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Land Value Taxation: The Overlooked But Vital Eco-Tax
Karl Williams is a graduate of Monash University (Australia)
and the Editor of the Geoist Journal of Australia
I. Historical overview
II. The problem of sprawl
III. Affordable and efficient public transport
IV. Agricultural benefits
V. Financial concerns
VI. Conclusion: A greater perspective
Appendix: "Natural Capitalism" -- A Case Study in Blindness to Land Value Taxation
Land value taxation (LVT) has often been omitted from the lists of natural resources for which eco-taxes are being advocated. LVT provides strong financial encouragement for land to be put to its optimal use and will eliminate speculation on land, as occupants must pay the full LVT whether the land is being fully utilised or not. This leads to better land management, a reduction in urban sprawl, less urban smothering of agricultural land, and less farmland being pushed into hinterland.
LVT makes the investment in resource-efficient infrastructure affordable because the resulting enhanced land values are "recycled" back into public coffers. One particular application of LVT to agricultural land provides much-needed financial incentives for organic farming. Unlike other ecotaxes which "sow the seeds of their own revenue demise," LVT actually increases over time as our environment is enhanced and is thus a stable revenue base.
This paper argues that the LVT assessment process shifts and refines our focus from monitoring human activity onto our use and abuse of natural resources, as any responsible form of stewardship should. It suggests that only if land users are prepared to pay the full cost of utilising resources should private resource holding be permitted.
"The depletion of natural resources and the despoliation of nature is due to a single reason: the failure properly to measure the rental value of all of nature's resources, and to make the users pay the community for the benefits they receive." F. Harrison, "The Corruption of Economics" 
1 Harrison, Frederick, The Corruption of Economics, Shepheard-Walwyn, London, 1994, p.189
I. Historical overview
Why has land value taxation (LVT) frequently been omitted from lists of significant eco-taxes yet, as this paper will argue, LVT can be enormously influential in its effect on economic and environmental practices?
One reason lies in the confusion arising from how the very word "land" is used imprecisely or in different circumstances such as
1. Unlike capital which is produced and reproduced, land is fixed in supply (except for minor exceptions like multistorey developments and land reclamation). As the old saying goes, "Invest in land - they're not making any more of it". Furthermore, one can't go out into the desert and truck in prime real estate. And unlike natural resources like air and water, land can be neatly parceled up and readily "owned" (with title deeds which confer ownership in perpetuity).
2. There are all sorts of substitutes for capital items and for many natural resources, but there's no substitute for land - at least, not while the Law of Gravity holds! It is this twin combination of fixed supply and never-ending demand which determines how land behaves like a monopoly good, and which led Churchill to declare, "It is quite true that land monopoly is not the only monopoly which exists, but it is by far the greatest of monopolies - it is a perpetual monopoly, and it is the mother of all other forms of monopoly."
2 From a speech delivered at King’s Theatre, Edinburgh, July 17, 1909
3. Unlike capital, the value of land is not built up by the occupier but by the community (principally through the increase in presence of population and through the further provision of tax-funded infrastructure). Herein lies the rationale for LVT, being the charge by the community for community-created amenities. As will be further detailed, it also explains the reason why our present form of land tenure and taxation is supported by predatory rent-seekers.
It is not the purpose of this paper to outline the detailed economic means by which LVT operates in its unique manner, except to highlight these foundations which may assist those wanting to examine the theoretical side further. However, as much as brevity permits, straightforward, non-technical explanations will be given to explain some of the major benefits of LVT. A brief case study of a best-selling environmental economics book is attached to this paper as an appendix, noting the confusion which surrounds the authors' identification of all major, desirable eco-taxes except LVT.
It should also be noted that the advantages of LVT extend far beyond the immediate and direct contribution to environmental solutions - they give rise to economic efficiency, social justice, individual liberty, world peace, effective third world aid and more. An understanding of the nature of economic rent and rent-seeking behaviour would assist the appreciation of some points made here, but an explanation of this extends beyond the immediate ambit of this paper. This succinct summary, however, may assist:
"For the failure to make people pay rent for access, or possession of, natural resources is at the heart of all major environmental problems, and is the cause of some of the most fractious geo-political problems .... There are no remedies for the ecocrises that do not include a heightened awareness of the value of economic rent and the process of the land market"
3 Banks, Ronald, Costing the Earth, Shepheard-Walwyn, 1989, London, 1989, p.3
II. The problem of sprawl
While taxes on labour and capital act as a deterrent to production and employment, the unique qualities of land are such that a tax on land values encourages land to be put to its optimal use. Simply put, land holders cannot afford to hold land unused or underused, for they are compelled to pay the full LVT whether they use this scarce resource or not. The resulting compact cityscape would consume far less resources (in terms of land, infrastructure and ongoing energy costs) and would be more amenable to the provision of public transport, walking and riding.
