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Urban land is far more valuable than rural land, a fact most of us don't realize and whose huge significance we may tend to gloss over. It has the power to either solve our social problems or create them, depending on who benefits from it.
Very briefly, an acre of decent agricultural land in Vermont might sell for $2,500. (In the midwest, agricultural land values are somewhat lower.) An acre in midtown Manhattan can sell for over $250,000,000 — on those rare occasions when a landholder puts it on the market — with or without a building on it. The difference is a ratio of 1:100,000! And as population increases and social and technological progress continues, that ratio will rise.
A May, 2006, Federal Reserve Board study found that in the top 46 metro
markets, land accounted for, on average, 50.9% of the value of single-family
housing stock, in 2004. The study reported that in the remainder of the country,
the corresponding value, for 2000, was about 27%. The 50.9% figure ranged
from a low of 23.3% in Oklahoma City to a high of 88.5% in the San Francisco
metro. (source: http://www.federalreserve.gov/pubs/feds/2006/200625/index.html)
A 40-story condominium or office building is an effective way of sharing a scarce resource: urban land. But even a new 40-story building with a lot of amenities may not be worth as much as the land on which it sits, if the central business district is healthy. An older building may be worth a tiny fraction of what the land is worth, and may even have a negative worth: it costs money to tear it down and remove the rubble, restoring the site to readiness for a new structure.
What are the implications of this? When a tenant pays a landlord for occupancy, a significant fraction of what he is paying for is not the structure or the services the landlord provides, but the location itself. The services the city provides (subways, buses, paved streets, water, sewer, emergency services, commuter trains, airports, etc) and the population that can reach that site are what give the site value. And yet it is the landlord who gets to collect the tenants' money month by month, and, when he/it is ready to sell, it is the landholder who profits from the appreciation of the site. What kind of sense does this make? What does it mean to our distribution of wealth and income in this country? What sort of leverage does this give the owners of those sites, and our other valuable resources (e.g., taxi medallions, radio and tv channels, wireless spectrum, water and reservoir lands, etc.)? Each of these is part of the natural or societal creation, and yet we permit the privatization of what should be common resources. The "ownership society" concept encourages each of us to believe that the nibbles we can afford at the edges are our fair share of the economy. But to achieve fairness, a far better way would be to collect the land rent -- the value of all the sites and spectrum and other things we all rely on -- from those who seek to use them, based on predictably scheduled auctions -- and use that as the basis of our common spending, which helps to provide the subways, buses, paved streets, water, sewer, emergency services, railroads, airports, etc), rather than taxing our buildings (1%), our sales (6-11%), our wages and other income (15% to 39% of some portion of it, subject to shelters and evasion). Leona Helmsley, the Manhattan real estate magnate, said it clearly, though most of us misunderstood the significance of what she said: We don't pay taxes. The little people pay taxes.
Lest we think that urban land values have only recently become significantly higher than rural land values, consider that over 125 years ago, Henry George noted the huge difference, and ultimately made the connection between poverty and urban land values, which led to his first book, Progress & Poverty. Even in his day, he noted that there were properties whose value was over $1,000,000 per acre (see, for example, The Single Tax: What It Is and Why We Urge It). And $1,000,000 then — the 1880s — was worth a lot more than $1,000,000 is today!
The return that goes to the landholder is not available for labor or capital, and by definition depresses economic activity. The alternative, collecting for the commons much or all of the return that goes to land, and using it as the basis for public spending — instead of sales taxes or wage taxes — would lower the price of land, and permit labor and capital to get their just return in the form of wages and interest. This would promote equity, justice and saving, instead of promoting speculation in land.
The owner of city land takes, in the rents he receives for his land, the earnings of labor just as clearly as does the owner of farming land. And whether he be working in a garret ten stories above the street, or in a mining drift thousands of feet below the earth's surface, it is the competition for the use of land that ultimately determines what proportion of the produce of his labor the laborer will get for himself. This is the reason why modern progress does not tend to extirpate poverty; this is the reason why, with all the inventions and improvements and economies which so enormously increase productive power, wages everywhere tend to the minimum of a bare living. The cause that in Ireland produces poverty and distress – the ownership by some of the people of the land on which and from which the whole people must live – everywhere else produces the same results. It is this that produces the hideous squalor of London and Glasgow slums; it is this that makes want jostle luxury in the streets of rich New York, that forces little children to monotonous and stunting toil in Massachusetts mills, and that fills the highways of our newest States with tramps.... read the whole article
Henry George: The Crime of Poverty (1885 speech)
I am talking too long; but let me in a few words point out the way of getting rid of land monopoly, securing the right of all to the elements which are necessary for life. We could not divide the land. In a rude state of society, as among the ancient Hebrews, giving each family its lot and making it inalienable we might secure something like equality. But in a complex civilisation that will not suffice. It is not, however, necessary to divide up the land. All that is necessary is to divide up the income that comes from the land. In that way we can secure absolute equality; nor could the adoption of this principle involve any rude shock or violent change. It can be brought about gradually and easily by abolishing taxes that now rest upon capital, labour and improvements, and raising all our public revenues by the taxation of land values; and the longer you think of it the clearer you will see that in every possible way will it be a benefit.
Now, supposing we should abolish all other taxes direct and indirect, substituting for them a tax upon land values, what would be the effect?
There is no need for poverty in this world, and in our civilization. There is a provision made by the laws of the Creator which would secure to the helpless all that they require, which would give enough and more than enough for all social purposes. These little children that are dying in our crowded districts for want of room and fresh air, they are the disinherited heirs of a great estate.
Did you ever consider the full meaning of the significant fact that as progress goes on, as population increases and civilization develops, the one thing that ever increases in value is land?there the speculator jumps in, land rises in value, and a great boom takes place, and people find themselves enormously rich without ever having done a single thing to produce wealth.
Now, it is by virtue of a natural law that land steadily increases in value; that population adds to it; that invention adds to it; that the discovery of every fresh evidence of the Creator’s goodness in the stores that He has implanted in the earth for our use adds to the value of land, not to the value of anything else. This natural fact is by virtue of a natural law, a law that is as much a law of the Creator as is the law of gravitation.
What is the intent of this natural law of increasing land values? Is there not in it a provision for social needs? That land values grow greater and greater as the community grows and common needs increase: is there not built into this law a manifest provision for social needs — a fund belonging to society as a whole, with which we may take care of those who fall by the wayside — with which we may meet public expenses, and do all the things that an advancing civilization makes more and more necessary for society to do on behalf of its members?
Today the value of land in New York city is over a hundred million annually. Who has created that value? Is it because a few landowners are here that that land is worth a hundred million a year? Is it not because the whole population of New York is here? Is it not because this great city is the center of exchanges for a large portion of the continent? Does not every child that is born, every one that comes to settle in New York, does it not add to the value of this land? Ought it not, therefore, get some portion of the benefit? And is it not wronged when, instead of being used for that purpose, certain favored individuals are allowed to appropriate the fund of land values?
We might take this vast fund for common needs; we might with it make a city here such as the world has never seen before — a city spacious, clean, wholesome, beautiful — a city that should be full of parks; a city without tenement houses; and we could do this, not merely without imposing any tax upon production, without interfering with the just rights of property, but while at the same time securing far better than they are now the rights of property, and abolishing the taxes that now weigh on production. ... read the whole article Speculators all over the country appreciate that fact. Wherever there is a chance for population coming; wherever railroads meet or a great city seems destined to grow; wherever some new evidence of the bounty of the Creator is discovered, in a rich coal or iron mine, or an oil well, or a gas deposit,
Mason Gaffney: The Taxable Capacity of Land
Another attractive feature of land taxation is its interesting positive effect on the economic base of a city. It strengthens it by its tendency to hit absentee owners harder than resident owners. The land fraction in real estate is generally highest in the CBD of any city, so that is a favorite place for absentees to buy and hold. They like the steady income, and the "trophy" quality. The surplus in real estate is what attracts outside buyers, and land is what yields the surplus. About 2/3 of downtown Los Angeles is owned by non-resident aliens, for example. In a more workaday city, Milwaukee, the absentee owners consist of former residents, or their heirs, who grew too rich to abide the harsh winters.
Consider the effect on your balance of payments. When you get more tax money from absentees, money that used to flow to Tehran, Zurich, or Palm Beach now flows into your local treasury to pay your local teachers and city workers, and relieve your builders and building managers. In this way taxing land actually acts to undergird the value of its own base. ... Read the whole article
The size of rent is not reported in capitalist nations, except to trivialize it. Their national accountants, dominated by landowners, neglect or conceal it artfully, to protect it from being taxed. Local governments do, however, measure and tax property by value. More than half the value of property is land. In Vancouver, B.C., 73% of the value of all property assessed for taxation is land, even though much land there is exempt from tax, and not assessed at all. In California's major cities it would be just as high if only we assessed land here as accurately as they do there. Read the whole articleWalter Rybeck: What Affordable Housing Problem?
Like all creatures -- goldfinches, squirrels, butterflies, cicadas -- we humans are squatters on this planet. We all need a part of earth for shelter, nourishment, a work site and a place to raise the next generation. Otherwise we perish. ...
In the 1980s, Washington, D.C., was concerned about its growing army of homeless. At that time I found there were 8,000 boarded-up dwelling units in our Nation's Capital -- more than enough to accommodate some 5,000 street people. I also found there were 11,500 privately owned vacant lots in the District of Columbia, mostly zoned for and suitable for homes or apartments. Decent housing on these sites held in cold storage would have provided an alternative for the many low-income families squatting in places that were overcrowded, overpriced, overrun with vermin and overloaded with safety hazards.
These issues spurred my research described in a 1988 report, "Affordable Housing -- A Missing Link." Evidence from the Census Bureau, Bureau of Labor Statistics and other sources over a 30-year period revealed the following average cost increases of items that go into the building and maintenance of housing:
Why do those statistics not seem to jibe with what you have been told, seen with your own eyes, and felt in your own pocketbooks?
The answers would be obvious except that, so far, I have not mentioned what happened to the price of the land that housing sits on. Many of those who talk and write about housing conveniently overlook the fact that housing does not exist in mid air but is attached to the land, and that the price of this land has gone through the stratosphere.
In contrast to those 11- to 14-percent annual increases in housing-related costs, residential land values nationwide rose almost 80 percent a year, or almost 2000 percent over those three decades. ...
A close friend in Bethesda bought a house and lot there 40 years ago for $20,000. Two months ago he sold the property for a cool half million. That 2400 percent increase was entirely land value. The buyer immediately demolished the house to put up a larger one, so he clearly paid half a million for the location value -- the land value -- alone.
Officials, civic leaders and commentators who bemoan the lack of affordable housing nevertheless applaud each rise in real estate values as a sign of prosperity. Seeing their own assets multiply through no effort of their own apparently makes them forget the teachers, firemen, police and low-income people who are boxed out of a place to squat in their cities and neighborhoods. ...
Many of our Founding Fathers, George Washington included, had amassed huge estates. But the property tax induced them to sell off excess lands they were not using. ...
One of the many virtues of a tax on land values is that it can be introduced gradually. Cities that take this incremental approach report that homeowners-voters-taxpayers hardly notice the change. What's important in modernizing your taxation is not the speed of change but the direction you choose. If you keep the present tax system with its disincentives for compact and wholesome growth, you will experience the treadmill effect that has been so familiar in so-called urban and housing "solutions." You will have to keep running faster and faster with patchwork remedies to keep from sliding backward.
A caution. Revising taxes as proposed here will not end the need for housing subsidies, at least not in the short run, but it will do three things that should greatly reduce subsidies.
In Conclusion, I have tried to show that America has a housing land problem, not an affordable housing problem. This problem can be substantially alleviated by freeing the market of anti-enterprise taxes and by turning the property tax right side up -- that is, by dropping tax rates on housing and by raising them on publicly-created land values. Read the whole article
Mason Gaffney: The Taxable Capacity of Land
The question I am assigned is whether the taxable capacity of land without buildings is up to the job of financing cities, counties, and schools. Will the revenue be enough? The answer is "yes."
The universal state and local revenue problem today is whether we must cap tax rates to avoid driving business away. It is exemplified by Governor Pete Wilson of the suffering State of California. He keeps repeating we must make a hard choice: cut taxes and public services, or drive out business and jobs. (When a public figure gives you two choices you know they're both bad, and he wants one of them.)
The unique, remarkable quality of a property tax based on land ex buildings is that you may raise the rate with no fear of driving away business, construction, people, jobs, or capital! You certainly will not drive away the land. However high the tax rate, not one square foot of it will put on a track shoe and hop out of town. The only bad thing to say about this tax's incentive effects is that it stimulates revitalization, and makes jobs. If some people think that is bad, maybe this attitude is the problem. ...
I have here data ... I worked up in Milwaukee from 1969 data indicating that, if land were assessed correctly, the land fraction of the real estate tax base would be over twice what the City Assessor reported. His fraction was 31%; it should have been 70%.
How does one come to so startling a finding? Wisconsin is not a backward state. It prides itself on the high quality of its public administration. What I did was study sites on the eve of demolition. When you buy an old junker to tear down and replace with a new building, you (the market) are obviously recognizing that the building has no residual value. All the value is then in the land. However, in Milwaukee in 1969 the Assessor was saying the building was worth about three times as much as the land, just before tear-down. That is a good way to measure to what extent land is underassessed.
Try that in Manhattan. When the visitor first gapes at its skyline from afar, it looks like one big modern high-rise. If you poke around on foot much, though, you soon realize those are the exception. Most of the lots are covered with obsolete junk, some of it tumbledown, commanding rents mainly for their location value.
Check the Empire State Building. Old as it is, it is still nearly the tallest building in the world. As to its site, it is in a so-so reach of 5th Avenue (34th Street), many blocks from the 100% location (57th Street, I would guess). Even so, when the site and the building sold in separate transactions a few years ago, the site represented 1/3 of the total value. What does that say about the land fraction on neighboring parcels, covered only with the remains of ordinary old structures? What does that say about the land fraction nearer the 100% location? ...
"How about corporate stock?", I hear. "Should we exempt corporate wealth from the property tax?" Actually, almost all jurisdictions already exempt stock and all other "intangible" property. Not to worry, however, you tax corporate assets. When you rank property owners by value of holdings, the top ten on most tax rolls are all corporations. None of their multi-national profit-shifting through layered ownership of foreign subs, and creative transfer pricing, can hide their taxable property on your assessor's maps. This makes sense anyway. Why should you think you can tax a corporation for its business in Malaysia? What concerns you is its property in your town. ...
In other cases, industries occupy land of high value that is wrongly assessed low simply because industry occupies it, and it has not been subdivided. What has subdivision to do with it? The bias of assessors is to value industrial "acreage" low, relative to improved "lots," even though they lie cheek by jowl. It is a kind of wholesale discount for owners of "raw" (undivided) tracts.
For example, in West Allis, Wisconsin, the southwest corner of the Allis-Chalmers plant occupies the northeast corner of the 100% location, the most valuable commercial site in town. That land, with the same retail potential as the other three corners, is assessed as raw industrial acreage, as though it were in the boonies, with no recognition of its high location value for retail/office use. To make a land tax work, the assessor must be reinstructed to value that land at its highest and best use rather than as ordinary raw acreage. Exempting buildings would create the necessary pressure, thus solving the very problem that otherwise might be taken as a point against it. As noted earlier, the U.S. Census of Governments gives us no data on this point. You, however, can find it easily enough: tax assessments are public records, and you know your own town. ...
"Hold on once more," I hear, "not so fast, how about the mansions of rich people?" Another fair question: how, indeed, can you justify exempting them from taxation? The answer may astonish you. Here are some data from British Columbia that speak to the point. They are from the area around Vancouver (The "Lower Mainland") and the southern part of Vancouver Island, around Victoria, where over half the people in the province live. B.C. practices high quality professional assessment; data from its rolls are quite reliable, as such things go.
Cities and districts around Vancouver and Victoria are ranked, in Table 1, according to the land value per property (single-family residences). These range from nearly $700,000 each in the "University Endowment Lands" district (very posh), to around $40,000 each in the "Victoria Rural" district (more modest). The last column, LSREV (Land Share of Real Estate Value), shows the land value (L) as a share of the total value (B+L).
These shares range from a high of 80% on the University Endowment Lands (UEL) down to 38% in Colwood (the lowest), and 39% in Victoria Rural (next to lowest). In between, the numbers follow the trend closely. The dearer the land parcels, the higher is the "land fraction" (the fraction of total real estate value that is land value). From such data, one might formulate a rule along the lines that "the lot value increases with the square of the house value." It is hard to be so precise, and not necessary. The relevant rule we need here is just that people's house values are more alike than their lot values. It is lot value, more than house value, that divides the rich from the poor.
Now do us both a favor, please. Pause and savor that comparison. Let it linger, as though you were testing a slow sip of wine from Fredonia's famous grapes. Roll it on your tongue, mull sensually over its aroma and bouquet, and, getting back to business, mull cerebrally over its full import. The house that shelters the very rich family is worth 2.8 times the house of the modest family; but the land under the house of the very rich is worth 17.5 times the land of the modest. Seventeen and one half times as much! Again, it is lot value, more than building value, that divides the rich from the poor. Seldom will you find an economic rule more strongly supported by data. It's just a matter of presenting the data so as to test and bring out the rule.
An American counterpart of Vancouver's "University Endowment Lands" is Beverly Hills, California, where land value composes some 80% of residential values, and the mean parcel is worth something like a million dollars. Beverly Hills, with its great wealth and mansions, is known as "Tear-down City." Every year many a grand old palace that once sheltered some renowned matinee idol, and rang to scandalous parties, is torn down to salvage its site for the next, grander one. In a land boom, such as crested in 1989, half the city goes to the brink of demolition and replacement.
What do those data tell us? The rich as a rule do not live next to the poor. Rather, they cluster in neighborhoods with much higher lot values. The poor seek shelter first, and go where it is affordable. The rich put a high premium on location, neighborhood, views, and grounds, resulting in higher land fractions in their real estate. Mansions are visible evidences of wealth, impressing viewers powerfully; land values are invisible. The perceptual bias is to underrate the invisible, if you are not regularly in the real estate market. In the numbers, however, land and buildings are equally visible, and their message is clear. It is land value more than house value that divides the rich from the poor. Ergo, a tax shift from buildings to land is a shift from the poor to the rich, even though the houses of the rich are exempted. It makes the property tax more progressive. ... Read the whole articleLindy Davies: The Cat in New York
When I taught at the Henry George School in New York, our Director, George Collins, used to give a stirring graduation speech to students. He told them they would find that the gift of insight they'd been given, in studying Georgist political economy, was also a kind of curse: they would never look upon their city with the same eyes. The land question and its ramifications, the malignant absurdities of today's economic systems and the sheer obviousness of the remedy, would shout at them in every day's news.
I was reminded of that when I recently visited New York. We stayed with cousins in Park Slope, Brooklyn, which is by all accounts one of the sanest and most pleasant neighborhoods in the city. Things were still running there: the coffee shops, the restaurants, Prospect Park, the Library, the Brooklyn Academy of Music. Well, now, in the Park, actually, the zoo was about to close because of budget cuts; the Mayor had suggested that devotees of the zoo should perhaps secure sources of private funding to keep it open. ...
Economists note in this budget crunch, as in others the city has faced, a curious disconnect between the fiscal crisis and the overall economy. Tax receipts are way down and the budget outlook is indeed scary, even while the underlying economy actually lurches toward recovery. If it weren't for the large declines in the (admittedly, very important) financial and tourism sectors, the city's economy would not be performing badly at all. How unfortunate, then, that New York will see no other alternative than to choke off economic recovery by raising income and sales taxes while cutting back on public services. But what can they do? The tax base is declining.
Or is it? It turns out that land values in New York, while modestly down in some areas, have not taken anywhere near the beating that the Stock Market has, or the small business community, or public services. No, the real estate market in New York City remains, all in all, quite bullish. There are few bargains to be had. Residential rents, of course, having been held artificially low by rent stabilization, provide no relief even in a weak market.
So, no -- despite the dire warnings, New York City need not endure a fiscal crisis. Its tax base -- properly defined -- is robustly capable of providing for public needs, while actually bringing business into the city. They have just been taxing the wrong things, all along. Tourists, bulls and bears come and go, but New York City's land values -- like its citizens -- are quite resilient. Read the whole article
Nic Tideman: The Case for Taxing Land
I. Taxing Land as Ethics and Efficiency
II. What is Land?
III. The simple efficiency argument for taxing land
IV. Taxing Land is Better Than Neutral
V. Measuring the Economic Gains from Shifting Taxes to Land
VI. The Ethical Case for Taxing Land
VII. Answer to Arguments against Taxing Land
There is a case for taxing land based on ethical principles and a case for taxing land based on efficiency principles. As a matter of logic, these two cases are separate. Ethical conclusions follow from ethical premises and efficiency conclusions from efficiency principles. However, it is natural for human minds to conflate the two cases. It is easier to believe that something is good if one knows that it is efficient, and it is easier to see that something is efficient if one believes that it is good. Therefore it is important for a discussion of land taxation to address both question of efficiency and questions of ethics.
This monograph will first address the efficiency case for taxing land, because that is the less controversial case. The efficiency case for taxing land has two main parts. ...
To estimate the magnitudes of the impacts that additional taxes on land would have on an economy, one must have a model of the economy. I report on estimates of the magnitudes of impacts on the U.S. economy of shifting taxes to land, based on a mathematical model that is outlined in the Appendix.
The ethical case for taxing land is based on two ethical premises: ...
The ethical case for taxing land ends with a discussion of the reasons why recognition of the equal rights of all to land may be essential for world peace.
After developing the efficiency argument and the ethical argument for taxing land, I consider a variety of counter-arguments that have been offered against taxing land. For a given level of other taxes, a rise in the rate at which land is taxed causes a fall in the selling price of land. It is sometimes argued that only modest taxes on land are therefore feasible, because as the rate of taxation on land increases and the selling price of land falls, market transactions become increasingly less reliable as indicators of the value of land. ...
Another basis on which it is argued that greatly increased taxes on land are infeasible is that if land values were to fall precipitously, the financial system would collapse. ...
Apart from questions of feasibility, it is sometimes argued that erosion of land values from taxing land would harm economic efficiency, because it would reduce opportunities for entrepreneurs to use land as collateral for loans to finance their ideas. ...
Another ethical argument that is made against taxing land is that the return to unusual ability is “rent” just as the return to land is rent. ...
But before developing any of these arguments, I must discuss what land is.
What is Land?
David Ricardo defined land, memorably, as ‘the original and indestructible powers of the soil.’ This definition is overly narrow. It would exclude from land such valuable and destructible things as minerals and topsoil. Ricardo’s definition even suggests that the value of land arising from urban locations might not be included in ‘land,’ since it would not necessarily qualify as a ‘power of the soil.’
The definition of land that is most useful in economic theory is that land is all scarce factors of production other than people and the products of human effort. Land is the gifts of nature. Thus land includes both rural and urban territory, mineral resources, water, fish in oceans and rivers, virgin forests, geosynchronous orbits and the frequency spectrum. ...
With urban land there is a different type of interdependency between use at one time and the potential flow of services at another. To be used most productively, urban land must be combined with durable, immobile capital. Therefore an increase in the intensity of urban land use often requires the destruction of previous capital investments. This intertemporal dependence means that, in principle, a forecast of all future economic conditions is needed to know what use of land is best today. Since people make different forecasts, they reach different conclusions about what use of land is best today. Only with the passage of time, if at all, is it possible to know what use of land would have been best.
The fact that structures are durable and immobile also means that care must be taken in defining the value of the flow of land services. There is a tendency to think of “the rent of land” as the amount of money that land yields to those who have exclusive use of it. However, this formulation is not always useful for defining the rent of land over a particular interval of time. If an investor spends a year and £20 million erecting a building that is expected to last for 30 years, what was the rent of the land under the building during the year of construction? It is not sensible to say that, if the best possible use of the land produces a negative cash flow over a given interval of time, then land has no rental value over that interval. If markets were perfect and the decision to construct the structure was optimal, the finished building would have a value that was greater than its cost of construction by the rent of the land it occupied and the accumulated interest on construction costs and land rent. But if a non-optimal construction decision is made, that does not reduce the rent of land.
To give a meaning to ‘the rent of land’ that does not depend on when construction happens to occur, it is useful to define ‘the rent of land’ as the opportunity cost of leaving vacant land vacant. Thus in the case of the year of construction discussed above, one would ask, ‘Suppose that the construction had been postponed for a year. Perhaps by that time it would be appropriate to invest in a £21 million building rather than a £20 million building. If one developed the most profitable possible plan for the land, subject to the constraint that the land be left vacant for the first year, how much lower would the present value of net returns be?’ The answer to this question, the loss of the present value of net returns from postponing use of land for a year, would be the rent of the land for the year. This is the amount of money that one would need to get in net returns from some pre-existing use to justify postponing redevelopment for a year. Thus the rent of land for any developed site, for any year, is defined to be the answer to the question, ‘If this site were undeveloped, what would be the cost of leaving undeveloped and unused for a year?’
Land also differs from labor and capital in the origin of claims to own it.
Ownership of land is thus a form of privilege. The word ‘privilege’ comes from the Latin prive + legis, meaning ‘private law’. A private law is a law that has someone’s name it, that is, a law that authorizes one person to do what others are not permitted to do. In a just world, there would be no privilege. (Thus no one is underprivileged.) In a just world, land would not be ‘owned’, but rather ‘held’ or ‘possessed’, subject to a payment that reflected the value given up by others in allowing one person to have exclusive use of a site. ... Read the whole article
Nic Tideman: Using Tax Policy to Promote Urban Growth
Urban growth is desired because it raises peoples' incomes. In a market economy, incomes can be divided into components derived from four factors of production:
Thus a successful urban growth strategy in a market economy must either increase the amounts of land, labor, capital and entrepreneurship that are used in a city or increase the payments that are made per unit of each factor, or both.
The land that a city has is fixed (or if it changes, it does so at the expense of other administrative units). Therefore, with respect to land, socially productive urban growth means adopting policies that raise the productivity of land. Labor, on the other hand, is reasonably mobile, and capital is highly mobile. Entrepreneurship springs up and fades away with the rise and fall of opportunities. Therefore, in a market economy, the payments that must be made to attract these factors are substantially outside the control of a city. Thus the growth of a city with respect to labor, capital and entrepreneurship is achieved primarily by making the city a place that attracts more of these factors, taking the rates of wages, interest and profits that must be paid to attract them as given by market forces.
Tax policy is critical for urban growth because taxes on the earnings of labor, capital and entrepreneurship drive these factors away. A city that desires to grow should refrain from taxing wages, interest or profits and concentrate its taxes on land, which does not have the option of moving away.
Certain other sources of public revenue, in addition to the rent of land, have the characteristic of not discouraging growth. These sources of revenue involve either charging people for using scarce opportunities that no one created, as with land, or charging people for the costs that their actions impose on others.
A city that wishes to grow should confine its search for revenue to these sources. In this way it will attract more labor, capital and entrepreneurship, thereby raising the rent of land, which can be collected publicly without discouraging growth.
Additions to the stock of capital are extremely important for urban growth, because of the impact of abundant capital on wages and rents. When capital is abundant, labor and land are more productive, and the more productive they are, the higher wages and rents are. ...... Every activity that is continued should pass a test of providing adequate value for money. Most of the worthwhile activities of local governments raise the rental value of the land in the vicinity of the activity by enough to pay a substantial fraction if not all of the costs of the activity.
Thus the rental value of land is a natural first source of financing for local public expenditures.
Making the rental value of land a principal source of local public revenue has both an equity rationale and an efficiency rationale. The equity argument for social collection of the rent of land is founded on a recognition that the rental value of land has three sources.
The efficiency argument for social collection of the rent of land has two parts.
To achieve the potential efficiency of public revenue from land, it is important that people not be charged more for the use of land, just because they happen to be using it particularly productively. The rental value of land should be reassessed regularly, the values that are determined should vary smoothly with location, and they should be available for public inspection so that all users of land can see that they are being charged amounts commensurate with what their neighbors are being charged.
Social collection of the rent of land also facilitates the privatization of land. If every user of land is charged annually according to the rental value of the land that he or she holds, then it is possible to undertake a just privatization of land simply by passing out titles to the current users of land.
No one will be disadvantaged by not receiving land. Future generations will not be deprived by not having been awarded shares. And the community will have a continuing income from the rent of land.
The efficiency that is entailed in using the rent of land to finance public activities applies to certain other sources of public revenue as well:
1. Charges on any publicly granted privileges, such as the exclusive right to use a portion of the frequency spectrum for radio and TV broadcasts.
All of the above taxes are positively beneficial and should be collected even if the revenue is not needed for public purposes. Any excess can be returned to the population on an equal per capita basis. If these attractive sources of revenue do not suffice to finance necessary public expenditures, then the least damaging additional tax would probably be a "poll tax," a uniform charge on all residents. If some residents are regarded to be incapable of paying such a tax, then the next most efficient tax is a proportional tax on income up to some specified amount. Then there is no disincentive effect for all persons who reach the tax limit. The next most efficient tax is a proportional tax on all income.
It is important not to tax the profits of corporations. Capital moves from where it is taxed to where it is not, until the same rate of return is earned everywhere. If the city refrains from taxing corporations they will invest more in St. Petersburg. Wages will be higher, and the rent of land, collected by the government, will be higher. The least damaging tax on corporations is one that provides a complete write-off of investments, with a carry-over of tax credits to future years. Such a tax has the effect of making the government a partner in all new investments. With such a tax the government provides, through tax credits, the same share of costs that it later receives in revenues. However, the tax does diminish the incentive for entrepreneurial activity, and it raises no revenue when investment is expanding rapidly. Furthermore, the efficiency of such a tax requires that everyone believe that the tax rate will never change. Thus it is best not to tax the profits of corporations at all. If the people of St. Petersburg want to share in the profits of corporations, then they should invest directly in the corporations, either privately or publicly. The residents of St. Petersburg would be best served by refraining from taxing the profits of corporations. Creating a place where profits are not taxed can be expected to attract so much capital that the resulting rises in wages and in government-collected rents will more than offset what might have been collected by taxing profits.
The taxes that promote urban growth have at least one of two features.
Jeff Smith and Kris Nelson: Giving Life to the Property Tax Shift (PTS)
John Muir is right. "Tug on any one thing and find it connected to everything else in the universe." Tug on the property tax and find it connected to urban slums, farmland loss, political favoritism, and unearned equity with disrupted neighborhood tenure. Echoing Thoreau, the more familiar reforms have failed to address this many-headed hydra at its root. To think that the root could be chopped by a mere shift in the property tax base -- from buildings to land -- must seem like the epitome of unfounded faith. Yet the evidence shows that state and local tax activists do have a powerful, if subtle, tool at their disposal. The "stick" spurring efficient use of land is a higher tax rate upon land, up to even the site's full annual value. The "carrot" rewarding efficient use of land is a lower or zero tax rate upon improvements. ...
Might the PTS fall heavily on low-income land holders and elderly homeowners? The land-rich, money-poor old widow could suffer if society were to levy sites. Eventho' the vast majority of poor people would come out ahead, there probably will be the rare exception. To deal with "the widow on a valuable lot", the new policy could include deferments.
Just as some poor could pay more, some rich could pay less, such as the owners of a skyscraper that'd be the highest (literally) and best use of a site. While a PTS could be a tax break for a few, the intent of the shift is not so much to whittle away fortunes as it is to promote prosperity, equity, and sustainability. Were society to attain such goals, letting some fortunes escape unscathed is a small price to pay. Also, putting a site to best use, while profitable, also benefits the community by providing convenient employment, bringing money into the local economy, and by precluding less efficient development, such as sprawl.
Since the shift is progressive, then the rich are footing the bill for everyone else. To answer this charge that one group will pay more (those who can afford it), proponents could note that the amount one pays is scaled according to the value of what one takes -- a parcel of nature. The payment is for exclusive use to our common heritage. Those who exclude the rest from the best must expect to pay the most. ...
A big problem needs a big solution which in turn needs a matching shift of our prevailing paradigm. Geonomics -- advocating that we share the social value of sites and natural resources and untax earnings -- does just that. Read the whole article
Jeff Smith: Sharing Natural Rents to Sustain Human Society
To get rich, or more likely to stay rich, some of us can develop land, especially sprawling shopping centers, and extract resources, especially oil. While sprawl and oil depletion are not necessary, they are more profitable than a car-free functionally integrated city. Under the current rules of doing business, waste returns more than efficiency. We let a few privatize rent -- ground rent and resource rent -- although rent is a social surplus. As if rent were not profit enough, winners of rent have also won further state favors -- tax breaks, liability limits, subsidies, and a host of others designed to impel growth (20 major ones follow herein).
If we are to sustain our selves, our civilization, and our eco-system, we must make some hard choices about property. What we decide to do with rent, whether we let it reward our exploiting or our attaining eco-librium, matters. Imagine society waking up to the public nature of rent. Then it would collect and share its surplus that manifests as the market value of sites, resources, the spectrum, and government-granted privileges. Then we could forego taxing labor and capital. On such a level playing field, this freed market would favor efficiency - the compact city - not waste - the mall and automobile.... Read the whole article
Herbert J. G. Bab: Property Tax -- Cause of Unemployment (circa 1964)
The steep increase in the level of rentals represents a true and accurate yardstick of our housing shortage. During the period 1950 to 1961
The ever widening gap between the level of rentals and the urban family income constitutes a rental squeeze, which has brought untold misery and hardship to families in the lower income group, especially to those belonging to minority groups. The rental squeeze has also aggravated overcrowding and slum conditions....
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.
Inflated land values must necessarily increase the cost of new homes, the cost of home-ownership and rentals. It discourages residential construction, prices many families out of the housing market and aggravates the housing shortage. ...
The administration of the property tax leaves very much to be desired. Assessment procedures and practices are in many cases erroneous, arbitrary and widely variant. So is the ratio of assessed value to full market or cash value. In many states no public records are available indicating assessed values and the taxpayer has no of knowing what his tax bill will be.
The most serious defect in the administration of property taxation is the continuous, widespread and enormous underassessment of land. A survey made recently found that in 9 California counties, vacant lots and acreage were assessed at only 5.3% of the cash value, while residential property was assessed at 19.3% of its value. The illegal underassessment of land deprives local governments of millions of dollars of revenues. Moreover, it further aggravates the serious defects of property taxation.
We have analyzed the effects of property taxation on improvements as distinguished from those caused by the incidence of these taxes on land.
The paradox of property taxation consists in the fact that lower rates on improvements produce the same results as higher rates on land and conversely higher rates on improvements produce the same results as lower rates on land.Bill Batt: How Our Towns Got That Way (1996 speech)
The reform of our property tax system must be regarded as one of the most urgent and important task we face today. ...Read the whole article
The Costs of Poor Taxes
Society pays a price for not adopting taxes which follow the principles developed over the centuries. Here I want only to show how the resulting distortions that arose in the use of land ultimately caused the railroads to fail in being able to serve society. While in the short term the railroads certainly saved themselves from having to pay taxes on their vast land holdings, the most valuable of which were right around their own investment in tracks and stations, they ultimately lost the frequency of traffic which that tax structure would have induced. This is because the population and improvement densities needed to make public transit traffic economically viable did not come about. Taking the long view of society, George Kennen notes in one of his books that:
The railway. . . was capable of accepting and disgorging its loads, whether of passengers or freight, only at fixed points. This being the case, it tended to gather together, and to concentrate around its urban terminus and railhead, all activity that was in any way related to movements of freight or passengers into or out of the city. It was in this quality that it had made major and in some ways decisive contributions to the development not only of the great railway metropolises of the Victorian age particularly of such inland cities as Moscow, Berlin, Paris, and Chicago but even certain of the great maritime turnover ports, such as London and New York.
The automobile, on the other hand, had precisely the opposite qualities. Incapable, in view of its own cumbersomeness and requirements for space, of accepting or releasing large loads at any concentrated points anywhere, but peculiarly capable of accepting and releasing them at multitudes of unconcentrated points anywhere else, the automobile tended to disintegrate and to explode all that the railway had brought together. It was, in fact, the enemy of the concentrated city. Thus it was destined to destroy the great densely populated urban centers of the nineteenth century, with all the glories of economic and cultural life that had flowed from their very unity and compactness.... read the whole articleMason Gaffney: Red-Light Taxes and Green-Light Taxes
II. What is waste, and what should we do about it?
We are all against wasting resources: wonderful - but what is waste? In answering, I will deal with two cognate questions.
A. What is waste?
The question has been faced before. Gifford Pinchot was a leader with a magic name in the U.S.A. during the early conservation era. He answered well for his times and, I submit, for ours too.
"... natural resources must be developed and preserved for the benefit of the many and not merely for the profit of a few. ... the people shall get their fair share of the benefit which comes from the development of the country which belongs to us all."
He did not say just "preserved;" he said "developed and preserved." Today I suspect he would say "REdevelop," to get away from the negative baggage carried by "develop;" I certainly will.
Pinchot went on:
"The first principle of conservation is development, the use of the natural resources now existing ... for the benefit of the people who live here now. There may be just as much waste in neglecting the development and use of certain natural resources as there is in their destruction by waste. ... Conservation, then, stands emphatically for the use of substitutes (he mentions water for power and transportation) for all the exhaustible natural resources, ... The development of our natural resources and the fullest use of them for the present generation is the first duty of this generation. ...
So Pinchot was against waste, like everyone, but he gives it a new turn (or, rather, an old turn that many have forgotten). To him, WASTE MEANS FAILING TO USE RENEWABLE RESOURCES. Urban land makes a good example. Urban land, economically speaking, is a lot like falling water, strange as it seems. Economists (who are not all bad) classify urban land as a "flow resource." They liken it to flowing water because its services perish with time, whether used or not - and we are trapped in the one-way flow of time. It is an even better example of a "flow resource" than water itself, because unused water may have other uses downstream. Even in wasting out through California's Golden Gate, fresh water repels salinity. The unreaped harvests of idle land, however, flow down the river and out the Golden Gate of time like lost loves, and magic moments that passed us by. The waste of NOT using flow resources is just as real as the waste of misusing exhaustible resources. Indeed, when we tote up the transportation costs of disintegrated urban settlement patterns, it is clear that failure to use good urban land is a major cause of wasting energy. ... read the whole articleMason Gaffney: Economics in Support of Environmentalism
Pinchot on "Development"
Gifford Pinchot, the father of Conservation, was not against developing land. In his own words:
"The first principle of conservation is development, the use of the natural resources now existing ... for the benefit of the people who live here now. There may be just as much waste in neglecting the development and use of certain natural resources as there is in their destruction by waste. ... Conservation, then, stands emphatically for the use of substitutes for all the exhaustible natural resources, ... (water power and water transportation are his examples). ... The development of our natural resources and the fullest use of them for the present generation is the first duty of this generation. ...
So Pinchot was against waste, so what? Who isn't? This could be just a banality, but he gives it a new turn. To him, waste means failing to use renewable resources. His example was hydropower, which he would substitute for coal and oil. That is not such a good example today, when we cherish our few remaining wild rivers, but today urban land makes an even better example.
"Urban land?", you may ask. "What has urban land in common with falling water?" Economists (who are not all bad) classify urban land as a "flow resource." They liken it to flowing water because its services perish with time, whether used or not, and we are trapped in the one-way flow of time. Likewise, urban land is not depleted by use. It is an even better example of a "flow resource" than flowing water itself, because, as we are so conscious today, "unharnessed" flowing water may have other downstream uses. Even in wasting out through the Golden Gate, it may repel salinity. The unreaped harvests of idle land, however, flow down the river and out the gates of time like lost loves dimming, and golden moments we let slip away beyond recall.
What is this "service" of urban land, that we should be mindful of it?
George is largely remembered for the single tax. But the single tax came at the end of a long trail as a means — the means, he said — by which to remedy ills previously identified and diagnosed. Behind the single tax lay a closely knit system of thought. To understand George, it is necessary to go behind the single tax and explore that system for its major characteristics.
Notable in George's work is the emphasis he laid on the relation of man to the earth. "The most important of all the material relations of man is his relation to the planet he inhabits."
George might well be called a land economist, indeed, the foremost land economist. For George, the basic fact of man's physical existence is that he is a land animal, "who can live only on and from land, and can use other elements, such as air, sunshine and water, only by the use of land." "Without either of the three elements, land, air and water, man could not exist; but he is peculiarly a land animal, living on its surface, and drawing from it his supplies."
So man not only lives off land, levying on it for its materials and forces, but he also lives on land. His very life depends on land. ". ..land is the habitation of man, the store-house upon which he must draw for all his needs, the material to which his labor must be applied for the supply of all his desires; for even the products of the sea cannot be taken, the light of the sun enjoyed, or any of the forces of nature utilized, without the use of land or its products. On the land we are born, from it we live, to it we return again - children of the soil as truly as is the blade of grass or the flower of the field. Take away from man all that belongs to land, and he is but a disembodied spirit."
Land and man, in that order! These two things are the fundamentals. They are, for instance, the fundamentals of production. It is said that without labor, certainly, there can be no production. Similarly, without land, clearly there can be no agricultural production or mining production. It was just as clear to George that there could be no production of any kind without land. There could be no factory production, no trade, no services rendered, and none of the multitudinous operations of town and city.
All these processes require land: a place, a spot, a site, a location, so many acres or square feet of the earth's surface on which to be performed. "In every form ...the exertion of human labor in the production of wealth requires space; not merely standing or resting space, but moving space -- space for the movements of the human body and its organs, space for the storage and changing in place of materials and tools and products. This is as true of the tailor, the carpenter, the machinist, the merchant or the clerk, as of the farmer or stock-grower, or of the fisherman or miner."
The office building, the store, the bank, as well as the factory, need land just as do the farm and mine. Land is needed as sites on which to build structures. Likewise, businesses need land as the locations on which to perform their subsequent operations.
George adds: "But it may be said, as I have often heard it said, 'We do not all want land! We cannot all become farmers!' To this I reply that we do all want land, though it may be in different ways and in varying degrees. Without land no human being can live; without land no human occupation can be carried on. Agriculture is not the only use of land. It is only one of many. And just as the uppermost story of the tallest building rests upon land as truly as the lowest, so is the operative as truly a user of land as is the farmer. As all wealth is in the last analysis the resultant of land and labor, so is all production in the last analysis the expenditure of labor upon land."
The railroad needs land, not just for its terminals and depots but for its very roadbeds; whoever uses the railroad uses the land that the railroad occupies, as well as the improvements the railroad affords. The State needs land not only for parks and reservoirs but for schools and courts, for hospitals and prisons, and for roads and highways with which to link its residents together.
Our homes require land, whether the home is a country estate, a city apartment, or a room in hotel or tenement. Our diversions require land, whether for a ride in the country, a round on the golf course, a seat at the theatre, or a chair in the library or before the television set. "Physically we are air-breathing, light-requiring land animals, who for our existence and all our production require place on the dry surface of our globe. And the fundamental perception of the concept land -- whether in the wider use of the word as that term of political economy signifying all that external nature offers to the use of man, or in the narrower sense which the word usually bears in common speech, where it signifies the solid surface of the earth -- is that of extension; that of affording standing-place or room."
In George's view, man's dependence on land is universal and endless, "...for land is the indispensible prerequisite to life." "What is inexplicable, if we lose sight of man's absolute and constant dependence upon land, is clear when we recognize it."
Here then is the main element, the distinctive characteristic, of George's work. In George's view, man's relation to the earth is his primary material relation. All other influences, therefore, must be appraised as to how they affect, or are affected by, this basic relation. It is perhaps this to which Soule refers when he says, of Progress and Poverty, "This book expounded a theory developed with superb logic." ... read the whole article
... It unlocks urban land markets that are frozen up by the tendency of firms to buy and hold land for possible future expansion. This is a form of vertical integration which, like all withholding actions, is self-reinforcing and self-validating, hence cumulative in its impact. That is, if A and B are tying up surplus land for their possible future needs, that forces C, D, and E to do the same because they cannot rely on the open market to supply the land when and if needed. A fortiori, speculative preemptors who hold key parcels to profit from others attempts to assemble buildable parcels, or to compete in key markets, force others to do likewise in self-defense. The pooling function of the free market is impaired. Conversely, the gains from correcting such market failures are also self-reinforcing and cumulative, providing us with many "free lunches." ...
... Adding people and capital w/o diluting resource base
Georgist policy lets a region, nation, or the world add population and/or capital without diluting its resource base. It is as though rescuers pulled drowning people into a lifeboat, and their presence made the boat expand instead of sink! Call it "The Accommodating Lifeboat Theorem." It sounds like the Miracle of the Loaves and Fishes, but it is a different kind of miracle: synergy. It comes from the power of enlarging the market, as described by George in his chapter on the effects of increased population, and Adam Smith in his aphorism, "the division of labor is limited by the extent of the market." An indication of it is that bigger cities around the world have more land value per head than small ones, as documented by William Alonso.
We must temper this claim. Bigger cities are often located on better land, so size isn't all that accounts for Alonso's finding. However, more than sheer size, and more than good natural location, is the internal circulation of a city. Georgist policies are essential to financing good circulation, containing sprawl, and inducing private land development complementary to the circulatory system. ... read the whole article
Ted Gwartney: A Free Market Strategy to Reduce Sprawl
The ideal public policy would be to reduce taxes on production and commerce and raise public revenue from non-distorting revenue sources.
That non-distorting revenue source is land and natural resources. The central problem which limits the operational success of the economy is the failure to procure the public value which is created by the community.
This value ought to be reserved for the community to pay for public improvements. However, this value is to a large extent diverted into private pockets by speculation in land and natural resource values. The correct approach is to create a system in which no-one, except the citizenry as a whole, is rewarded by the collection of publicly created values.
Economists can agree that the
economically efficient public
finance system is one in which revenue is drawn from the rent that
people pay for the use of land and natural resources. These payments
do not distort economic activity. Land rent, because it is pure
surplus, could be taken and used for any purpose and there would be
no negative consequences for the allocation of labor and capital, or
in the use of land and natural resources. If this surplus is invested
in needed infrastructure and other public services, it will in turn
increase land values for future public investment. ... Read the
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper