Just as when interest rates rise, housing prices tend to go down, a tax on
land values will tend to bring down the purchase price of land. (A tax on building
values will have very different effects, because more houses can be created;
a tax on buildings will dampen the demand for buildings, and discourage people
from maintaining existing ones.)
Henry George: Why The Landowner
Cannot Shift The Tax on Land Values (1887)
... the price it can demand as
purchase money, which is, of course, rent or the expectation of rent,
capitalized.
Here, let us say, is a lot on
the principal select street of a city having an annual or rental value
of $10,000. Such a lot would now command a selling price of some
$250,000. An increased tax upon Land Values would not reduce its rental
value, except as it might have an effect in forcing into use unoccupied
land at a greater distance from the center of the city. But as less of
this rental value could be retained by the owner, the selling price
would be diminished. And if a tax on Land Values could be imposed with
such theoretical perfection that the whole rental value would be taken
by the community, the owner would lose both his income from its present
value and any expectation of profit from its future increase in value.
While it would be still worth as much as before to the user, it would
be worth nothing at all to the mere owner. Instead of having a selling
value of $250,000, it would not sell for anything, since what the user
paid for the privilege of using it would go in full to the community.
Under a tax of this kind, even though it could not be imposed with
theoretical nicety, the mere owner of land would disappear. No one
would care to own land unless he wanted to improve or use it. ... read the whole article
Charles B. Fillebrown: A Catechism
of Natural Taxation, from Principles of Natural Taxation (1917)
Q7. What is meant by land value?
A. Its site value -- its selling or market value -- its net value to the purchaser
-- the capitalization of its net rent -- the value supposed to be adopted by
the assessors as the basis of taxation.
Q10. What is the distinction between the taxation of land and the taxation
of rent?
A. Taxing land means, in the ordinary use of the words, to tax the land upon
its capital value, or selling value, at a given rate per $100 or $1,000 of that
value. Taxing rent means taxing the annual value, or ground rent, at a given
percentage of that rent. It is in one case a tax on rent; in the other is a tax
on capitalized rent.
Q21. What is meant by an "old tax" or a "new tax"?
A. By the term "old tax" is intended the taxing force at last change
of ownership; by a "new tax," one the imposed since then.
Q38. What are the three legs of the tripos, the threefold support upon
which the single tax rests?
A. They are:
(1) The social origin of ground rent -- that the site value of land is
a creation of the community, a public or social value.
(2) The non-shiftability of a land tax -- that no tax, new or old, on the
site value of land can be recovered from the tenant or user by raising his
rent.
(3) The ultimate burdenlessness of a land tax -- that the selling value of
land, reduced as it is by the capitalized tax that is imposed upon it, is
an untaxed value. Whatever lowers the income from land lowers proportionately
its selling price, so that whether the established tax upon it has been light
or heavy, it is no burden upon the new purchaser, who buys it at its net
value and thus escapes all part in the tax burden which he should in justice
share with those who now bear it all.
Q40. What is meant by a capitalized tax?
A. It is a sum, the interest of which would pay the tax.
Q49. What is the lesson of the inevitable "capitalization" of
the land tax?
A. It is that an unfair discrimination in favor of the landowner can never
be overcome until all taxes are paid out of ground rent; then all men will
enjoy total exemption equally with the landowner. ... read the whole article
Fred Foldvary: Geo-Rent:
A Plea to Public Economists
The textbooks and mainstream
journals recognize the idea of
capitalization. Indeed, there is a great deal of literature about land
prices reflecting the schools, infrastructure, and security in the
neighborhood. But, again, the understanding is often compartmentalized;
the insight is rarely applied in thinking about efficient forms of
taxation and governance. Public
economists rarely point out how the
idea of capitalization favors geo-rent taxation: If local government
taxes geo-rent, and it uses that money to provide infrastructure and
security, it further enhances geo-rent, thus recouping some of its
investment. If local government claims 50 percent of geo-rent,
it has
an incentive to enhance geo-rent. It is the half residual claimant. The
arrangement is healthy, because government’s local works directly
affect the magnitude of geo-rent. The government’s residual claimancy
gives it an incentive to produce social benefits.
This government-as-improver process parallels capitalization as
the
basis for the private provision of collective goods, such as the common
elements of condominiums financed by the periodic assessment of the
owners. Private communities and condominiums demonstrate the connection
between residual claimancy and capitalization.
Land values in many parts of
the United States are very high, and one
reason is supply-side restrictions. But much of the value reflects the
capitalization of amenities. Today, government works are
financed in
large part by taxes on labor, profits, sales, and non-land real estate.
The owners of land receive an implicit subsidy. This implicit
subsidy
is of great empirical importance, yet is not discussed in
microeconomics textbooks, and is usually ignored in the tax analysis in
public finance. Read the entire article
Louis Post: Outlines of Louis F. Post's
Lectures, with Illustrative Notes and Charts (1894)
d. Effect of Confiscating Rent to Private Use.
By giving Rent to individuals society ignores this most just law, 99 thereby
creating social disorder and inviting social disease. Upon society alone,
therefore, and not upon divine Providence which has provided bountifully,
nor upon the disinherited poor, rests the responsibility for poverty and
fear of poverty.
99. "Whatever dispute arouses the passions of men,
the conflict is sure to rage, not so much as to the question 'Is it wise?'
as to the question 'Is it right?'
"This tendency of popular discussions to take an
ethical form has a cause. It springs from a law of the human mind; it
rests upon a vague and instinctive recognition of what is probably the
deepest truth we can grasp. That alone is wise which is just; that alone
is enduring which is right. In the narrow scale of individual actions
and individual life this truth may be often obscured, but in the wider
field of national life it everywhere stands out.
"I bow to this arbitrament, and accept this test." — Progress
and Poverty, book vii, ch. i.
The reader who has been deceived into believing that Mr.
George's proposition is in any respect unjust, will find profit in a
perusal of the entire chapter from which the foregoing extract is taken.
Let us try to trace the connection by means of a chart, beginning with the
white spaces on page 68. As before, the first-comers take possession of the
best land. But instead of leaving for others what they do not themselves
need for use, as in the previous illustrations, they appropriate the whole
space, using only part, but claiming ownership of the rest. We may distinguish
the used part with red color, and that which is appropriated without use
with blue. Thus: [chart]
But what motive is there for appropriating more of the space than is used?
Simply that the appropriators may secure the pecuniary benefit of future
social growth. What will enable them to secure that? Our system of confiscating
Rent from the community that earns it, and giving it to land-owners who,
as such, earn nothing.100
100. It is reported from Iowa that a few years ago a workman
in that State saw a meteorite fall, and. securing possession of it after
much digging, he was offered $105 by a college for his "find." But
the owner of the land on which the meteorite fell claimed the money,
and the two went to law about it. After an appeal to the highest court
of the State, it was finally decided that neither by right of discovery,
nor by right of labor, could the workman have the money, because the
title to the meteorite was in the man who owned the land upon which it
fell.
Observe the effect now upon Rent and Wages. When other men come, instead
of finding half of the best land still common and free, as in the corresponding
chart on page 68, they find all of it owned, and are obliged either to go
upon poorer land or to buy or rent from owners of the best. How much will
they pay for the best? Not more than 1, if they want it for use and not to
hold for a higher price in the future, for that represents the full difference
between its productiveness and the productiveness of the next best. But if
the first-comers, reasoning that the next best land will soon be scarce and
theirs will then rise in value, refuse to sell or to rent at that valuation,
the newcomers must resort to land of the second grade, though the best be
as yet only partly used. Consequently land of the first grade commands Rent
before it otherwise would.
As the sellers' price, under these circumstances, is arbitrary it cannot
be stated in the chart; but the buyers' price is limited by the superiority
of the best land over that which can be had for nothing, and the chart may
be made to show it: [chart]
And now, owing to the success of the appropriators of the best land in securing
more than their fellows for the same expenditure of labor force, a rush is
made for unappropriated land. It is not to use it that it is wanted, but
to enable its appropriators to put Rent into their own pockets as soon as
growing demand for land makes it valuable.101 We may, for illustration, suppose
that all the remainder of the second space and the whole of the third are
thus appropriated, and note the effect: [chart]
At this point Rent does not increase nor Wages fall, because there is no
increased demand for land for use. The holding of inferior land for higher
prices, when demand for use is at a standstill, is like owning lots in the
moon — entertaining, perhaps, but not profitable. But let more land
be needed for use, and matters promptly assume a different appearance. The
new labor must either go to the space that yields but 1, or buy or rent from
owners of better grades, or hire out. The effect would be the same in any
case. Nobody for the given expenditure of labor force would get more than
1; the surplus of products would go to landowners as Rent, either directly
in rent payments, or indirectly through lower Wages. Thus: [chart]
101. The text speaks of Rent only as a periodical or continuous
payment — what would be called "ground rent." But actual
or potential Rent may always be, and frequently is, capitalized for the
purpose of selling the right to enjoy it, and it is to selling value
that we usually refer when dealing in land.
Land which has the power of yielding Rent to its owner
will have a selling value, whether it be used or not, and whether Rent
is actually derived from it or not. This selling value will be the capitalization
of its present or prospective power of producing Rent. In fact, much
the larger proportion of laud that has a selling value is wholly or partly
unused, producing no Rent at all, or less than it would if fully used.
This condition is expressed in the chart by the blue color.
"The capitalized value of land is the actuarial 'discounted'
value of all the net incomes which it is likely to afford, allowance
being made on the one hand for all incidental expenses, including those
of collecting the rents, and on the other for its mineral wealth, its
capabilities of development for any kind of business, and its advantages,
material, social, and aesthetic, for the purposes of residence." — Marshall's
Prin., book vi, ch. ix, sec. 9.
"The value of land is commonly expressed as a certain
number of times the current money rental, or in other words, a certain
'number of years' purchase' of that rental; and other things being equal,
it will be the higher the more important these direct gratifications
are, as well as the greater the chance that they and the money income
afforded by the land will rise." — Id., note.
"Value . . . means not utility, not any quality inhering
in the thing itself, but a quality which gives to the possession of a
thing the power of obtaining other things, in return for it or for its
use. . . Value in this sense — the usual sense — is purely
relative. It exists from and is measured by the power of obtaining things
for things by exchanging them. . . Utility is necessary to value, for
nothing can be valuable unless it has the quality of gratifying some
physical or mental desire of man, though it be but a fancy or whim. But
utility of itself does not give value. . . If we ask ourselves the reason
of . . . variations in . . . value . . . we see that things having some
form of utility or desirability, are valuable or not valuable, as they
are hard or easy to get. And if we ask further, we may see that with
most of the things that have value this difficulty or ease of getting
them, which determines value, depends on the amount of labor which must
be expended in producing them ; i.e., bringing them into the place, form
and condition in which they are desired. . . Value is simply an expression
of the labor required for the production of such a thing. But there are
some things as to which this is not so clear. Land is not produced by
labor, yet land, irrespective of any improvements that labor has made
on it, often has value. . . Yet a little examination will show that such
facts are but exemplifications of the general principle, just as the
rise of a balloon and the fall of a stone both exemplify the universal
law of gravitation. . . The value of everything produced by labor, from
a pound of chalk or a paper of pins to the elaborate structure and appurtenances
of a first-class ocean steamer, is resolvable on analysis into an equivalent
of the labor required to produce such a thing in form and place; while
the value of things not produced by labor, but nevertheless susceptible
of ownership, is in the same way resolvable into an equivalent of the
labor which the ownership of such a thing enables the owner to obtain
or save." — Perplexed Philosopher, ch. v.
The figure 1 in parenthesis, as an item of Rent, indicates potential Rent.
Labor would give that much for the privilege of using the space, but the
owners hold out for better terms; therefore neither Rent nor Wages is actually
produced, though but for this both might be.
In this chart, notwithstanding that but little space is used, indicated
with red, Wages are reduced to the same low point by the mere appropriation
of space, indicated with blue, that they would reach if all the space above
the poorest were fully used. It thereby appears that under a system which
confiscates Rent to private uses, the demand for land for speculative purposes
becomes so great that Wages fall to a minimum long before they would if land
were appropriated only for use.
In illustrating the effect of confiscating Rent to private use we have as
yet ignored the element of social growth. Let us now assume as before (page
73), that social growth increases the productive power of the given expenditure
of labor force to 100 when applied to the best land, 50 when applied to the
next best, 10 to the next, 3 to the next, and 1 to the poorest. Labor would
not be benefited now, as it appeared to be when on page 73 we illustrated
the appropriation of land for use only, although much less land is actually
used. The prizes which expectation of future social growth dangles before
men as the rewards of owning land, would raise demand so as to make it more
than ever difficult to get land. All of the fourth grade would be taken up
in expectation of future demand; and "surplus labor" would be crowded
out to the open space that originally yielded nothing, but which in consequence
of increased labor power now yields as much as the poorest closed space originally
yielded, namely, 1 to the given expenditure of labor force.102 Wages would
then be reduced to the present productiveness of the open space. Thus: [chart]
102. The paradise to which the youth of our country have
so long been directed in the advice, "Go West, young man, go West," is
truthfully described in "Progress and Poverty," book iv, ch.
iv, as follows :
"The man who sets out from the eastern seaboard
in search of the margin of cultivation, where he may obtain land without
paying rent, must, like the man who swam the river to get a drink,
pass for long distances through half-titled farms, and traverse vast
areas of virgin soil, before he reaches the point where land can be
had free of rent — i.e., by homestead entry or preemption."
If we assume that 1 for the given expenditure of labor force is the least
that labor can take while exerting the same force, the downward movement
of Wages will be here held in equilibrium. They cannot fall below 1; but
neither can they rise above it, no matter how much productive power may increase,
so long as it pays to hold land for higher values. Some laborers would continually
be pushed back to land which increased productive power would have brought
up in productiveness from 0 to 1, and by perpetual competition for work would
so regulate the labor market that the given expenditure of labor force, however
much it produced, could nowhere secure more than 1 in Wages.103 And this
tendency would persist until some labor was forced upon land which, despite
increase in productive power, would not yield the accustomed living without
increase of labor force. Competition for work would then compel all laborers
to increase their expenditure of labor force, and to do it over and over
again as progress went on and lower and lower grades of land were monopolized,
until human endurance could go no further.104 Either that, or they would
be obliged to adapt themselves to a lower scale of living.105
103. Henry Fawcett, in his work on "Political Economy," book
ii, ch. iii, observes with reference to improvements in agricultural
implements which diminish the expense of cultivation, that they do not
increase the profits of the farmer or the wages of his laborers, but
that "the landlord will receive in addition to the rent already
paid to him, all that is saved in the expense of cultivation." This
is true not alone of improvements in agriculture, but also of improvements
in all other branches of industry.
104. "The cause which limits speculation in commodities,
the tendency of increasing price to draw forth additional supplies, cannot
limit the speculative advance in land values, as land is a fixed quantity,
which human agency can neither increase nor diminish; but there is nevertheless
a limit to the price of land, in the minimum required by labor and capital
as the condition of engaging in production. If it were possible to continuously
reduce wages until zero were reached, it would be possible to continuously
increase rent until it swallowed up the whole produce. But as wages cannot
be permanently reduced below the point at which laborers will consent
to work and reproduce, nor interest below the point at which capital
will be devoted to production, there is a limit which restrains the speculative
advance of rent. Hence, speculation cannot have the same scope to advance
rent in countries where wages and interest are already near the minimum,
as in countries where they are considerably above it. Yet that there
is in all progressive countries a constant tendency in the speculative
advance of rent to overpass the limit where production would cease, is,
I think, shown by recurring seasons of industrial paralysis." — Progress
and Poverty, book iv, ch. iv.
105. As Puck once put it, "the man who makes two
blades of grass to grow where but one grew before, must not be surprised
when ordered to 'keep off the grass.' "
They in fact do both, and the incidental disturbances of general readjustment
are what we call "hard times." 106 These culminate in forcing unused
land into the market, thereby reducing Rent and reviving industry. Thus increase
of labor force, a lowering of the scale of living, and depression of Rent,
co-operate to bring on what we call "good times." But no sooner
do "good times" return than renewed demands for land set in, Rent
rises again, Wages fall again, and "hard times" duly reappear.
The end of every period of "hard times" finds Rent higher and Wages
lower than at the end of the previous period.107
106. "That a speculative advance in rent or land
values invariably precedes each of these seasons of industrial depression
is everywhere clear. That they bear to each other the relation of cause
and effect, is obvious to whoever considers the necessary relation between
land and labor." — Progress and Poverty, book v, ch. i.
107. What are called "good times" reach a point
at which an upward land market sets in. From that point there is a downward
tendency of wages (or a rise in the cost of living, which is the same
thing) in all departments of labor and with all grades of laborers. This
tendency continues until the fictitious values of land give way. So long
as the tendency is felt only by that class which is hired for wages,
it is poverty merely; when the same tendency is felt by the class of
labor that is distinguished as "the business interests of the country," it
is "hard times." And "hard times" are periodical
because land values, by falling, allow "good times" to set
it, and by rising with "good times" bring "hard times" on
again. The effect of "hard times" may be overcome, without
much, if any, fall in land values, by sufficient increase in productive
power to overtake the fictitious value of land.
The dishonest and disorderly system under which society confiscates Rent
from common to individual uses, produces this result. That maladjustment
is the fundamental cause of poverty. And progress, so long as the maladjustment
continues, instead of tending to remove poverty as naturally it should, actually
generates and intensifies it. Poverty persists with increase of productive
power because land values, when Rent is privately appropriated, tend to even
greater increase. There can be but one outcome if this continues: for individuals
suffering and degradation, and for society destruction. ...
f. The Single Tax Retains Rent for Common Use.
To retain Rent for common use it is not necessary to abolish land-titles,
nor to let land out to the highest bidder, nor to invent some new mechanism
of taxation, nor in any other way to directly change existing modes of holding
land for use, or existing machinery for collecting public revenues. "Great
changes can be best brought about under old forms."109 Let land be held
nominally as it is now. Let taxes be collected by the same kind of machinery
as now. But abolish all taxes except those that fall upon actual and potential
Rent, that is to say, upon land values.
109. "Such dupes are men to custom, and so prone
To rev'rence what is ancient and can plead
A course of long observance for its use,
That even servitude, the worst of ills,
Because delivered down from sire to son
Is kept and guarded as a sacred thing." —Cowper.
It is only custom that makes the ownership of land seem
reasonable. I have frequently had occasion to tell of the necessity under
which the city of Cleveland, Ohio, found itself, of paying a land-owner
several thousand dollars for the right to swing a bridge-draw over his
land. When I described the matter in that way, the story attracted no
attention; it seemed perfectly reasonable to the ordinary lecture audience.
But when I described the transaction as a payment by the city to a land-owner
of thousands of dollars for the privilege of swinging the draw "through
that man's air," the audience invariably manifested its appreciation
of the absurdity of such an ownership. The idea of owning air was ridiculous;
the idea of owning land was not. Yet who can explain the difference,
except as a matter of custom?
To the same effect was the question of the Rev. F. L.
Higgins to a friend. While stationed at Galveston, Tex., Mr. Higgins
fell into a discussion with his friend as to the right of government
to make land private property. The friend argued that no matter what
the abstract right might be, the government had made private property
of land, and people had bought and sold upon the strength of the government
title, and therefore land titles were morally absolute.
"Suppose," said Mr. Higgins, "that the
government should vest in a corporation title to the Gulf of Mexico,
so that no one could fish there, or sail there, or do anything in or
upon the waters of the Gulf without permission from the corporation.
Would that be right?"
"No," answered the friend.
"Well, suppose the corporation should then parcel
out the Gulf to different parties until some of the people came to own
the whole Gulf to the exclusion of everybody else, born and unborn. Could
any such title be acquired by these purchasers, or their descendants
or assignees, as that the rest of the people if they got the power would
not have a moral right to abrogate it?"
"Certainly not," said the friend.
"Could private titles to the Gulf possibly become
absolute in morals?"
"No."
"Then tell me," asked Mr. Higgins, "what
difference it would make if all the water were taken off the Gulf and
only the bare land left."
If that were done it is doubtful if land-owners could any longer confiscate
enough Rent to be worth the trouble. Even though some surplus were still
kept by them, it would be so much more easy to secure Wealth by working for
it than by confiscating Rent to private use, to say nothing of its being
so much more respectable, that speculation in land values would practically
be abandoned. At any rate, the question of a surplus — Rent in excess
of the requirements of the community — may be readily determined when
the principle that Rent justly belongs to the community and Wages to the
individual shall have been recognized by society in the adoption of the Single
Tax. 110
110. Thomas G. Shearman, Esq., of New York, author of
the famous magazine article on "Who Owns the United States," estimates
that sixty-five per cent of the present annual value of the land in the
United States would pay all the present expenses of American government — federal,
state, county, and municipal. ... read the book
Herbert J. G. Bab: Property
Tax -- Cause of Unemployment
...
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. Read
the whole article
Bill Batt: The Nexus of
Transportation, Economic Rent, and Land Use
The one kind of tax where there
is no deadweight loss whatsoever is
that imposed upon an base with inelastic supply. Since land and some
other elements of nature cannot be increased in quantity resulting in a
completely vertical supply curve, no inefficiency is incurred by such a
tax. Consider two cases of a tax commonly found worldwide on real
estate. Because a real property tax is actually two taxes from the
standpoint of economic dynamics -- the tax on the land component and
the tax on the improvement component, each is considered here as a
separate case. In the first case, the tax on the land component alone
is illustrated. In the other case, the tax on the improvement component
(i.e. the building) is shown. What happens?
The tax on land alone is completely capitalized in the market
value of
the land parcel and is not passed forward to the tenant. This is
important, because when the roughly 1/3 of all American households that
rent rather than own their own homes are removed from the burden of
property taxation, it has the effect of making the land tax far more
progressive. Those land parcels that do pay taxes are split between
residential and non-residential titleholders. Even though the
residential households are likely to constitute the overwhelming number
of parcels in the tax base, they are likely to bear only about half the
taxes paid, the remaining share borne largely by commercial sites.
Agricultural parcels may in some instances represent a large area of
land, but it is likely to be of far lower market value and represent
less than five percent of the revenue paid. The land component of a tax
on real property then is actually highly progressive.... read
the whole article
Mason Gaffney: Land as a Distinctive Factor
of Production
b. Existence
of land value actually lowers saving rates.
i) Land value substitutes
for real capital in portfolios and thus lowers the need to create real capital. This
is the same effect that historians have noted about the negative effect of
slavery on capital formation. It is part of the “wealth effect.” (The
other part is lowering incentives to work, and raising incentives to allocate
both land and capital to personal pleasure instead of earning cash by serving
others.)
High land values may also affect interest rates indirectly by reducing
saving and the supply of capital. The existence of high land rents and
values, like the ownership of slaves, tends to satisfy the need for accumulation
of assets without any actual capital formation.
ii) Rising land prices are
net income to individuals. Most of net income is normally consumed. "Equity
withdrawal" is a common form that this takes. Another form is letting
land appreciation substitute for a capital consumption allowance as capital
depreciates.
c. Investing in land is macro-economically
sterile. It creates neither income nor capital. Socially,
it is a wash: one buys, one sells, nothing else happens.
d. Public policy needs to
promote capital formation but not land creation. For creating
land, thrift is not needed, nor can it avail: no man can create land. Thrift
creates no land, and the value of land, however high, stimulates no thrift. Land
rent may be taxed heavily without discouraging capital formation. Indeed
it would certainly encourage capital formation to lower the level of land prices, because
there is a diminishing marginal utility of assets to private holders. The
loss of land values would stimulate new saving to make up the loss.
e. Land price is unrelated
to cost of producing land. The present value of land
is not derived from nor caused by nor related to its cost of production. It
has none. Present value is derived solely by discounting future ground
rents, which are not a reward or incentive for creating land.
-
With capital the sequence is that persons save to form capital,
a lump sum, which then yields a service flow. Capital formation precedes
and causes the service flow. With land the sequence is reversed. The
service flow is a free gift which simply exists. The buyer does not
create it, nor cause others to create it; he simply acquires it. The
expected service flow is then converted by arbitrageurs (economic men)
into a lump sum present value. That process is called "capitalizing," i.e.
making land superficially resemble capital for purposes of exchange. However,
it is land price that adjusts to a given rent, rather than rent's being
determined at a level sufficient to reward producing the asset. The
interest (or capitalization) rate at which rent is converted to price is
determined by the supply of and demand for real capital, not land. ....
Land values are hypersensitive to discount rates
The sensitivity of present values to discount rates increases
as the value being discounted. Land values are discounted from
more remote future values than are values of most capital, even most
durable and "fixed" capital. Consider land yielding an
expected constant cash flow: let the interest rate double and the present
value is halved. Compare the present value of a steer to be slaughtered
in one year: let the interest rate double from 5% to 10% and the present
value drops from .95 of slaughter value to .91.28 Even
that overstates it a lot because we haven't accounted for the feed bill,
but never mind, the point should be clear.
- 28. More
accurately that is from 1/1.05 to 1/1.10.
Let buyers expect land's cash flow to rise annually by a growth coefficient,
G, and the valuation formula is cash flow divided by the interest rate
minus the growth rate (I-G), rather than I alone. Now let the interest
rate double, and the present value is cut to less than half.
Or let land be yielding a nominal current cash flow and to be held
in anticipation of a higher use to begin 10 years down the road, and thirty
years
after that to be renewed for an even higher use. Let there be a whiff
of oil, or the floating value of a shopping center, or the possible extension
of a freeway and a new water supply paid by others. Let there be a
fear (or hope) that Washington will debauch the currency sometime again in
this
century, or that another Howard Jarvis will cut land taxes some more, or
that future building costs will fall: any and all of these, which are common
and
familiar expectations, make present values of land more sensitive to discount
rates than in the simple basic capitalization model which is based on assumed
constant cash flow in perpetuity. Read the whole article
Nic Tideman: Land Taxation and Efficient
Land Speculation
Gaffney (1961, 1973) has suggested an additional reason why taxing land
will improve the efficiency of land development decisions: It mitigates friction
in the lending market. Land, he says, is an investment that commends itself
to investors with low discount rates and high opportunity costs of their
time. It requires little attention; unlike investments in on-going enterprises,
land is unlikely to fall greatly in value as a consequence of neglect. Potential
users of land, on the other hand, tend to be people who have above-average
discount rates. Because of the combination of differing capacities of borrowers
to offer collateral and the difficulties in identifying borrowers who will
be good risks, an equilibrium can persist in which competing bidders for
land have quite divergent discount rates. In such circumstances, the taxation
of land ameliorates the variation in discount rates. The capitalization
of land taxes into lower purchase prices constitutes a substitution of
a recurring
annual charge for a one-time charge. This makes land relatively more attractive
to people with high discount rates, and relatively less attractive to people
with low discount rates, shifting land out of the hands of people who will
tend to leave it idle and into the hands of people who will tend to develop
it. Since this circumvents friction in the lending market, the consequent
earlier development of land is more efficient. ... read the whole article
Bill Batt: Comment on Parts
of the NYS Legislative Tax Study Commission's 1985 study “Who Pays
New York Taxes?”
Land value taxation, on the other hand, overcomes all these obstacles.
Locations are the beneficiaries of community services whether they are
improved or not. As has been forcefully argued by this writer and others
elsewhere,32 a tax on land value conforms to all the textbook principles
of sound tax theory. Some further considerations are worth reviewing, however,
when looking at ground rent as a flow rather than as a “present value” stock.
The technical ability to trace changes in the market prices of sites – or
as can also be understood, the variable flow of ground rent to those sites – by
the application of GIS (geographic information systems) real-time recording
of sales transactions invites wholesale changes in the maintenance of cadastral
data. The transmittal of sales records as typically received in the offices
of local governments for purposes of title registration over to Assessors’ offices
allows for the possibility of a running real-time mapping of market values.
Given also that GIS algorithms can now calculate the land value proportions
reasonably accurately, this means that “landvaluescapes” are
easily created in ways analogous to maps that portray other common geographic
features. These landvaluescapes reflect the flow of ground rent through
local or regional economies, and can also be used to identify the areas
of greatest market vitality and enterprise. The flow of economic rent can
easily be taxed in ways that overcomes the mistaken notion that it is a
stock. Just as income is recognized as a flow of money, rent too can (and
should) be understood as such.
The question still begs to be answered, “why tax land?” And
what happens when we don’t tax land? Henry George answered this more
than a century ago more forcefully and clearly, perhaps, than anyone has
since. He recognized full well that the economic surplus not expended
by human hands or minds in the production of capital wealth gravitates
to
land. Particular land sites come to reflect the value of their strategic
location for market exchanges by assuming a price for their monopoly use.
Regardless whether those who acquire title to such sites use them to the
full extent of their potential, the flow of rent to such locations is commensurate
with their full capacity. This is why John Stuart Mill more than a century
ago observed that, “Landlords grow richer in their sleep without
working, risking or economizing. The increase in the value of land, arising
as it does from the efforts of an entire community, should belong to the
community and not to the individual who might hold title.”33 Absent
its recovery by taxation this rent becomes a “free lunch” to
opportunistically situated titleholders. When offered for sale,
the projected rental value is capitalized in the present value for purposes
of attaching
a market price and sold as a commodity. Yet simple justice calls for the
recovery in taxes what is the community’s creation. Moreover, the
failure to recover the land rent connected to sites makes it necessary
to tax productive activities in our economy, and this leads to economic
and technical inefficiency known as “deadweight loss.”34 It
means that the economy performs suboptimally.
Land, and by this Henry George meant any natural factor of production
not created by human hands or minds, is ours only to use, not to buy or
sell as a commodity. In the equally immortal words of Jefferson a century
earlier, “The earth belongs in usufruct to the living; . . . [It
is] given as a common stock for men to labor and live on.”35 This
passage likely needs a bit of parsing for the modern reader. The word usufruct,
understood since Roman times, has almost passed from use today. It means “the
right to use the property of another so long as its value is not diminished.”36
Note also that Jefferson regarded the earth as a “common stock;” not
allotted to individuals with possessory titles. Only the phrase “to
the living” might be subject to challenge by forward-looking environmentalists
who, taking an idea from Native American cultures, argue that “we
do not inherit the earth from our ancestors; we borrow it from our children.” The
presumption that real property titles are acquired legitimately is a claim
that does not withstand scrutiny; rather all such titles owe their origin
ultimately to force or fraud.37
If we own the land sites that we occupy only in usufruct, and the rent
that derives from those sites is due to community enterprise, it is not
a large logical leap to argue that the community’s recovery of that
rent should be the proper source of taxation. This is the Georgist argument:
that the recapture of land rent is the proper – indeed the natural – source
of taxation.38 ... read the whole commentary
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