Note that advocates of LVT, often nowadays called Geoists, call for the full collection of the LVT and not the partial and misapplied (with all manner of exemptions and thresholds) forms collected by some local, state and federal governments in Australia and elsewhere. When the land occupier is repaying his/her full dues (which is only just, as they represent the value of the amenities of the land), then land will have no market price. The improvements on the land (buildings etc.) retain their market value as they are not being taxed, so production is not penalised or discouraged. The social justice implications of having land with no market price (i.e. all humanity having their very birthright) are profound, but are again outside the domain of this paper.
While all landholders will be encouraged to put their land to its optimal use, land speculators will be particularly affected by LVT. The former head of the Town Planning Department of the University of Queensland, Philip Day, characterises the current lure of windfall increases in land value operating as a standing invitation to "develop" land by seeking approval for a change of use, irrespective of its environmental significance and regardless of how such rezoning repeatedly leads to the environmentally destructive process of urban sprawl.
4 Day, Phillip, LAND: the elusive quest for social justice, taxation reform & a sustainable planetary environment, Australian Academic Press, Brisbane, 1995, pp. 3-4,16
While, at first sight, the prospect of sprawling cities with lots of open space and possible greenery might be appealing from an environmental perspective, a closer examination should lead to a different conclusion. The inducement to collect windfall profits (resulting from the failure of society to apply LVT) encourages some landholders to withhold vacant land from the market and forces new development to "leapfrog" this land and move further out. Hence there is an unnecessary outlay in roads, pipelines, power supplies and other infrastructure which must service a greater area. Commuting journeys, similarly, must now consume greater resources. Financially inducing land to be put to its optimal use is not "flogging" the land, but is rather ensuring land is carefully used and that we only exploit as much as we properly need.
That LVT deters urban sprawl is now becoming widely accepted even in mainstream economics, with endorsements being expressed by such luminaries as Ralph Nader and Nobel prize-winning economist William Vickery .
5 Nader, Ralph, The Decline or Urban Civilization: the Sprawl Years, San Francisco Bay Guardian, May 12 1998
6 Vickrey, William, in Korten, David C., When Corporations Rule the World, Kumarian Press, San Francisco, 1995, pp.62 & 65
It should be noted that environmentally-harmful sprawl also occurs as suburbs sprawl over farmland, and underused farmland sprawls over what should be left as national parks or wilderness. As Gaffney stresses, "Sprawl in the urban environment is the kind most publicised, but there is analogous sprawl in agriculture, forestry, mining, recreation and other land uses and industries."
7 Gaffney, Mason, Neo-classical Economics as a Stratagem against Henry George, in Harrison, op. cit., p.43
III. Affordable and efficient public transport
But LVT has much more to contribute to the question of low-impact urban function, in the form of affordable and efficient public transport and other desirable infrastructure. The principle reason why public transport options are presently so limited is because the taxpayer-funded investment in this and other forms of infrastructure effectively disappears, in an almost unseen manner, into the "Black Hole" of landowners' pockets.
That is, not only is the resulting compact cityscape more amenable to the provision of public transport (not to mention walking and riding), but LVT makes the investment in such infrastructure affordable because the resulting enhanced land values are "recycled" back into public coffers. The extension of London's Jubilee line underground network, which opened in 1999, provides a good case in point of how desirable infrastructure can be self-funding if land values are recaptured. An independent study was performed which assessed the increase in land values extending to 800 yards from each of the 10 stations. The accumulated gain (to private landowners) was estimated to be around £13 billion, courtesy of the £3.5 billion of taxpayers funds it took to build the line!
8 Riley, Don, Taken for a Ride, Centre for Land Policy Studies, London, 2001, pp.23-7
It is the fact that such infrastructure has always been potentially affordable that has led the United Nations Centre for Human Settlements (Habitat) to include support of it in the 1996, as well as the 1976, declarations. The 1996 Habitat agenda states and recommends:
"Apply transparent, comprehensive and equitable fiscal incentive mechanisms, as appropriate, to stimulate the efficient, accessible and environmentally sound use of land, and utilize land based and other forms of taxation in mobilizing financial resources for service provision by local authorities"
9 Paragraph 76(h) of 1996 U.N. Habitat agenda
Furthermore, in 1976, Australia, along with other nations, endorsed the so-called Vancouver Plan, being the recommendations of the United Nations Habitat Conference on Human Settlements, which called for the unearned increment in land values resulting from changes in land use to be recouped by communities and applied to the provision of urban infrastructure and services. However, as Day laments, "Nowhere in the western world has this obligation to recoup betterment been fully implemented".
10 Day, op.cit., p.4
Nor does LVT merely hold open the possibility of partially offsetting some of the investment costs. The impressive aforementioned estimates relating to London's Jubilee line extension speak for themselves, and William Vickrey made similar estimates for New York which conclude that the collection of land rents as public revenue would generate sufficient revenue to completely defray the capital costs of investment in infrastructure.
11 Vickrey, William, Propositions Relating to Site Value Taxation, Columbia University, New York, unpublished manuscript of August 13, 1995
A simple model will serve to illustrate. Presently, rail/metro infrastructure is almost prohibitively expensive because the windfall benefits are effectively handed over to landowners. To partially recoup the outlay, authorities are forced to set fares so high as to act as a disincentive to potential low-impact commuters.
Enter LVT. Land values enhanced by the infrastructure are "recycled" by LVT back into the public purse. This enables fares to be reduced, which makes the adjacent land more valuable because it now has access to cheaper public transport. These resulting enhanced land values are again recycled back to the community coffers, which again allows low fares which allow more recycled enhanced land values, which allow lower fares which allow..... While illustrating the process, in practice such iterations would be bypassed as authorities would cut to the chase and set the most economically and environmentally desirable fare structure, which equals the marginal cost of traveling, and not have to dig into scarce public funds to finance such projects. A further example of self-funding is given in the Appendix.
IV. Agricultural benefits
The application of LVT to agricultural land, with the assessment being based on "maximum sustainable yield," forces farmers to think long-term and provides much-needed financial incentives for organic farming. That is, farmers will be saddled with the same annual LVT dues whatever their yield (in addition to climatic considerations in assessing LVT) and will now have a powerful incentive to farm with a long-term perspective. If, for example, the land is degraded and yields consequently drop, then the financial consequences will properly be borne by the farmer. This is merely the briefest of explanations of an important adaptation of LVT, which calls for other measures such as the requirement for any user of the Global Commons to pay an appropriate Ecological Security Deposit and a transition period to allow farmers to unhook themselves from the conventional chemical circuit.
12 Hardy, Shirley-Anne, The Land Question, self-published, Malvern, Scotland, 1981, p.8The LVT assessment process shifts and refines our focus from monitoring human activity, onto our use and abuse of natural resources, as any responsible form of stewardship should. The potential effect of such a focus on everyday attitudes is inestimable.
The process of monitoring and assessing LVT itself leads to a more subtle, more environmentally-appreciative understanding of how best to prioritise conflicting demands on land. Should a tract of land best be used for green space for local residents, a light rail corridor or employment providing development? LVT assessment inherently weighs the pros and cons of a whole range of intangible costs and benefits for the wider community now and into the future, and eliminates corrupting "NIMBY" motives and rent-seeking behaviour that influence existing planning and development decisions. In response to the accusation that LVT assessment is little more than a best guess at quantifying values that are inherently unquantifiable, LVT advocates respond "Guilty as charged!" However, they then add, "Our good guesses are based on solid, objective methodology and are better than wild guesses, and even most wild guesses are better than the decisions made today." Currently, many natural resources are almost assigned a worthless value because, not entering the mainstream marketplace, they usually have no $ tags hanging off them - hence the existence of externalities whereby the environment is plundered as near worthless. So even wild guesses at the value of land and other natural resources are better than the present situation, in which the "no guess" decision effectively assigns natural and community resources a zero value.
One way or another, it is necessary to quantify and prioritise the real value (in a broad sense) of natural resources to better account for economic externalities. In the end, only if a prospective resource user is prepared to pay the full cost of utilising land and other natural resources will resource extraction or development go ahead. The intrinsic nature of the LVT assessment process considerably assists in such cost estimation.
LVT's foundation of detailed land use assessments will also help expose the true costs of subsidies for natural resources, which effectively amount to negative eco-taxes. Subsidies come in all shapes and sizes, often barely visible, and urgently need to be exposed and evaluated. Even some harmful subsidies which are labeled land taxes have nothing to do with genuine LVT. Banks gives the example of a Brazilian tax which was levied on unimproved land but was reduced by up to 90% on land used for crops or pasture. Forests were classified as unimproved land and were therefore taxed at the full rate, which induced settlers to chop down the trees to reduce their tax liability."
13 Banks, op.cit., p.28
The major dynamic behind such over-exploitation of parts of the environment is the process by which hundreds of millions of people are displaced onto marginal land by current tax-and-tenure systems. In desperation they overwork resources that ought to be carefully nurtured. Yet the practices of such desperate peasants can be largely halted when the principles of LVT are implemented and made clear. Daly makes the case that taking away by taxation the value added by individuals from applying their own labor and capital creates resentment but "taxing away value that no one added, scarcity rents on nature's contribution, does not create resentment. In fact, failing to tax away the scarcity rents to nature and letting them accrue as unearned income to favored individuals has long been a primary source of resentment and social conflict."
14 Daly, Herman, Sustainable Development: Definitions, Principles, Policies (a speech given to the World Bank, April 30, 2002)
For reasons similar to those we've seen with the example of landowners benefiting from investment in infrastructure, much aid to developing countries does little to alleviate the plight and environmentally-destructive practices of the desperate landless, who can only work on the conditions demanded by the landowners because of the aforementioned monopolistic qualities of land. Improvements to infrastructure simply boost land values and the rents demanded of the landless. Furthermore, as Banks notes, "Canceling part of the debt amounts to the infusion of billions of dollars into these less developed countries which, under the existing tenure and tax regimes, would benefit the price of land rather than provide work for the landless."
15 Banks, op.cit., p.27
V. Financial concerns
That public finance can be raised is a way that doesn't undervalue natural resources is, of course, a principle of all eco-taxes. But the amount of revenue that can be raised, while still sending these strong price signals, is also important to build infrastructure, social welfare, education, environmental rehabilitation etc. The funds that can be raised (or have been forgone thus far) from LVT are colossal by any estimate. Beck notes the Worldwatch Institute claim that if property taxes in North America and Japan were replaced with pure land value taxes and if land value taxes reached the same level in the rest of the world, they could generate 12 percent of global tax revenue, or $900 billion a year.
16 Beck, Hanno T., in Wenzer, Kenneth C. Land Value Taxation, M.E. Sharpe, New York, 1999, p.222
A more detailed estimate of potential LVT has been made for Australia - an estimated A$132.7 billion for Australia in 1998-99 . One could argue that, in terms of potential revenue alone, LVT deserves resolute investigation.
17 Dwyer, Terry The Taxable Capacity of Australian Land and Resources, Land Values Research Group, Canberra, 2001, p.18
The whole field of eco-taxes cannot be viewed in isolation of the fiscal imperatives to raise sufficient public finance, and here we see another of the virtues of LVT. If people were required to pay the rental value of most natural resources they used (as many, in fact, already do - to private owners) an adjustment in patterns of consumption would follow. The environmental goals would be achieved - at the cost of fiscal goals.
However, under our present fiscal regime, governments are locked into a dependency on revenue from socially-harmful sources such as tobacco and gambling, and cannot raise the taxes on them to levels that would "kill the golden goose". Would such political realities change with eco-taxes? Because of the inherent problem with most eco-taxes that they reduce consumption of natural resources and therefore the tax base, they give rise to a financial inducement to hold the tax rate at a low enough rate so that a degree of pollution and wasteful consumption can continue.
The effects of conventional eco-taxes sharply contrast with LVT which instead is a renewable and naturally-escalating source of revenue which arises when people are willing to pay for the use of land the value of which is enhanced by natural resources which sustain healthy lives. In other words, the success of a cleaner and more secure environment would feed through to the land market, which measures the attraction of the natural environment for living and working. Because people are willing to pay higher rents for such benefits LVT, instead of eroding revenue, expands the public's revenue base so that everybody enjoys the benefits of cleaning up and conserving the natural environment. Under the current system of land tenure, the financial benefits of a cleaner environment accrue to landowners.
VI. Conclusion: A greater perspective
LVT and its 19th-century champion, Henry George, achieved huge acclaim before being buried by the "purpose-built" body of neoclassical economics financed largely by rent-seeking American plutocrats. In one form or another, Henry George's writings on the need to tax land values was preceded or endorsed by various biblical prophets, and by Carlyle, Churchill, Einstein, Franklin, Aldous Huxley, Jefferson, Lincoln, Locke, J.S. Mill, Paine, Penn, Rousseau, Bertrand Russell, Adam Smith, Spencer, Spinoza, Sun Yat Sen, James Tobin, Tolstoy, Twain, Voltaire, Winstanley, Frank Lloyd Wright and many more. Just how this wisdom has been lost sight of is a long - too long for this paper - and tragic story.
18 Gaffney, op.cit., pp.29-145
19 A list of 300+ of these and other endorsements quoted throughout history can be obtained from me on request at email@example.com
Here, for this conference, is the quirk - environmental considerations played almost no part in the compelling endorsements lavished on LVT! The main bill, then and now, is its powerful explanation of the great causes of social injustice, with the second billing going to an exposure of a whole range of economic inefficiencies and deadweight losses of our present economic system, which should more accurately be termed land-monopoly capitalism. Support acts include
This is not a meandering departure from the subject of this conference. No significant, effectual solutions can be made to our environment if the all-embracing economic system is only nibbled at, piecemeal, from the angle of taxation alone.
LVT is not a mere taxation solution, but an integrated economic solution, impacting on land management and cutting at the heart of privilege and injustice. Yes, environmental tax reformers must indeed address the looting of undervalued natural resources driven by bourgeois habits of overconsumption. Let us not, however, overlook the destruction resulting from short-term perspectives driven by poverty and desperation. LVT deals with both worlds.
APPENDIX: "NATURAL CAPITALISM" - A CASE STUDY IN BLINDNESS TO LAND VALUE TAXATION
This book by Hawken & Lovins is meticulously researched, well-argued and rather deserving of its best-selling status, yet it completely misses the need for LVT. As such, it is illustrative of how so many major advantages of LVT can be momentarily grasped and then mislaid.
At the very beginning the authors make a exhaustive list of natural resources (which they term natural capital) used by humankind, yet fail to mention the one on which we all need to stand! In the wide-ranging review which follows, the authors appear to come tantalizingly close to grasping many of the direct benefits of LVT, only to lose the thread and conclude the book, no closer to a realisation of the monumental impact LVT would bring about.
20 Hawkens Paul and Lovins, Amory B and Lovins, L Hunter Natural Capitalism, Earthscan, London, 1999, p.2
The authors devote a full 17 pages to the Brazilian city of Curitiba, holding it up as emblematic of an enlightened municipality which has overcome a whole raft of economic, social and environmental problems. Yet, even though the authors explicitly state that "The city runs mainly on property taxes" and acknowledge how property taxpayers are intimately involved in the decision-making process , they investigate these matters no further. Had they understood how LVT allows environmental custodianship to be self-funding by recycling enhanced land values, they would have seized the significance of LVT in their account of Curitiba's green renewal which concludes "And green begets green; land values around the new parks have risen sharply, and with them tax revenues."
21 ibid., pp.288-305
22 ibid., p.292
23 ibid., p.299
24 ibid., p.297
Elsewhere, they see the small picture, but not the big. A solid case is mounted to make driving and parking vehicles bear their true costs (this is, of course, LVT in the form of renting of temporary or "moving" parcels of land), but cannot see the wood for the trees.
25 ibid., p.40-2
Urban sprawl deservedly receives much attention, yet the powerful impetus LVT gives to put land to its optimal use and bring about a more compact cityscape remains unnoticed. Toronto's inducement to clustering around urban corridors is praised, but no inquiry is made into its "density bonuses and penalties". Also left tantalizingly unexplained is the statement "Mortgage and tax rules that subsidize dispersed suburbs are another long-standing cause of sprawl."
26 ibid., p.45
27 ibid., p.46
Geoism eliminates the curse of land speculation by making it economically unaffordable to hold onto land that is not put to its optimal use. In the study of Curitiba, the authors recognise the ills of speculation , but demonstrate their limited vision by stating "A good start to correcting these costly distortions would be to make developers bear the expenses they impose on the community." Of course, we ALL should pay for costs we impose on the community, just as the authors rightly say elsewhere that we should all pay for costs imposed on the environment. In terms of LVT, "in proportion to what we take from the community (in terms of the exclusive use we make of land), we should repay." Or, in more general terms, "Pay for what we take, not what we make." On this point (the present practice of taxing production), the authors have clearly seen the inequity and economic disadvantages of such punitive taxes , as well as the folly of subsidising the use of natural resources (surely such subsidies should be seen as negative eco-taxes?!) .
28 ibid., pp.292 & 297
29 ibid., p.46
30 ibid., pp.1 & 166
31 ibid., p.160
The authors' otherwise first-rate survey and set of proposals ends on a disappointing and baffling note when take the conventional approach of viewing the Earth as a speculative commodity and bemoan plummeting real estate prices in Southern California . While the case for adopting a wide range of technical innovations has been convincingly argued, until the Geoist perspective has been taken, there is little to substantiate the authors claim that this a "revolutionary paradigm for the industrial economy".
32 ibid., p.316
33 ibid., inside front cover
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper