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Henry George: The Crime of Poverty (1885 speech)
Now, supposing we should abolish all other taxes direct and indirect, substituting for them a tax upon land values, what would be the effect? In the first place it would be to kill speculative values. It would be to remove from the newer parts of the country the bulk of the taxation and put it on the richer parts. It would be to exempt the pioneer from taxation and make the larger cities pay more of it. It would be to relieve energy and enterprise, capital and labour, from all those burdens that now bear upon them. What a start that would give to production! In the second place we could, from the value of the land, not merely pay all the present expenses of the government, but we could do infinitely more. In the city of San Francisco James Lick left a few blocks of ground to be used for public purposes there, and the rent amounts to so much, that out of it will be built the largest telescope in the world, large public baths and other public buildings, and various costly works. If, instead of these few blocks, the whole value of the land upon which the city is built had accrued to San Francisco what could she not do?
So in this little town [Burlington, Iowa], where land values are very low as compared with such cities as Chicago and San Francisco, you could do many things for mutual benefit and public improvement did you appropriate to public purposes the land values that now go to individuals. You could have a great free library; you could have an art gallery; you could get yourselves a public park, a magnificent public park, too. You have here one of the finest natural sites for a beautiful town I know of, and I have travelled much. You might make on this site a city that it would be a pleasure to live in. You will not as you go now — oh, no! Why, the very fact that you have a magnificent view here will cause somebody to hold on all the more tightly to the land that commands this view and charge higher prices for it. The State of New York wants to buy a strip of land so as to enable the people to see Niagara, but what a price she must pay for it! Look at all the great cities; in Philadelphia, for instance, in order to build their great city hall they had to block up the only two wide streets they had in the city. Everywhere you go you may see how private property in land prevents public as well as private improvement. ... read the whole speech
Henry George: Justice the Object -- Taxation the Means (1890)
Tax buildings, and you will have fewer or poorer buildings; tax farms, and you will have fewer farms and more wilderness; tax ships, there will be fewer and poorer ships; and tax capital, and there will be less capital; but you may tax land values all you please and there will not he a square inch the less land. Tax land values all you please up to the point of taking the full annual value — up to the point of making mere ownership in land utterly unprofitable, so that no one will want merely to own land — what will be the result? Simply that land will be the easier had by the user. Simply that the land will become valueless to the mere speculator — to the dog in the manger, who wants merely to hold and not to use; to the forestaller, who wants merely to reap where others have sown, to gather to himself the products of labour, without doing labour. Tax land values, and you leave to production its full rewards, and you open to producers natural opportunities. Read the entire article
Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894) — Appendix: FAQ
Charles B. Fillebrown: A Catechism of Natural Taxation, from Principles of Natural Taxation (1917)
Ted Gwartney: Estimating Land Values
THE SOURCE OF PUBLIC REVENUE
What are the factors that cause land to have market value and to whom does this market revenue advantage properly belong? Land has market value for three reasons:
Land rent is the price that people and businesses are willing to pay for the exclusive right to possess and use a good land site for a period of time. For example, people prefer to use sites of good location because it gives them an advantage of spending less time in travel by being near what they choose to do and where they work. A businessman can sell more goods at a site where many people pass each day, compared to a site where only a few people would pass.
The collection of land rent should be used as revenue, by the community for supplying public needs. This returns the advantage an individual land possessor receives from the exclusive use of a land site, to the balance of the people who live within the community and have allowed the land possessor the exclusive use of the land site for the period of time.
It is the responsibility of the local communities to insure that the market rent of land is collected for public purposes. When a major part of land rent is not collected, which is the case in most of the world today, land title holders obtain rights to sell the value of the public improvements which were made by the whole community. The community added to the market value of land by making improvements which increases demand and rent for the land. The longer the possessors hold the land out of use the greater will be the bonus they obtain.
By prohibiting people from using good land, the possessors force the premature use of other less desirable land, which is more distant from the city. This raises the cost of community improvements and the rental value of the unused, but better located, land. This precipitates the degradation of the rural environment by using city land inefficiently -- and creates huge unnecessary pressures on the natural environment.
A problem that we face is that cities throughout the world are spreading out and using land prematurely which is not needed and should not be used. That is because failure to collect land rent subsidizes the waste of natural resources and clutters the environment. Cities that collect the full rental value of land are more compact and provide greater and less costly amenities for their citizens.
Any moves to enact good government principles without collecting the full market rent of the land may result in a failure. People are guided by the profit motive. When people can make a larger profit by doing nothing, but keeping the land they possess out of use for a long period of time, they will do so. When the community collects the full market rent of land, they eliminate the motive for keeping land out of efficient use, because the unearned profit has been collected as public revenue.
Efficient land use appeals to all people because it surpasses the political constraints of most people. Everybody understands that the earth belongs equally to all people. They want a clean environment on earth and to leave a healthy inheritance to the future generations, regardless of their political viewpoints.
The major function of a competent city government is to provide good community services by collecting the land rent created within the community to ensure the efficient use of land and equal opportunities for all of its citizens. Transportation is an important function of government which would facilitate the creation of a compact city, where people can easily find the facilities they desire for education, commerce, religion and recreation. Good land use, with the freedom of individuals to achieve the highest and best use of land, would ensure a desirable community. A compact city would reduce the need to invade the wilderness and devastate the environment. ...
Adam Smith, in The Wealth of Nations, suggested that any "tax" should be a charge for services which benefit all people and are more efficiently preformed by a single cooperative effort. He postulated four principles of taxation which any source of revenue should meet:
Collecting public revenue from land rent is the only revenue source, or "tax", that meets these criteria.
While the major argument for raising public revenue from land rent and natural resources is because it is equitable and fair, it is also the most efficient method of raising the revenue which is needed for public facilities and services. Land is visible, can't be hidden and its valuation is less intrusive than valuations of income and sales. Taxes on labor and capital cause people to consider alternative options, including working with less effort, which produces less real goods. For example, a tax on wages will reduce after-tax net wages and weaken the incentive to work. A person might be willing to work hard for a wage of $20 per hour, but decide to drop out if the taxes take $8 and the net wage is only $12 per hour. Economists claim that present taxes account for a 25% loss in production in the United States. Production and consumption would be greatly improved if public revenue came primarily from land rather than a wage tax. The same would occur when buildings and machinery are taxed. The tax on building reduces the quantity and quality of buildings produced. A tax on sales, commerce or value added reduces consumption, production and net wealth. Sales tax evasion in the United States has exceeded 30% in recent years.
As new inventions and more efficient ways of producing goods are discovered, people's economic well-being is not improved, because they have lost access to land and must pay both rent and taxes. (5) Instead of rent being used to provide community services, capital and wages must be depleted, which obstructs private enterprise.
When the rent of land is taken for public purposes production and distribution are not held back. This is because the same amount of rent would otherwise have been taken by some private individual. The rent would be the same, the difference is how it is utilized. There is evidence that communities who raise their revenue from land, rather than from labor and capital, are more prosperous, many increasing productivity by more than 25% (6)
HOW MUCH LAND RENT
SHOULD THE COMMUNITY COLLECT?
Studies have been produced that demonstrate that communities prosper and succeed in proportion to the percentage of the land rent that they collect. The first communities that decide to collect all of the ground rent will have an enormous competitive advantage over all other communities. They will be able to reduce or eliminate regressive taxes on labor and capital. They will attract new business and industry and become prosperous.
To determine how much land rent the community should collect let's consider the alternatives. Whatever is not collected will be capitalized into market value by land owners. Buying land at inflated market prices is a block to new industry. Land owners sell the capitalized land rent (known as land value) which is uncollected by the community even though it is unearned income. This causes a disparity between landowners and non-landowners. In the United States 5% of the population, which does not include many homeowners or farmers, own 70% of the total national land and natural resource values.
People will come to a well run community because they will be better off than living by themselves or in an impoverished locale. A city must secure revenue in order to provide good quality services.
This revenue can best be procured when the community recaptures the value of the benefits and services that it provides. This is done by collecting the rental revenue from land that reflects the value of the services and facilities provided in that community. The land rent belongs equally to all people that live in the locale who helped to produce that value. In a well run community. there is sufficient land rent to provide adequate funding for the social purposes requested of, and provided by, the local city government
Cities which choose to collect land rent as their primary source of revenue have the advantage of not requiring burdensome taxes to be paid by workers, businesspeople, entrepreneurs or citizens. Individuals who work to create wealth should be allowed to keep what they produce. When labor is not taxed, greater production and consumption occurs. Investment capital is formed which is used to produce more wealth. New jobs are created and economic diversity results.
Each person has a right to keep what he or she produces, but no one has the right to waste what belongs to all people, the land which includes the natural environment. Each person should have an opportunity to use the best land for his business or personal needs, as long as they are willing to pay the land rent that other land users are willing to pay.
If the value of land rent exceeds the community's needs for public services a method of dispensing of the surplus revenue can easily be found. To maintain an equitable society, where nobody has special benefits that they do not pay for, it is important to collect all of the land rent. The community should use what is needed for public services and improvements such as schools, hospitals, parks, police, roadways, utilities and defense -- and reserve a fund for emergencies.
An ethical proposal might be to then divide the excess revenue that is not needed for public facilities and services at the end of each year and send each citizen in that community an equal portion of the remaining revenue. This is similar to the method used in Alaska and Alberta. Equality of opportunity to be productive can only be accomplished by recapturing all of the market rent of land and ensuring that all people benefit from its value.
Not only is land rent potentially an important source of public revenue, collecting all of it would ensure that the equal opportunity to be productive would be available to all citizens. People could fund useful buildings, equipment and wages, rather than having to buy land at inflated prices. Many countries, including the United States, were started on the premise of using land rent to fund public services. Many countries suffer economic loss because they no longer collect the market rent of land.
The value of land can be estimated with an acceptable accuracy, at a cost which is very small compared to the revenue to be obtained. A proper system of assessment and taxation of land can provide for the proper economic use of the land. A land site should be available to the user who can make the highest and best use of the site and maximize the site benefits for all people. A land tax can provide a major source of public revenue which the local governing body could use for the benefit of all people. A land tax can prevent the dispossession of our children, the future producers in the society. Justice requires that land values, which are created by society and nature, be made available for public improvements. This is the responsibility of good government.. Read the whole article
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
Al Hartheimer: Affordable Housing and the Land Value Tax Perspective
Perceptions of the causal factors of these statistics and the suffering of so many who lack basic necessities in this wealthy country are most often simplistic explanations - these people lack money and they lack money because they lack jobs or their wages are too low, or housing costs are too high. For those concerned about the growing wealth gap in America and worldwide, and the resultant poverty, homelessness, hunger and food insecurity, the dilemma usually bogs down into supply or demand side efforts to find solutions. But the root cause is a deeper injustice.
The primary cause of the enormous and growing wealth gap is that the land and natural resources of the earth are treated as if they are mere market commodities from which a few are allowed to reap massive private profits or hold land and resources out of use in anticipation of future profits. Henry George, the great 19th century American political economist and social philosopher, proposed a solution to a problem that too few understood at the time and too few understand today. Early Christian teachings drew upon deep wisdom teachings of the Jubilee justice tradition when they addressed this problem. The problem is the Land Problem.
The Land Problem takes two primary forms: land price escalation and concentrated land ownership.
In order to show that there was NO NEED for land reform in Central America because our land in the US is even more concentrated in ownership than Central America, Senator Jesse Helms read these facts into the Congressional Record in 1981:
Henry George, the great American political economist and land rights philosopher (1839-1897), eloquently confronted the enigma of the wealth gap in his masterwork Progress and Poverty and set forth both an ethical and practical method for holding and sharing the land as a sacred trust for all.
To abolish these taxes would be to lift the whole enormous weight of taxation from productive industry. The needle of the seamstress and the great manufactory; the cart-horse and the locomotive; the fishing boat and the steamship; the farmer's plow and the merchant's stock, would be alike untaxed. All would be free to make or to save, to buy or to sell, unfined by taxes, un-annoyed by the tax-gatherer. Instead of saying to the producer, as it does now, "The more you add to the general wealth the more shall you be taxed!" the state would say to the producer,
"Be as industrious, as thrifty, as enterprising as you choose, you shall have your full reward! You shall not be fined for making two blades of grass grow where one grew before; you shall not be taxed for adding to the aggregate wealth.
In an economic system such as ours which uses money as a medium of exchange, land and resources come to have monetary value. In asserting that the gifts of nature are common property and should be equitably shared by all, George saw that in a just society the ownership of land and natural resources would be conditional upon the cash payment to all of a fairly assessed tax, or land rent, for the exclusive right to God's gifts. Thus the collection of land rent for the community as a whole would replace the taxation of productive endeavors. Those with more and/or better located land would pay more into the common fund, while those with little or no land would pay much less or nothing at all.
As George explained it:
...the value of land is at the beginning of society nothing, but as society develops by the increase of population and the advance of the arts, it becomes greater and greater. In every civilized country, even the newest, the value of the land taken as a whole is sufficient to bear the entire expenses of government. In the better developed countries it is much more than sufficient. Hence it will not be enough merely to place all taxes upon the value of land. It will be necessary, where rent exceeds the present governmental revenues, commensurately to increase the amount demanded in taxation, and to continue this increase as society progresses and rent advances.
The author of Common Sense was onto the same idea when he said:
Men did not make the earth...It is the value of the improvement only, and not the earth itself, that is individual property...Every proprietor owes to the community a ground rent for the land which he holds. - Tom Paine
Enormous sums are currently accruing as unearned income to a relatively few individuals, families and corporations who are holding large amounts of land, very valuable and well-located land, and natural resources as their own exclusive private property. These enormous land values and resource rents are also accruing as unearned income to banks holding mortgages based on exploitative compound interest rates. It may be of interest to note that the word "mortgage" means "dead hand." Truly, when one must work so many years of one's life to pay off a mortgage, one productive hand is as if dead in terms of producing for oneself, as the labor of that hand pays the mortgage. For the 33% of citizens (40 million people) in the United States who are renters, there is not even equity ownership to look forward to after a life of labor. For the more than three million homeless people in American and the multi-millions who are homeless around the world, what Henry George said in 1879 holds true today:
Our primary social adjustment is a denial of justice. In allowing one man to own the land on which and from which other men must live, we have made them his bondsmen in a degree which increases as material progress goes on. ...
The policy approach urged by Henry George and Thomas Paine as a way to assure human rights to the earth's resources was successfully implemented in part and to varying degrees in several places throughout the world.
As a result of decades of steady education and promulgation, there are now 18 municipalities in Pennsylvania which have adopted a so-called split-rate property tax which shifts taxes away from buildings and onto land according to site value. This approach is based on the understanding that the property tax is actually two types of taxes -- one upon building values, and the other upon land values. This distinction is an important one, as these two types of taxes have significantly different impacts on incentive motives and development results.
Either way, labor and capital gain access to land to improve and augment the building stock. The tax incentives are harnessed correctly to encourage effort directed to the provisioning of housing and other basic human needs.
Shifting the tax burden in this way
Researchers have carefully recorded the number of building permits issued in the three year period before and after the split-rate was put in place. In every instance, the number of building permits increased significantly after the implementation of this reform. As the city improves, without the need for subsidies, the land values gradually increase, thus providing the city with an increasing source of revenue for public services. With this system, land values maintain a natural correlation to the overall health of the city. Land values do not peak and spike as they do under conditions which promote land speculation and profiteering. As development stabilizes, land values also stabilize. Thus it is possible to have a self-financing city with citizens reaping the full rewards of their labor and creativity.
The experience with this form of taxation in the 18 municipalities of Pennsylvania point towards the possibilities of a self-renewing city. But until we greatly reduce or eliminate the burden of federal income and payroll taxes and the billions of dollars of wasteful and inequitable corporate subsidies, we will only have a partial realization of the promise. Nonetheless, there is much we can learn from the split-rate tax cities in Pennsylvania, upon several of which we shall now focus.
Harrisburg, the capital of Pennsylvania, provides one of the best examples of the benefits of shifting taxes away from labor and productive capital and onto land according to site values.
In 1981 Harrisburg was listed as the second-most distressed city in the nation under criteria used by the federal government. A review of the gains made in effective economic development activities since then has produced significant results, and the sharp reversal of nearly three decades of previous serious decline. Beginning with the implementation of the split-rate property tax and gradually increasing the tax on land while decreasing the tax on buildings, Harrisburg has sustained an economic resurgence that has garnered national acclaim. It twice won the top United States community honor as All-American City, along with the top state recognition from the state Chamber of Business and Industry as Outstanding Community in Pennsylvania, all because of Harrisburg's development initiatives and progress.
As of 2001, the value of taxable real estate was over $2.2 Billion, versus $212 Million in 1982. Over 26,000 building permits were issued from 1982 representing over $2.65 Billion in new investment. Even adjusted for inflation, this is more than for any period since Harrisburg became a municipality in the year 1791, with most of this investment undertaken since 1990. There are over 5,500 businesses on the city tax rolls in 2001 compared to 1,908 in 1981. The number of vacant structures, over 5,500 in 1982, have been reduced by 85% to less than 400. The crime rate has dropped 53% and fire rate has been cut by 72%.
Harrisburg Mayor Stephen Reed has written several letters to officials of other cities telling them that the split-rate tax has been a key to the remarkable renewal of his city.
The citizens of Allentown, the third largest city in Pennsylvania with a population of 105,000, voted for the land value tax system in 1994 and it was instituted in 1996. The difference between the land and building rates was expanded in each of the following four years. Michael Rosenfeld, the executive director of that city's Redevelopment Authority, says that the benefits of this tax approach are evident. The value of both new commercial construction and of new residential construction increased substantially after the shift to land value taxation. Nearly three out of every four properties in Allentown saw some sort of tax cut. Today, many of those properties have new or better buildings on them, stabilizing the tax base to the point where there has been no need for a tax increase in five years. The number of building permits in Allentown has increased by 32% compared to the three-year period before the land value tax reform.
Allentown and Bethlehem are both in eastern Pennsylvania and are roughly comparable as to size and economy. In that Allentown adopted this tax approach and Bethlehem did not, there was an opportunity to compare the two. Allentown's new construction and renovation grew by 82% in dollar value in the three years after it adopted two-rate LVT as compared to the prior three years. Its new construction and renovation grew 54% faster than Bethlehem's new construction and renovation despite the infusion of much federal grant money into Bethlehem (but not into Allentown) during 1997-99.
The small cities of Washington and Monessen, both in southwestern Pennsylvania, are roughly comparable as to size and economy. Monessen has the common form of property tax which taxes building value significantly more than land value. After Washington adopted the split-rate tax in 1985, it saw its new construction and renovation increase by 33% in dollar value following this tax reform as compared to the prior three years. During the same time period, Monessen's new construction and renovation decreased by 26%.
Studies comparing Oil City, Pennsylvania, which shifted its tax base starting in January 1989, with Franklin, a comparable neighbor municipality, found that Oil City experienced a 58.2% increase in new construction and renovation in the three years after it adopted a two-rate property tax as compared to the three years before, whereas Franklin experienced a 12.2% decline during the same time periods.
In 1995, Professor Nicholas Tideman, the Chairman of the Economics Dept. at Virginia Tech University and his then-graduate student, Florenz Plassman, now a professor at the University of Binghamton, N.Y. completed a highly technical, peer reviewed study of land value taxation in Pennsylvania. To quote from the conclusion of their study:
"The results say that for all four categories of construction, an increase in the effective tax differential is associated with an increase in the average value per permit. In the case of residential housing, a 1% increase in the effective tax differential is associated with a 12% increase in the average value per unit. From the perspective of economic theory, it is not at all surprising that when taxes are taken off of buildings, people build more valuable buildings. But it is nice to see the numbers."
Dr. Steven B. Cord has done an exhaustive review of 237 studies of land value taxation from all over the world. In every instance there was an increase in construction and renovation after the policy was enacted, indicating that there were previously unmet needs for housing and other living and working space. ... read the whole article
Walt Rybeck: What Affordable Housing Problem?
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
Ted Gwartney: A Free Market Strategy to Reduce Sprawl
Unused land is far more abundant than we realize.
We utilize less than 5% of the total land area in the United States for urban purposes, including housing, commerce, and manufacturing. As you fly across the country all you see is farm, timber, desert and an occasional small community. While less than 5% of our nation's land area is needed for urban purposes, much vacant land within existing cities is bypassed because it is cheaper to build further out than pay the high prices demanded for the more efficient, better located, land. The result is urban sprawl.
Sprawl is not just about the density of land use. In many cities only one half of the land is devoted to housing and commercial uses while the other half is vacant or under-improved. Could it be that there are inefficient requirements built into some public policies? Smart growth should not be constrained by archaic patterns that impede or misappropriate free and open urban land usage. Local ordinances and practices within cities that force accelerated suburban sprawl should be abolished. We don't need more regulation, we need greater freedom to act responsibly. Individuals should have the opportunity to decide whether they want to live in the suburbs or in the city. This should not be a coerced decision because of a public policy that impedes growth within the city. Simple tax reform can help to achieve some of the goals and objectives of smart growth without government intervention and wasteful subsidies. ...
One means that has long been available but not brought into general use is to exempt buildings from the real estate tax and begin to impose an annual tax on land sites that makes holding land off the market for speculation a costly proposition. An annual fee on land should be set near what the land site alone would yield if rented by the owner to the highest bidder. Think of how this would change the behavior of land owners. If I owned a parcel of land with a rental value of $6,000 a year and that was near what the city charged me as my annual fee, my return on investment as a land speculator would be greatly reduced. In order to generate positive cash flow I would either develop the land myself or put it on the market so that someone else would develop it. At the same time, if my tax rate on the building I constructed on the land was zero, my incentive is to construct a building that maximizes my cash flow (i.e., to develop the parcel to its highest and best use in the market). At minimum, land prices would stabilize and the increase in land brought onto the market would be somewhat offset by increased demand. Land prices to builders would tend to begin to fall over time. ...
A Strategy for Economic Development
Economic theory recognizes that when government places taxes on production and on commerce the net result is a reduction in those activities. The reason this occurs is that these taxes add to the cost of production and to the cost of doing business. 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.
Public Finance by Self-Financing
In the public sector, capital investment in infrastructure projects would no longer be a debt burden, because the projects would become self-financing. User charges for the public services, when combined with the rental income created by these projects, would cover the cost of creating and running a public service.
It was estimated that the BART transportation system in San Francisco produced two times more land value than it cost to build. The public recaptured only a small part of the cost from benefits provided by land taxes and user fees. Most of the cost came from external sources, unrelated sales and income taxes. Most of the profits went into only a few pockets.
Thus, the claim that a community is short of capital is misleading . ... Read the whole article
Fred Foldvary: Geo-Rent: A Plea to Public Economists
Fortunately, real-estate practitioners pay no attention to textbook economics. Increasingly, new communities are developed within a nexus of private ownership and contract.
The empirical fact on the ground is attracting increasing academic attention from many fields, including urban studies, legal scholars, and anthropologists, and there have been international scholarly conferences to explore private communities (Glasz, 2005).
The great challenge concerns existing communities of the traditional governmental structure: How are they converted to a nexus of private property and contract?
Robert Nelson (1999) has proposed a policy for converting neighborhoods to residential associations, similar to the policy in St. Louis, where neighborhoods may privatize (Foldvary 1994). Under Nelson’s plan, state law would permit property owners to petition to form a neighborhood association within a proposed boundary. Approval would require an affirmative vote both of 90 percent of the total property value affected and 75 percent of the individual unit owners. The relevant governments would 125 then authorize a transfer of services and property such as streets to the association, accompanied by tax credits in compensation for the reduction of government expenses. All property owners in the privatized neighborhood would be required to be members of the association and pay assessments. Since they would already have title to the real estate, there is no financial impediment, as there would be if they had to buy the land afresh.
Conversion to civic associations would not only partially privatize local governance, it would also result in a shift in public finances, with lower taxes to the city, replaced by association assessments which would be much closer to geo-rent. The association would get revenue from payments either equal per member or based on front footage or property value. The economic ideal would be payments based on geo-rent, because the rent would most closely reflect the value of the community services. But even if there is, say, an equal payment by the real estate owners, if the properties have about the same market value, the payments would have the effect of tapping geo-rent, with no excess burden.
My proposal (Foldvary, 1994) for a neighborhood conversion makes the membership in private communities strictly voluntary and open to any real estate owner. Any person or organization having title to land would be able to partially secede, to withdraw property and services from governmental jurisdiction, and create its own governance. The government could require an exit fee or on-going rental payments to compensate for its services that the private community would still benefit from. If most of a neighborhood wishes to privatize but some do not, those wishing to remain directly under the government would continue to be under government jurisdiction, and there would then be agreements for the joint provision of services such as streets that service both members and non-members. While this may result in a more complicated arrangement than that of Nelson, I believe it is important to maintain the voluntary nature of civic associations as much as possible. ... Read the entire article
Charles T. Root — Not a Single Tax! (1925)
... The present views point toward specific policy changes. To minimize global conflict, a nation should use its tax system to recoup rents from beneficiaries of its statecraft.
This would deflate the rent-seeking incentive to provocative behavior, as well as the discretionary funds used to gain political support. There is little gain to the nation as a whole, and high cost, in creating rents for a few individuals or corporations. A surtax on income from foreign sources, for example, rather than the present preferential treatment, is indicated.
An analogous movement is already underway in municipal affairs. Robert Freilich, a lawyer sometimes called the "father of growth control", has worked out systems of urban growth whereby newly annexed lands must pay the full costs of their own development, instead of leeching on central cities as has been the custom. This has, where applied, drastically cooled down the passion for leapfrog annexations. I trust the analogy between municipal and national imperialism is evident.
To strengthen the nation and move toward justifying labelling defense a "public good", a wider sharing of rents is indicated. This is a simple matter of readjusting tax systems.
The result there, as one might expect, has been to heighten the sense of national unity and patriotism in the constructive sense, increasing the numbers of citizens honourably devoted to the nation as such. ... 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.
Mason Gaffney: George's Economics of Abundance: Replacing dismal choices with practical resolutions and synergies
At the state or local level, George's program is the answer to California Governor Pete Wilson's dilemma, and every governor's dilemma:
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 will walk 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 they are the problem.
So George's simple program not only reconciles efficiency and equity, it squares taxes and incentives. ...
George's tax program stimulates both the demand side and the supply side. Here is the gist of why it works where other methods fail. A land tax spurs landowners to use land to earn cash to pay the taxes. A land tax creates pressure on owners to hire and produce more; other taxes create pressures to hire and produce less. That works because it is a fixed charge: it cannot be avoided by underusing land, and it is not increased by using it. It applies leverage to landowners, just as would a fixed debt service. Leverage means that a landowner, by raising gross output 20%, for example, may raise his net income by 100%.
On the demand side, to repeat,
The taxable capacity of land is surprisingly high. It has been concealed conceptually by many sophisms inherent in modern economic theory, and concealed statistically by rolling land rent into other categories. A good deal of potential rent has also been aborted by the counterproductive tax methods used on buildings and labor. This is a big topic, treated in "The taxable capacity of land," and "How to revive a dying city," bound herein, and "Adequacy of land as a tax base," and "The synergistic city," on reserve.
A great deal of latent rent would be generated by new, full development. It is not just the individual sites that matter here, but the synergistic community effects of active renewal and full, timely development.
Thus, when you take the tax off new buildings, and put it on the land under old tumbledowns, you kick off a general process of revitalization that turns gloom into hope into optimism: optimism that boosts land prices and the land tax base. ...
Urban blight is cumulative and self-reinforcing: blighted buildings cast a pall on land around them, discourage upkeep and stifle renewal. Whatever slows renewal of one site therefore slows the neighborhood, which reflects back blight to the first, a vicious downward spiral.
Conversely, new buildings help stimulate renewal around them.12 The rule is that new buildings draw tenants from old and weaken other Defenders so other owners have to renew, too. When they do, where better than next to the newest, hottest building? So renewal is cumulative, just like blight, only upwards in a benign spiral. A benign spiral is a "free lunch," the kind that cynics say "there ain't no such thing as." ...
When a city untaxes buildings its land prices, the new tax base, are pushed up. Competition for sites raises the tax base -- not buildings, now, but land prices derived from ground rents. Using the higher base the city can improve public services, if needed, but without taxing any building, without scaring away any generators of fiscal surpluses. In this scenario, buildings raise the tax base indirectly, by raising the value of land around them. So do productive people, when their wages are not taxed away.
Land prices are raised just by the
expectation of new buildings'
being tax free. The mere expectation will immediately boost
the value of land, even before the new buildings go up. 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. ...
"Corporate" is not coterminous with "industrial," anyway. Many corporations are in retailing. They own chain stores, malls, gasoline stations, auto dealerships, major real estate "developments," drive-ins, office space, department stores, banks, "power centers," etc. As to these, shifting to the land basis will shift more of the tax burden to them, because retailing has a higher land fraction than any other major land use (except vacant, golf courses, cemeteries, parking lots, etc.). That is because location is more critical to retailers than other businesses. You can tell this by their high rate of tear-downs and remodeling.
Among its other effects, site-value taxation will induce some land to shift from retail to industrial use. Recall that exempting the building, or prospective building, lets buyers bid more for land. The higher the building fraction, the stronger is that force. Thus the present system, which is biased against buildings generally, is biased against industrial compared with retail uses. Removing that bias will help industry outbid retail for land -- not all land, of course, but land on the tipping point between the uses. Most towns today seem oversupplied with retailers, compared with their shortage of basic industries. Shifting to the site-value basis of property taxation helps redress that balance. ...
The adequacy of a tax base must be judged over the cycle of boom and bust, a cycle we are now learning is still much alive. How stable is the base? Capital comes and goes; land is fixed. When they finally close that plant and move the work to Mexico, at present we reward them by lowering their taxable valuation -- reward them and punish ourselves, as city revenues fall. On the other hand, if we taxed just their land, the valuation would remain about the same. They will squeal, cajole, and threaten, but no way can they move their land to Mexico. They will just have to find a new use for it. Meantime, you will have made it more likely there are profitable new uses by removing the tax threat against whatever new capital they might invest in your town to employ your people.
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.
To stimulate building is also to uphold and fortify the tax base, even though you do not tax the new buildings directly. Some people fault the "depressing" canyons of Manhattan, between the skyscrapers. In my observation, it is not the canyons that depress Manhattan. When the GM building went up, Fortune Magazine reported it doubled the rents of stores across the deep canyon so formed. Its spillover effects were highly positive. What really depresses Manhattan are rather the centenarian firetraps and the activities they attract. They tend to downvalue other lands nearby, eroding the tax base.
Consider the effect of floorspace rentals on ground rents and land values. Doubling floorspace rentals will more than double land values, through a kind of leverage effect. That is because all cash flows above a constant amount required for the building will inure as ground rents. The higgling and arbitrage of the market will see to that. Once that constant is met, everything above it goes to landownership as such, raising land prices which are the land tax base.
When you observe cities much, the positive neighborhood effects of replacing old buildings with new are irresistible and contagious, raising land prices all around. The converse is also true: the negative neighborhood effects of letting old junkers stand without replacement are depressive. Thus, when you take the tax off new buildings, and put it on the land under old tumbledowns, you kick off a general process of revitalization that turns gloom into hope into optimism: optimism that boosts land prices and the land tax base.
There are three kinds of slums.
That's the bad news. How do you turn it around? When you drop buildings from the property tax base, you change the arithmetic of incentives, as we have discussed. Parachuting into the middle of a slum is still hopeless, as before. Change will come first to the fringes of the Type II slum, where it merges into healthy neighborhoods. New development likes to anchor onto healthy neighborhoods. Richard Hurd, father of urban studies in America, taught us in 1902 that land values are marked by continuity in space. It's still so. Fashions and technology change, but principles last. Hope survives at the edge of the slum; land there retains some renewal value. There is where you'll first see change, because there is where the forces are evenly balanced. Tip the forces for renewal, and there is where it begins.
Once it begins, it proceeds incrementally through the Type II slum. When it's through, your oldest neighborhood has become your newest, the cutting edge of progress, the showplace of the town. That is how it has got to work; that is how it will work when you exempt buildings and tax only land. When it is through, you have a high tax base where now you have nothing but fire and police calls. ... Read the whole article
Mason Gaffney: How to Revive a Dying City
George's Constructive Program
The key to renewing cities is shifting from obstructive ways of sharing rent, like rent control; and destructive ways, like looting and subsidies; to constructive ways. Henry George showed us how equity and efficiency go hand in hand, how the magic of justice combines with the magic of incentive.
Power to Destroy or to Redeem
But we've always heard that tax destroys incentives. The news in Henry George is that we can tax all the rent out of land, and not one square foot will walk away, nor will God switch off the Creation. Man creates capital by saving; some Other Force created land, and sustains and serves it every day, undeterred by taxes.
Nor will Georgist taxes leave
owners sulking on their land, but
the contrary. A 1983 Fortune magazine
article calls them "Higher
Taxes that Promote Development." The fixed tax is levied on land
value, based on opportunity cost. The owner uses land harder and
improves it more to meet a fixed tax; or sells, releasing surplus
land to those needing more space. Taxes stifle enterprise only if
they increase with enterprise. Land tax increases only with
opportunity cost, which is independent of the enterprise of the
owner. The only activity this tax impairs is withholding land
use. ... read the whole article
Mason Gaffney: What happens when a state radically slashes its property tax?
Michiganders are saying they must wait and see, but there is no need for that: California can show you 17 years of experience. To read your future, just study our past. Here is what has happened since California passed Proposition 13 in 1978.
The obvious direct results have been to cut public services, raise other taxes, and lose credit rating. ...
The private sector is doing badly, too. Raising income taxes, business taxes, and sales taxes is no way to stimulate an economy; they are all a drag on work and enterprise. ...
It should give one pause. It is, however, if you think about it, the expectable result of what the voters did.
The predictable result is to inhibit economic activity, and encourage holding wealth inert and stagnant.
David Shulman tersely summarized the distributive effects of Prop. 13 as he left us for Salomon Brothers in Manhattan: "it breached the social compact." ...
1/8 of all new businesses started in the U.S. were in L.A., 1945-50. These were small, creative, flexible, and too varied to classify. No Linnaeus could sort them in conventional categories: the new Angelenos simply stayed here and started producing everything for themselves, some things previously imported, and others never seen before. ...
Why is that not happening today, 1995? An invisible, pervasive change is Proposition 13, which makes it possible to hold land at negligible tax cost. In 1945 land was taxed at 3% every year, building a fire under holdouts to turn their land to use. Today that same tax cost is well below 1%. Using Gwartney's Rule of Thumb (see below under B,1), it is about 1/8 of 1%: a rate of 1% applied to 1/8 of the true value.
Landowners are only taxed now if they use their land to hire people and produce something useful. Then they meet the drag of our high business and employment and sales taxes, necessitated by the fall of property taxes. A handful of oligopolistic landowners control most of the market; small businesses are squeezed out. This helps us segue from being at the cutting edge of industrial progress to a third-world economy - from the NH model to the AL model - with little relief in sight. ...
California displayed amazing growth up to 1978, and the resilience to shrug off the loss of war industries after 1945 and still grow "explosively" (as Jane Jacobs put it). After 1978 we have a string of reverses. The timing, along with a priori causative analysis, plus various direct observations too numerous for this time-slot, support an hypothesis that the reverses were aggravated by Prop. 13. Michigan, be warned of our lot, and learn about taxes from us: "This Could Happen to You." Read the whole article
Mason Gaffney: California's Governor-Elect
For better or worse, California has recalled its governor and elected Arnold Schwarzenegger (A.S.) to replace him. A.S. has revealed no specifics of how he will stanch our deficit. He campaigned on generalities: he is against taxes, against waste in government, against measures to rein in vehicle use, and nostalgic about the good old days when Governor Pat Brown was spending heavily on roads and water projects. No one seems sure how he will connect the dots. After his first visit to Sacto last week, he seemed not sure, either.
His choice of advisors, however, tells us A.S. will repeat Pete Wilson's performance from the early 1990s. Chief of Staff Patricia Clarey is a good soldier from Wilson's old staff; Auditor Donna Arduin is from Jeb Bush's Florida. The gurus who set the doctrinal tone give the clearest hints: they are neo-classical economists of deepest dye. These are advisors George Shultz and Michael Boskin from the Hoover Institution. Economics, to them, is a set of dismal choices. California's choice is to cut public services, or lose business and jobs. That is what they told Wilson in 1994. All taxes are the same, always "burdens," always driving away "business." ...
Boskin and Shultz, posing their dismal choice for California, dismissed by silence that we can raise needed revenues while also spurring job creation and stimulating the economy. It is simple: restore that part of the property tax that falls on land, while continuing to cap the rate on buildings. ...
