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Land "earning" more than work

Particularly in California, many property owners receive more benefit each year from appreciation of their landholdings than they earn by working full-time.  In large part, this is due to Proposition 13, which limits property taxes to no more than 1% of the assessed value of the property, and limits rises in the assessed value to no more than 2% per year, corrected only when more than 51% of the ownership changes.  This has sustained our economy in a period when wages have not been sufficient to meet needs.  But of course only those who are property owners are currently able to profit from this (leaving one third of Americans totally out of the benefit), and only those whose property is well-located can benefit from this, leaving much of middle America out of the party.  Those who are the biggest beneficiaries are those who own property in the coastal states, and the biggest beneficiaries are often the absentee landlords, the bulk of whose "earnings" are earnings not from capital (manmade and legitimately private property) but from land (not manmade, and legitimately common property).

When our society comes to recognize this, we will be on our way to reforming it. And reforming it is straightforward, as Henry George told us 125 years ago. The remedy is to make land common property by placing our taxes on land values.

Henry George:  The Land Question (1881)

When a man makes a fortune by the rise of real estate, as in New York and elsewhere many men have done within the past few months, what does it mean? It means that he may have fine clothes, costly food, a grand house luxuriously furnished, etc. Now, these things are not the spontaneous fruits of the soil; neither do they fall from heaven, nor are they cast up by the sea. They are products of labor – can be produced only by labor. And hence, if men who do no labor get them, it must necessarily be at the expense of those who do labor.

Herbert J. G. Bab:  Property Tax -- Cause of Unemployment (circa 1964)

Let us now turn to that part of the tax that is assessed on land. Increases in population, immigration from the farms and other forces have led to a rapid increase in the population of our large cities and metropolitan areas. Population pressure is bound to increase the value of urban land. Yet an adequate system of land taxation could have prevented the steep rise in urban land values.

Economists agree that taxes on land can not be shifted but are capitalized. For instance a lot having a value of $10,000 -- will have an imputed or expected income of $500 -- assuming a 5% rate of capitalization. A 2-1/2% yearly "ad valorem" tax would reduce the imputed income by $250 -- or 50%. Such a tax would naturally reduce the value of the land by the same percentage.

For these reasons increases in land values can be prevented by taxing land at an appropriate rate. Yet urban land values have increased tremendously during recent years. For instance in Los Angeles county the assessed value of land increased from $1,972 millions in 1952 to $4,002 millions in 1962, an increase of a little over 100%. The assessed values, are supposed to represent 25% of the market value. Thus the unearned increment in land values during this period amounted to not less than $8 billions. Even this figure is an understatement because it is based on assessed values and land is greatly underassessed. While land values have risen by about 10% yearly, property taxes assessed on land averaged about 1.5%. Thus a person owning vacant or underimproved land would have earned about 8 1/2% per year just by withholding land from its proper use.

A higher tax on vacant or unimproved land would make it unprofitable to hold such lands. It will tax land into better use and it will lead to a spurt in construction activity. While all other taxes are deterrents to employment and economic growth, though to a varying extent, land taxes are the only genuine incentive taxes. Read the whole article

Mason Gaffney: The Partiality of Indexing Capital Gains
Tantamount to ignoring land is minimizing its weight. Thus one may acknowledge it indulgently, while actually dismissing it. In fact, though, land comprises some half the assessed value of taxable real estate in California, and is not dismissable. Half the assessed value means more than half the market value because of assessment discrimination favoring land. A raft of studies of assessment discrimination, like the sales/assessment ratio studies of the U.S. Census, show consistent patterns of discrimination favoring land. In addition to ordinary assessment discrimination there is much legislated underassessment, for land in forest, farm, country club, and other favored uses.  ...

Most states legislate similar loopholes, widely used by suburban land speculators. More generally, the effect in California of Prop. 13 is to keep much land assessed not much above its 1978 valuation.] If that data were not enough, most of us resident in California have been through one or more years since 1976 when the value of our homes alone rose by more than our annual salaries. [As early as 1970 it was possible to document a high share of land value in national wealth: Mason Gaffney, 1970, "Adequacy of land as a Tax Base," in Daniel Holland (ed.), The Assessment of Land Value, Madison: University of Wisconsin Press, pp. 157-212. The theme is further developed in the writer's "Why Research Farmland Ownership and Values?", 1985, in T.A. Majchrowitz and R.R. Almy (eds.) Property Tax Assessment, Chicago: U.S.D.A., I.A.A.O, and The Farm Foundation, pp. 91-109.... read the whole article

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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper