborhood context creates an attractive market presence and ambience. By taxing buildings, however, we impose a penalty on their optimum development as well as on the incentives for their maintenance. Moreover, taxes on buildings take away from whatever burden would otherwise be imposed on sites, with the result that incentives for their highest and best use is weakened. Lastly, the technical and administrative challenges of properly assessing the value of improvements is daunting, particularly since they must be depreciated for tax and accounting purposes, evaluated for potential replacement, and so on. In fact most costs associated with administration of property taxation and appeal litigation involve disputes over the valuation of structures, not land values.

Land value taxation, on the other hand, overcomes all these obstacles. Locations are the beneficiaries of community services whether they are improved or not. As has been forcefully argued by this writer and others elsewhere,32 a tax on land value conforms to all the textbook principles of sound tax theory. Some further considerations are worth reviewing, however, when looking at ground rent as a flow rather than as a “present value” stock. The technical ability to trace changes in the market prices of sites – or as can also be understood, the variable flow of ground rent to those sites – by the application of GIS (geographic information systems) real-time recording of sales transactions invites wholesale changes in the maintenance of cadastral data. The transmittal of sales records as typically received in the offices of local governments for purposes of title registration over to Assessors’ offices allows for the possibility of a running real-time mapping of market values. Given also that GIS algorithms can now calculate the land value proportions reasonably accurately, this means that “landvaluescapes” are easily created in ways analogous to maps that portray other common geographic features. These landvaluescapes reflect the flow of ground rent through local or regional economies, and can also be used to identify the areas of greatest market vitality and enterprise. The flow of economic rent can easily be taxed in ways that overcomes the mistaken notion that it is a stock. Just as income is recognized as a flow of money, rent too can (and should) be understood as such.

The question still begs to be answered, “why tax land?” And what happens when we don’t tax land? Henry George answered this more than a century ago more forcefully and clearly, perhaps, than anyone has since. He recognized full well that the economic surplus not expended by human hands or minds in the production of capital wealth gravitates to land. Particular land sites come to reflect the value of their strategic location for market exchanges by assuming a price for their monopoly use. Regardless whether those who acquire title to such sites use them to the full extent of their potential, the flow of rent to such locations is commensurate with their full capacity. This is why John Stuart Mill more than a century ago observed that, “Landlords grow richer in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.”33 Absent its recovery by taxation this rent becomes a “free lunch” to opportunistically situated titleholders. When offered for sale, the projected rental value is capitalized in the present value for purposes of attaching a market price and sold as a commodity. Yet simple justice calls for the recovery in taxes what is the community’s creation. Moreover, the failure to recover the land rent connected to sites makes it necessary to tax productive activities in our economy, and this leads to economic and technical inefficiency known as “deadweight loss.”34 It means that the economy performs suboptimally.

Land, and by this Henry George meant any natural factor of production not created by human hands or minds, is ours only to use, not to buy or sell as a commodity. In the equally immortal words of Jefferson a century earlier, “The earth belongs in usufruct to the living; . . . [It is] given as a common stock for men to labor and live on.”35 This passage likely needs a bit of parsing for the modern reader. The word usufruct, understood since Roman times, has almost passed from use today. It means “the right to use the property of another so long as its value is not diminished.”36 Note also that Jefferson regarded the earth as a “common stock;” not allotted to individuals with possessory titles. Only the phrase “to the living” might be subject to challenge by forward-looking environmentalists who, taking an idea from Native American cultures, argue that “we do not inherit the earth from our ancestors; we borrow it from our children.” The presumption that real property titles are acquired legitimately is a claim that does not withstand scrutiny; rather all such titles owe their origin ultimately to force or fraud.37

If we own the land sites that we occupy only in usufruct, and the rent that derives from those sites is due to community enterprise, it is not a large logical leap to argue that the community’s recovery of that rent should be the proper source of taxation. This is the Georgist argument: that the recapture of land rent is the proper – indeed the natural – source of taxation.38 ... read the whole commentary

Nic Tideman: Market-Based Systems for Assigning Rental Value to Land