It is also alleged that land values are too small to support government. Let us test that idea. In 2003, at the current rate, there will be about 15,000 "confirmed" sales of owner-occupied urban California residences at prices over $1 million. That is from DataQuick, a standard source of current real estate data. 15,000 is about 2.7% of all confirmed sales. Some of those go much higher. The mean is probably over $2 million.
Turnover of costlier homes is lower than that of ordinary homes. (For example, turnover of existing homes is 30% greater in Riverside County, with lower values, than in Orange County, with higher values.) 2% a year is a fair guess at the turnover of homes valued at $1 million or more. If so, there are 50 x 15,000, or 750,000 homes in Calif valued at a mean $2 millions. Their aggregate value is 750,000 x $2million = $1.5 trillions.
These are not large buildings: they average 2864 s.f., with 4 bdrms, 3 baths. In the north end of Sta. Monica, a vacant lot alone is over $1m. They are not new buildings: only 9% are new. It's the land that makes them worth so much.
A tax of 1% on that value would yield $15 billions a year. That's from only 2.7% of the urban homes in Calif. The data exclude many sales, country manors, for example. Some well-known lands thus excluded are
There is also the other 97.3% of urban owner-occupied residential real estate. A lot of it is just under $1 million a pop. In Marin County, the median sales price of owner-occupied single-family homes was $700,000 when last seen, and rising. The mean is always higher than the median. Some L.A. County cities with median values just under $1 million include San Marino, Bel Air, Westwood, Brentwood, La Canada, Calabasas, and others. There is also all the other land: commercial, industrial, farm, forest, etc., which is 60% of the assessed property value in California, and a much higher fraction of the real value because it is so egregiously underassessed. ...
A high fraction of California real estate is absentee owned. The Sultan of Brunei, for example, owns several houses and sites in Beverly Hills and Bel Air. California's official Legislative Analyst, the highly respected William Hamm, estimated in 1978 that over fifty per cent of the value of taxable property in California was absentee-owned. ...
Some half of any reduction in California property taxes leaks to out-of-state owners. Nor is this the only leakage. ...
Yet no one has seized on this obvious case to show that local property taxes, substituted for absentee rent payments, creates multiple increases in local income. The whole intellectual apparatus is dominated by absentee investors and used for their benefit.
Many valuable land resources are held by license, rather than title, and escape the property tax almost entirely. ... Read the whole article
Mason Gaffney: Neo-classical Economics as a Stratagem Against Henry George (in The Corruption of Economics, London: Shepheard-Walwyn, 1994)
The Imperative to Put Down Henry George
The crabbed spirit of neo-classical economics
Popular responsiveness to problem-solvers
Henry George as reconciler and problem-solver
Priority #1. Safeguarding the property tax
Priority #2: Enforce Good Laws
Priority #3. De-Balkanize Tax Enclaves
Priority #4. What Tax to Fight First?
Priority #5: Make Landowners Pay Their Taxes
Tax All Natural Resources Uniformly and Comprehensively
Advances in the arts and sciences keep disclosing new values in old resources. Owing to institutional lag, these values can grow huge without finding their way onto the tax rolls. A thoughtless reaction is, "Bureaucrats want to tax everything!" The point is to tax all natural resources uniformly and comprehensively, to end the lowering taxes on incomes. productive business, and sales! Land taxation will not win wide support, nor will it deserve to, if it is perceived as a tax focusing on median homeowners, farmers, and merchants, while exempting oilmen, media tycoons, and timber barons.
In addition to newly awakened resources, many resources long known (like water) are held in odd tenures that have not been recognized as taxable property, although they should be. Any comprehensive move toward using resource rents for public revenue must include these varied resources and tenures. I have a list of 30 or so, too many to treat here. To give a sampling, they include
In tapping these many varieties of resources and tenures for public revenues, citizens and their representatives may have to set priorities. Two practical criteria rise to the top:
...Jeff Smith and Kris Nelson: Giving Life to the Property Tax Shift (PTS)
Recent FCC auctions have fetched billions of dollars for spectrum licenses, but this is like selling the badlands after giving away the beachfronts. The values of extant licenses given away ion the past, especially spectrum in top locations, are much higher. AT&T recently paid $112.5 billion for the McCaw Company's spectrum licenses, which are a smattering of all that is out there. These licenses should be on the property tax rolls in the jurisdictions that they cover. The revenue possibilities are staggering. Read the whole article
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. ...
To bolster their local economies and fatten their tax base, local governments compete to attract large new employers. Hoping to recoup down the road when businesses pay full property taxes, elected officials offer such inducements as five-year abatements and low system development charges. Yet each locality must outdo others' incentives. Enterprise zones and tax privileges amount to major subsidies that would otherwise generate substantial tax revenues....
PTS Improves the Economy
Land that is higher taxed is lower priced. Cheaper land reduces buyers' debt. Less demand for loans lowers the lending rate. Cheaper capital means more investment and more employment. In Australia, in the province around Melbourne, some towns levy the regular property tax, others tax only land. Those with the same rate for sites and structures suffer more bankruptcies; those with one rate for land enjoy more successful business start-ups.
The PTS encourages investing in high-yield use of parcels. Developing land generates jobs in construction. As those construction workers spend their incomes, they generate more business for local merchants. For the few years that New York exempted buildings in the 1920s, the city boomed more than any other US city. In New Zealand, over 80% of the towns tax land, not buildings. Before the 70's oil shock hit, they enjoyed over a decade of employment at 99%.
A stable source of revenue is a virtue in the eyes of any government. When recession strikes, governments that tax income or property must borrow more to make ends meet. The disincentives built into ordinary taxes deepen and prolong the recession. When taxes upon effort are eased, the economies can recover.
The PTS can cure local recessions. Spurring building, while not burdening it, keeps a web of regional suppliers, installers, architects, financiers, and others in greater demand. In the 17 Western Australian cities in the Perth area that had shifted to land taxation, new construction increased by 34% from 1971-76, while nine localities with ordinary property taxes saw a .02% decrease. From 1974-84, a period marked by recession in the latter half, towns near Melbourne that tax land alone saw the number of businesses increase by 11%, whereas cities without land taxation witnessed a drop of 20% (Cord 1998). Similarly, in the early 1990s, Connellsville and Washington, Pennsylvania, turned to the PTS; both enjoyed more new construction and housing (CSE 1997). Such examples illustrate the stable growth unleashed by the PTS. ...
Fiscal conservatives, too, could find a feature to cheer. The PTS generally reduces the number of government assessors, arbitrators, and staff by 40 percent. Computer Aided Mass Appraisal (CAMA) also saves tax dollars. ...
Rising government costs with deteriorating government services is another growing problem claiming our attention. On this issue, tax shifters can make common cause with those striving to cut bureaucratic overhead and corporate welfare (as is done by FOE on the national level in Washington, DC). As people feel overwhelmed by so many seemingly divergent problems, they seek an analysis -- and prognosis -- that ties these issues together and applies to them one of Thoreau's chop at the root -- a role made for the PTS. ...
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: What To Do About the Real Estate Bubble
What’s bubbling, and until when?Herbert J. G. Bab: Property Tax -- Cause of Unemployment (circa 1964)
Sellers are happy. So are developers and speculators. Real estate has gone all bubbly, and that bubble has gone ballistic. What goes up, however, must soon do something else. ...
Actually, it’s not housing whose price has entered the stratosphere. Buildings age – get older, more worn out. What’s getting more valuable is the land, the location – whether it has a building on it or not. Buildings you can make more of, but land you can not, especially locations along the coasts or on the good side of town. None of that would matter if you could ever get buildings to hover around in the air. Meanwhile however, speculators are happy.
... What’s seemingly good for landowners is not necessarily good for the economy. As people spend more on land, something nobody produced, they spend less on output, things people do produce. As producers get less money spent on their products, eventually they take the hint and produce less. "Produce less" is another way of spelling recession.
Plus, more expensive land means heavier borrowing to buy it. More debt means more inflation and less stability. When producers cut back, borrowers have a much harder time paying back their debts. As people go bankrupt, they drag others down with them. A collapsing house of cards is another way of spelling depression.
If land values didn’t get inflated, of course they would not have to get deflated.Call it mutual compensation for deprivation from part of our common natural heritage. While in rhythmic systems, prices must rise and fall, but they need not boom then bust; they could climb then glide. What would temper economies, preventing bubbles? Rather than let a few lucky owners collect land values, neighbors would have to recover land values for themselves. Nobody made land, and no lone owner made its value; the presence of society in general did that. Plus, for excluding everyone else from their sites, owners owe everyone else, as each one of us owes everyone for excluding them.
To recover land value, government could either transform the property tax into a land tax or replace it and other taxes with land dues or land use fees or an annual deed fee. ...
To pay the land dues, owners use their land efficiently; owners who had been speculating get busy and develop. No longer allowed to tax anything that moves, local governments, too, which presently let acres of abandoned urban land and buildings lie fallow, get busy, too, and make sure to get those acres into the hands of ambitious owners who’ll pay land dues. More locations put to use and more buildings put up increases supply, which dampens price.
Better still, as government recovers land rent, that leaves owners with less land rent to capitalize into land price. Hence buyers need not borrow so much. ...
Land would still rise in value. With every discovery of a nearby natural resource. With the opening of every new bridge. With every techno-advance, as silicon wafers did for Silicon Valley. With every jump in income and drop in crime, land value rises. But no longer into a bubble. Because every rise would find its way – via land dues and rent dividends – into everyone’s pockets. ...
If the 18-year average holds for this cycle, then real estate still has a few more years of sucking all the investments and purchasing power out of the rest of the economy. Land is still able to soak it all up, and lenders are still willing to pump more in. So despite the premature panic (markets almost never do what everybody says they’re going to do), Mankiw’s 2007 would be the earliest that the current bubble would burst, and 2008 is just as likely.
Then land prices will fall for a few years. Since the run-up was steep, the drop will be, too – after correcting for inflation, maybe as much as 50%. Which will be an enormous relief for the economy – just what the doctor ordered. With land affordable again, a new cycle can get under way. Whether the new one will be boom and bust or climb and glide is up to us, whether we’re willing to practice geonomics, to forego taxes and subsidies in favor of land dues and a Citizens Dividend.
While I don’t mind the current gambling, I do mind the widening of the cavernous gulf between haves and have-nots, and I boil over while workweek grows more onerous, and just seethe watching vacant lots and abandoned buildings push development out from urban cores to sprawl on suburban farmland. To reverse that, let’s let go of the individual owner’s hold on land rent and share Earth’s worth equitably among us all. We’ll all be glad we did. ... Read the whole article
... Under the impact of spectacular advances in technology the actual level of employment and production falls short of the full use of our manpower and industrial capacity. ...
The purpose of my talk is to show that the relation of property taxation to unemployment and lack of economic growth is that of cause to effect....
Ricardo believed that ground rents and the value of land have a tendency to rise continuously and that this benefits solely the landowners. The progress of industrialization and urbanization in the second half of the 19th century resulted in a rapid increase in the value of urban land and the owners of such land reaped tremendous profits. This led John Stuart Mill to observe, that "Only the landowners grow richer, as it were in their sleep without working, risking and economizing". He called for the taxation of land in order to recapture the unearned increment accruing to the land owners.
The apostle of land taxation is Henry George. In his famous book Progress and Poverty he develops his single tax theory. He tries to show that poverty and unemployment and other evils are caused by the land monopolists. Henry George's theory is similar to that developed by John Stuart Mill. Land values are based on ground rents which are created by the community and not by the land owners. Therefore the community is justified in recapturing these rents by a single tax on land. ...
Three criteria are generally used to judge the merits of a tax.
For instance if full employment and economic growth are regarded as desirable, the question to be examined is what effects will this tax have on achieving these objectives? ...
When analysing property taxes we shall distinguish between that part of the tax which is assessed on improvements and that part which is assessed on land.
That part of the tax that is assessed on buildings penalizes everybody who improves his land, his buildings or intends to construct residential, commercial or industrial property. The most serious incidence of property taxes is on new housing. When rental property or houses are newly constructed these taxes add 15 to 20% to the annual cost depending on assessment practices and tax rates. ...
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.
In the press, on the radio and on television we are often warned about the threat of inflation. Hardly ever are we told, that the increase in the cost of living is to a large extent due to the increase in housing costs brought about by the housing shortage.
To the extent that property taxes discourage residential construction and the improvement and modernization of homes they create unemployment. The housing construction industry employed about 2,200,000 people in 1962, that is about 1.4 persons per housing unit. Any change in the direction of home building employment is multiplied 2.57 times. Thus an increase in housing starts by 50% would give employment to 2.8 million persons. An increase by about 66.6% or by 2/3 would create about 3.6 million jobs. These figures do not take into consideration the investment in public utilities, streets, schools etc., that would be required to service these additional housing units.
Under our property tax system wealthy communities with expensive homes or with heavy concentration of industry will have a large tax basis and low tax rates. Schools will be good and public services will be adequate. Yet in a poor community the tax base will be much smaller, tax rates will be much higher and still it will be found impossible to provide for good schools and adequate public services.
In a pamphlet entitled Paying for better schools the Committee for Economic Development came to the conclusion that "where a child happens to live is likely to be important in determining the quality of his education. In some areas children are taught by meagerly qualified teachers in substandard schools with inadequate equipment. The school session is shorter and the school leaving age is lower than the national average."
A defect of our property tax system that is seldom mentioned is that it puts a premium on obsolescence and penalizes new housing. This is so because property taxes are ad valorem taxes. Every piece of real estate except land is subject to depreciation. Thus the owners of old and obsolete real estate will pay little in taxes, while newly constructed buildings will bear the brunt of the tax.
This characteristic of the property tax is obscured by the rising trends of land values, which in many cases offset the loss in value of the improvement. Increases in tax rates and differences in assessment procedures and practices further hide the fact that ad valorem taxes favor obsolete real property.
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. ...
Homeowners who bought their homes some time in the past can reap large profits when selling them. Old homes should sell at a lower price, because of the depreciation of the building, but in most cases the depreciation of the building is more than offset by the increased value of the lot. This increased value forces buyers to increase their down payments or to increase their loan are higher, many families are priced out of the market.
We have discussed the sharp increase in the level of rents that has taken place during these last years. These increases reflect the steep rise in land values that have taken place in almost all sections of our cities. The tax assessed on the improvements has discouraged the construction of more and better housing. At the same time, the tax assessed on land has been too low to induce owners to sell, improve, or replace their rental properties.
Property taxes shape the pattern of our cities.
The inflationary effects of property taxation are reinforced by the fact that property taxes themselves are included in the cost of living index and that property tax rates have the tendency to rise.
Relatively low taxes on land and high taxes on improvements will discourage the owners of vacant lots or underdeveloped land, such as that used for parking lots, gas stations, hamburger stands, etc., from improving their land. It will encourage them to keep the land out of use and to sell later at a profit. This will create an artificial shortage of land, which in turn will lead to urban blight and irregular, leapfrog city growth.
This urban sprawl makes our cities look ugly, but it has many disadvantages besides:
It is generally believed that zoning laws are a very effective tool to control the growth of our cities. Zoning laws determine the best possible use of urban land. Yet nobody can be forced to improve his land and to build unless there is an incentive. This can be achieved by taxing land at a rate that will make it unprofitable to hold it without improving it.
The city planner needs land taxation just as he needs zoning laws. With both these tools the orderly growth of our cities will be assured, but -- as experience has shown -- without land taxation rational and efficient land usage becomes impossible.
Professor Galbraith and others have expressed concern about the poverty of the public sector of our economy as compared to the affluence of the private sector. The appearance of our cities, the inadequate financial support we give our schools and poor public services seem to support this view. Yet, I can not agree with Professor Galbraith's conclusion that we need more public revenues to meet these needs. It seems to me that the spreading out of our cities over wider and wider metropolitan areas has immeasurably increased the financial burden of local governments. In other words, wasteful use of land caused by our property tax system is the real reason of the poverty of the public sector.
It stands to reason that the spreading out of our cities into wider and wider metropolitan areas is a very costly venture. For instance it was found that in the New York region suburbs have to make capital outlays of $68 per capita for new housing, while only $44 was required for new housing in the central cities and only $38 in the non-metropolitan area. Another survey found that it costs $80 per household to provide water in the outlying suburbs against $30 in the city.
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. Read the whole article
Mason Gaffney: Introduction: The Power of Neo-classical Economics (Introduction to The Corruption of Economics, London: Shepheard-Walwyn, 1994)
Bill Batt: The Fallacy of the "Three-Legged Stool" Metaphor
Tax experts, especially at the state level, ply their trade by invoking one metaphor above all others: the three-legged stool. It rests on the claim that a sound and successful tax regime for any government needs to rely on a three tax bases: income, property and sales. This is repeated so often that it passes today without much examination.
Mason Gaffney: Full Employment, Growth And Progress On A Small Planet: Relieving Poverty While Healing The Earth
5. Adapting to the changing nature of inter-urban and inter-regional competition. Georgist policies had a good run at the local level in the days when cities sought to grow by attracting population. New York City, Cleveland, Toledo, Detroit, Pittsburgh, Chicago, Houston, San Diego, San Francisco, Seattle, Vancouver, Edmonton, Calgary, and many smaller cities all had their periods of rapid population growth with Georgist-leaning leadership (Gaffney, 2001). Federal income tax policies have stifled that. By loading the Federal tax burden on labor, while sparing capital, Congress creates a universal bias for cities and counties to see purely proletarian labor as a “fiscal deficit generator,” a parasite to repel, while capital and housing for the rich generate local fiscal surpluses. The resulting local biases toward selective growth policies are well known, but most advocates of housing for the poor are merely hacking at the branches of evil, ignoring the roots in Federal tax policies. ...
Territorial expansion: Regional cross-subsidy, with subeconomic extension of public works and services. George’s critique of land speculation came to be focused on “Speculator Type #1,” who withholds good lands from timely use. Georgists have neglected to condemn the counterpart “Speculator Type #2,” who acquires marginal lands cheaply, and then lobbies public agencies to extend roads, utilities, military and police protection, and other public services to them, below cost.
Some Georgists may even see this as a legitimate way, and an easier way, to combat the artificial scarcity of land that Speculator Type #1 causes – a way of perpetuating the “frontier safety-valve.” However, it unbalances development severely: too much roading, et al., too little use of the land thus “opened up.” Some taxpayer must pay for the roading et al. If the taxes are activity-based or improvement-based (i.e. anything but land taxes) they will sterilize marginal land, and lower the intensity of use of all land.
This is a pervasive, immanent bias in most of our institutions, from city departments of public works up through state and provincial public utilities commissions and highway departments, clear to the Pentagon, World Bank, and CIA. Types #1 and #2, in tandem, create our form of Imperialism, that perpetual quest for Lebensraum that is our curse.
In my political experiences, one
collects more cuts and bruises
combating Speculators Type #2 than Type #1. I was, for example, able
to lead the local countywide campaign against Howard Jarvis’
“Proposition 13” without being seriously punished, but a
few years later when I led the campaign against southern
California’s favorite public water-works boondoggle, the
“Peripheral Canal,” my academic and professional world
collapsed about me. Earlier, when I joined the furor against American
imperialism (Gaffney, 1971) and the myth of infinite natural
resources (Gaffney, 1972), I became persona non grata at Resources
for the Future, Inc., where I then worked. In British Columbia, 1975,
I learned that the self-styled “socialist” government under
Premier David Barrett was unwilling even to consider withdrawing any
of its expensive cross-subsidies to speculators Type #2, and resented
me for raising the issue. The moose-pastures of northern B.C.
“are a mighty empire,” they told me, and the rich retirees
on the Gulf Islands are important constituents who should have both
their subsidized ferry service and their exclusionary zoning to keep
hoi polloi from sharing it. I have war stories, but the objective
point is that the socio-political bias for territorial expansion is
even stronger than the bias against cultivating, intensifying and
renewing our internal frontiers. The Georgist dream of taxing central
rents to finance public services becomes a nightmare when the public
money is dissipated in enriching Speculators Type #2. This kind of
spending not only dissipates rents, and wastes capital, at the same
time it despoils the environment. Worst of all, as the subeconomic
land development proceeds, each new settlement makes a platform for
the next, so there is no end to it short of the limits of capital and
of Earth. It is perhaps fortunate for Earth that, historically, the
limits of capital have been reached first, at the ends of bursts of
territorial overexpansion. ... read the whole article
Mason Gaffney: The Taxable Surplus of Land: Measuring, Guarding and Gathering It (for the Duma Hearings in Moscow, 1999)
In arid lands, water is life, and the most valuable natural resource is water. For example, in southern California we need water so much we import it from the Feather River 600 miles north of us, pump it uphill through the long San Joaquin Valley, then over the high Tehachapi Mountain range, and tunnel it through the San Bernardino Mountain Range, all at great cost. When it gets here, it supplements and competes with local water that nature provides freely in the Santa Ana, San Jacinto, and other rivers. That local water then has a value equal to the high cost of importing the remote northern water. That value in the local waters is a taxable surplus. However, we have not learned to take that surplus value into the local treasuries; we give the water away, and worse, we actually subsidize people to withdraw water by helping them pay for dams, canals, and pipelines so they can waste water without paying for it. Thus we turn a public asset into a public liability - an extreme form of folly that is called "dissipating rent." In this age of growing water scarcities it is past time we learned to husband and nurture rent, in order to socialize it by taxing the surplus. So should you, in comparable circumstances. ...
... The taxable surplus available from taxing the Net Product of land goes on forever, and grows as land rents grow. It is not like the false "revenue" that comes from privatizing land, which the IMF et al. would have you do. Selling the title to land gives money to the government currently in power, which this government is prone to treat as current income and spend right away: but it is not permanent income, any more than you would call it income when you sell your farm or home. To have income, permanent income, you must reserve the right to tax land forever, and use that income for public purposes or social dividends.
If you think you need cash immediately, in excess of current taxable surplus,
you can always borrow on the security of the tax revenue you have reserved
for your government. There are certain dangers in mortgaging your public
revenues like that, and I would counsel prudence and caution; but these dangers
are small and uncertain compared with the certain disaster that will follow
if you sell land forever, without
reserving any power to tax it in the future.
see also: http://www.progress.org/cg/mayors.htm — An Open Letter to the Mayors of the Cities and Towns in the United States
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper