Location, location, location

Louis Post: Outlines of Louis F. Post's Lectures, with Illustrative Notes and Charts (1894)

Whoever calmly reflects and candidly decides upon the merits of indirect taxation must reject it in all its forms. But to do that is to make a great stride toward accepting the single tax. For the single tax is a form of direct taxation; it cannot be shifted.11

11. This is usually a stumbling block to those who, without much experience in economic thought, consider the single tax for the first time. As soon as they grasp the idea that taxes upon commodities shift to consumers they jump to the conclusion that similarly taxes upon land values would shift to the users. But this is a mistake, and the explanation is simple. Taxes upon what men produce make production more difficult and so tend toward scarcity in the supply, which stimulates prices; but taxes upon land, provided the taxes be levied in proportion to value, tend toward plenty in supply (meaning market supply of course), because they make it more difficult to hold valuable land idle, and so depress prices.

"A tax on rent falls wholly on the landlord. There are no means by which he can shift the burden upon anyone else. . . A tax on rent, therefore, has no effect other than its obvious one. It merely takes so much from the landlord and transfers it to the state." — John Stuart Mill's Prin. of Pol. Ec., book v, ch. iii, sec. 1.

"A tax laid upon rent is borne solely by the owner of land." — Bascom's Tr., p.159.

"Taxes which are levied on land . . . really fall on the owner of the land." — Mrs. Fawcett's Pol. Ec. for Beginners, pp.209, 210.

"A land tax levied in proportion to the rent of land, and varying with every variation of rents, . . . will fall wholly on the landlords." — Walker's Pol. Ec., ed. of 1887, p. 413, quoting Ricardo.

"The power of transferring a tax from the person who actually pays it to some other person varies with the object taxed. A tax on rents cannot be transferred. A tax on commodities is always transferred to the consumer." — Thorold Rogers's Pol. Ec., ch. xxi, 2d ed., p. 285.

"Though the landlord is in all cases the real contributor, the tax is commonly advanced by the tenant, to whom the landlord is obliged to allow it in payment of the rent." — Adam Smith's Wealth of Nations, book v, ch. ii, part ii, art. i.

"The way taxes raise prices is by increasing the cost of production and checking supply. But land is not a thing of human production, and taxes upon rent cannot check supply. Therefore, though a tax upon rent compels land-owners to pay more, it gives them no power to obtain more for the use of their land, as it in no way tends to reduce the supply of land. On the contrary, by compelling those who hold land on speculation to sell or let for what they can get, a tax on land values tends to increase the competition between owners, and thus to reduce the price of land." — Progress and Poverty, book viii, ch. iii, subd. i.

Sometimes this point is raised as a question of shifting the tax in higher rent to the tenant, and at others as a question of shifting it to the consumers of goods in higher prices. The principle is the same. Merchants cannot charge higher prices for goods than their competitors do, merely because they pay higher ground rents. A country storekeeper whose business lot is worth but few dollars charges as much for sugar, probably more, than a city grocer whose lot is worth thousands. Quality for quality and quantity for quantity, goods sell for about the same price everywhere. Differences in price are altogether in favor of places where land has a high value. This is due to the fact that the cost of getting goods to places of low land value, distant villages for example, is greater than to centers, which are places of high land value. Sometimes it is true that prices for some things are higher where land values are high. Tiffany's goods, for instance, may be more expensive than goods of the same quality at a store on a less expensive site. But that is not due to the higher land value; it is because the dealer has a reputation for technical knowledge and honesty (or has become a fad among rich people), for which his customers are willing to pay whether his store is on a high priced-lot or a low-priced one.

Though land value has no effect upon the price of good, it is easier to sell goods in some locations than in others. Therefore, though the price and the profit of each sale be the same, or even less, in good locations than in poorer ones, aggregate receipts and aggregate profits are much greater at the good location. And it is out of his aggregate, and not out of each profit, that rent is paid, For example: A cigar store on a thoroughfare supplies a certain quality of cigar for fifteen cents. On a side street the same quality of cigar can be bought no cheaper. Indeed, the cigars there are likely to be poorer, and therefore really dearer. Yet ground rent on the thoroughfare is very high compared with ground rent on the sidestreet. How, then, can the first dealer, he who pays the high ground rent, afford to sell as good or better cigars for fifteen cents than his competitor of the low priced location? Simply because he is able to make so many more sales with a given outlay of labor and capital in a given time that his aggregate profit is greater. This is due to the advantage of his location, and for that advantage he pays a premium in higher ground rent. But that premium is not charged to smokers; the competing dealer of the side street protects them. It represents the greater ease, the lower cost, of doing a given volume of business upon the site for which it is paid; add if the state should take any of it, even the whole of it, in taxation, the loss would be finally borne by the owner of the advantage which attaches to that site — by the landlord. Any attempt to shift it to tenant or buyer would be promptly checked by the competition of neighboring but cheaper land.

"A land-tax, levied in proportion to the rent of land, and varying with every variation of rent, is in effect a tax on rent; and as such a tax will not apply to that land which yields no rent, nor to the produce of that capital which is employed on the land with a view to profit merely, and which never pays rent; it will not in any way affect the price of raw produce, but will fall wholly on the landlords." — McCulloch's Ricardo (3d ed.), p. 207 ...

a. Explanation of Wages and Rent

Differences in the desirableness of land divide Wealth into the two funds, Wages and Rent. Labor naturally applies its forces to that land from which, considering all the existing and known circumstances, most Wealth can be produced with least expenditure of labor force. Such land is the best. So long as the best land exceeds demand for it, laborers are upon an equality of opportunity, and the entire product goes to them as Wages in proportion to the labor force they respectively expend. But when the supply of the best land falls below demand for it, some laborers must resort to land where with an equal expenditure of labor force they produce less wealth than those who use the best land. The laborers thus excluded from the best land naturally offer a premium for it, or what is the same thing, offer to work for its owners for what they might obtain by working for themselves upon the poorer land. This condition differentiates Rent from Wages. Rent goes to land-owners as such, irrespective of whether they labor or not; Wages go to laborers as such, irrespective of whether they own land or not.85

85. Land of every kind may vary in desirableness from other land of the same kind. Certain farming land, for example, is so fertile that it will yield to a given application of labor two bushels of wheat to every bushel that certain other farming land will yield; and it is obvious that, other things being equal, farmers would prefer the more fertile land. But some fertile land lies so far away from market that less fertile land lying nearer is more productive, because it costs less to exchange its products for what their producer demands; in such cases farmers would prefer the less fertile land. The same principle applies to all kinds of land. Building lots at or near a center of residence or business are preferable for most purposes of residence or business to lots equally good in other respects which are far away.

Now, the land that is preferable is of course most in demand; and if it be all in use, with demand for it unsatisfied, competition for the preference sets in, and gives value to it.

All land cannot be equally desirable. Some excels in fertility. Some is rich with mineral deposits, a species of fertility. On some, towns and cities settle, thereby adding to the productiveness of the labor that uses it, because these sites are thus made centers of co-operation or trade. And yet production in the civilized state requires that the producer shall have exclusive possession of the land lie needs. This necessity inevitably gives to some people more desirable land than others have, even though all should have an abundance. Consequently the returns to equal labor are unequal. The man who has land that is more fertile or better located than that of another gets more wealth than the other in return for a given expenditure of labor. If, for example, one with given labor produces 10 bushels of corn from fertile land, equal, say, to $5 worth of any kind of wealth in the market, and the other with the same labor produces 8 bushels of corn, or $4 worth of any kind of wealth in the market, the first receives 2 bushels (or $1) more for his labor than the other receives for his, though each labors with equal effort, skill, and intelligence. Or, if the fertility of the land be the same, but its situation in reference to the market be such that the cost of transportation still preserves the relation of $5 to $4, the same inequality of wages results. It is this phenomenon that gives rise to Rent. Rent is the market value of just such differences in opportunity as are here illustrated. It is a premium for choice land, for preferential locations, for site, for space.

This premium is a very different thing from compensation for labor. Nor is the difference modified when premium owners first obtain Wages for work and with them buy the premium-commanding land. Rent can no more be turned into compensation for labor by exchanging labor products for the power to exact it, than a man can be turned into Wealth by exchanging Wealth for him. Whether the fruits of purchase or of conquest, or of fraud, Rent always constitutes that part of Wealth which is deducted from current production as premiums for superior opportunities for production.

Wages and Rent are both drawn from Wealth, and both go often to the same individual and in the same form of payment, as when a freehold farmer enjoys the use of the grain he raises from more fertile land than his neighbors have, or a city freeholder occupies or receives hire from his house and lot: but Wages flow from Wealth to labor as compensation for production, while Rent flows from Wealth to land-owners in premiums for allowing labor to produce Wealth from superior locations. Wages are appurtenant to Labor; Rent is appurtenant to Land. It is as laborer that the individual takes Wages, but as land-owner that he takes Rent. ...

Q36. How is it possible to determine what part of a man's product is due to land, and what part is due to labor?
A. All products are due wholly to the union of land and labor. Labor is the active force, land is the passive material; and without both there can be no product at all. But the part of a man's product that he individually earns, as distinguished from the part that he obtains by virtue of advantageous location, is determined by the law of rent — by what his location is worth.

Q40. Under the single tax theory what right have you to tax the value of "made land," like the Back Bay of Boston? Is not such land produced by labor?
A. The surface soil is produced by labor. But the foundation —the bottom of a bay, a swamp, a river, or a hole, is not. "Made land" does not differ economically from a house. Its materials are produced from one place to another and adjusted to meet the demand. But nature in the case of the "made land," as in that of the house, supplies the materials and the foundation. The value of the Back Bay of Boston is chiefly the value of a location — a communal value. The single tax would not take the value of "made land"; it would take the value of the space where the "made land" is. ... read the book

Charles B. Fillebrown: A Catechism of Natural Taxation, from Principles of Natural Taxation (1917)

Q3. What is meant by economic rent?
A. Gross ground rent -- the annual site value of land -- what land, including any quality or content of the land itself, is worth annually for use -- what the land does or would command for use per annum if offered in open market -- the annual value of the exclusive use in control of a given area of land, involving the enjoyment of those "rights and privileges thereto pertaining" which are stipulated in every title deed, and which, enumerated specifically, are as follows: right and ease of access to

* water, and
* health inspection,
* sewerage,
* fire protection,
* police,
* schools,
* libraries,
* museums,
* parks,
* playgrounds,
* steam and electric railway service,
* gas and electric lighting,
* telegraph and telephone service,
* subways,
* ferries,
* churches,
* public schools,
* private schools,
* colleges,
* universities,
* public buildings --

utilities which depend for their efficiency and economy on the character of the government; which collectively constitute the economic and social advantages of the land which are due to the presence and activity of population, and are inseparable therefrom, including the benefit of proximity to, and command of, facilities for commerce and communication with the world -- an artificial value created primarily through public expenditure of taxes. For the sake of brevity, the substance of this definition may be conveniently expressed as the value of "proximity." It is ordinarily measured by interest on investment plus taxes.

Q8. How about fertility value?
A. On the surface of the globe are countless varieties of exhaustible fertility, i.e. chemical constituency, differing in kind and degree, from the nitrogen, hydrogen, oxygen, and carbon of the soil to the carbon of the coal, the gold, and the diamond. Fertility as an attribute need not be predicated of agricultural land alone. Economic fertility belongs equally to any other land which yields to labor its product whether in food, mineral, or metal. Land may be fertile in wheat, corn, and potatoes. It may be fertile in cotton, in tobacco, or in rice. It may be fertile in diamonds, in gold, silver, copper, lead, or iron. It may be fertile in oil, coal, or natural gas, in a water power or water front. The value of artificial fertility is an improvement value. The value of natural fertility of any kind is a site value.

Q44. Why, on similar lots of land, should one man with a $10,000 building be taxed as much as another with a $100,000 building?
A. Because the value of the privilege of occupancy and use is the same in both cases.

... read the whole article

Michael Hudson: The Lies of the Land: How and why land gets undervalued

Chicago School economists insist that no free lunch exists. But when one begins to look beneath the surface of national income statistics and the national balance sheet of assets and liabilities, one can see that modern economies are all about obtaining a free lunch. However, to make this free ride go all the faster, it helps if the rest of the world does not see that anyone is getting the proverbial something for nothing - what classical economists called unearned income, most characteristically in the form of land rent. You start by using a method of appraising that undervalues the real income producer, land. Here's how it's done. ...

For hundreds of years property's value has been calculated by discounting its flow of rental income at the going rate of interest. The lower the interest rate, the higher the price a given rental stream will justify -- or as property owners express it, the more years' rent a property will bring. What is so striking about land values today is that they are rising for reasons independent of their earnings stream. The major new consideration is their prospect for future "capital" (that is, land-price) gains. In sum, the ultimate aim of real estate investors no longer is so much to seek income -- most of which is pledged to their bankers as interest payments on the property they acquire -- as much as to seek property gains. Politically opportunites abound. Merely changing zoning in New York City in the 1980s to allow using commercial loft spaces for residential purposes had the effect of multiplying asset values five or tenfold.

Whether the gains come from selling the property or from borrowing more money against it, the essential phenomenon is the rapid growth in asset values and real estate's uniquely favored tax treatment. That's why investors choose real estate instead of bonds or stocks, and much of the strategy underlying corporate takeovers has followed the strategies they developed over the past half century.

Nationwide the capital-gains dimension needs to be incorporated into the rental revenue statistics to measure real estate's total returns. This sector's nearly complete success in escaping the tax collector has placed an enormous tax burden on everyone else.  read the entire article

Lindy Davies: Land and Justice

We tend to have a very romantic conception of land, in this day and age. I'm not sure why, but I suspect it has to do with how seldom modern people actually come into contact with the stuff of the earth itself. We deal with burgers... papers... toilets... Without thinking about the many layers of processing between hayfield and burger, between tree and paper, between flush and water table.

We think of dropping out of the modern plastic world to go "back to the land." "The land" is where we go on camping trips.

This romantic conception of land can lead to some dangerously fuzzy thinking. It leads us to think, for example, that perhaps land used to be absolutely vital to human life, back in some halcyon, underpopulated past — but modern technology has long since taken care of that.

Or has it?

Let's think about this question: what is our most valuable natural resource? Is it
— gold, diamonds, precious or strategic minerals? Nope, not even close.
— Oil? Well, it's highly important to industrial civilization, of course, a matter of great political import — but by no means the most valuable.
— Water? Now we're getting closer: necessary for life, to be sure, and thus a potential object of wars — but in terms of cost per cubic foot, not so terribly high, yet.

What is it? Our most valuable natural resource — by leaps and bounds, more valuable than all the others combined — is urban land. Our most valuable natural resource is land whose natural fertility is utterly depleted, it will yield no gems or minerals; its soil is full of toxins. There's nothing worthwhile about it, except for one vital attribute: where it is. ... read the whole speech

Mason Gaffney: Land as a Distinctive Factor of Production

What gives value to land. Any real estate textbook will explain that the three factors for determining land value are "location, location and location." And any property owner will affirm this truth. But what generates locational value? Three phenomena: God, people and public activities.

• God the creator, Genesis tells us, "looked at everything he had made, and he found it very good." We recognize this goodness in the fertility of the soil, natural harbors, scenic beauty, the availability of water, and the subsurface riches of coal, oil, gold, iron and other substances. The land has a God-given goodness and is one of the gifts through which God sustains us.
• People create land values simply because they are social beings, consumers and producers. The more people concentrated on a piece of land, the higher its value. The press of population intensifies the demand for homes, jobs and services; this is what makes Manhattan far more valuable than downtown Richmond, Virginia, and Richmond more valuable than Anderson, Indiana, and Anderson more valuable than an uninhabited Utah crossroad.
• Finally, the public or government generates land values by providing streets, schools, police protection and other infrastructures. Opening a subway system for the District of Columbia in 1976 gave Washington’s blighted downtown a new lease on life. The subway and its riders are stimulating the economy along all of its corridors. According to a 1981 congressional study, "a minimum of $2 billion in land values has already been added to the existing land value base." However, it concluded that "only a trickle" of these new values finds its way back to local government through the property tax. The biggest share goes to people "lucky enough to own land within easy access of Metro stations."  ...   Read the whole article
  

Much urban blight is caused by these so-called ‘brown field’ vacant and under-used sites. However they are often in valuable locations, with good transport connections. It may be that owners are speculating that land prices will rise and enable them to sell at greater profit in the future than now, or it may be that there is genuinely no market for sites in a particular location unless the cost of remediation is subsidised as a form of public investment. Such investment, according to Vickrey and other followers of Henry George, can be entirely funded from LVT. In a lecture given in 1991, first published last year, Vickrey claimed:

The proviso, according to Vickrey, is to replace the tax on buildings with a tax on land value alone – LVT:-

Taxing buildings and work done to improve them discourages such work. Un-taxing them and taxing land more highly, irrespective of its actual state of development but based upon its highest and best immediate potential use, will encourage owners to maintain their sites and buildings in such a way as to maximise their income. A remote site or one with conservation or other restrictions will have a low site value, hence attract low taxes, whereas a high value city centre derelict site will very soon be redeveloped. The extra property tax revenue from extending the tax base to sites that are currently under-taxed (because the tax is based primarily on building/rental value not site/owner value), ensures public infrastructure projects can be funded without resource to general taxes or excessive borrowing on the financial markets.  Read the whole article

H.G. Brown: Significant Paragraphs from Henry George's Progress & Poverty, Chapter 5: The Basic Cause of Poverty (in the unabridged: Book V: The Problem Solved)

The truth is self-evident. Put to any one capable of consecutive thought this question:

"Suppose there should arise from the English Channel or the German Ocean a no man's land on which common labor to an unlimited amount should be able to make thirty shillings a day and which should remain unappropriated and of free access, like the commons which once comprised so large a part of English soil. What would be the effect upon wages in England?"

He would at once tell you that common wages throughout England must soon increase to thirty shillings a day.

And in response to another question, "What would be the effect on rents?" he would at a moment's reflection say that rents must necessarily fall; and if he thought out the next step he would tell you that all this would happen without any very large part of English labor being diverted to the new natural opportunities, or the forms and direction of industry being much changed; only that kind of production being abandoned which now yields to labor and to landlord together less than labor could secure on the new opportunities. The great rise in wages would be at the expense of rent.

Take now the same man or another — some hardheaded business man, who has no theories, but knows how to make money. Say to him: "Here is a little village; in ten years it will be a great city — in ten years the railroad will have taken the place of the stage coach, the electric light of the candle; it will abound with all the machinery and improvements that so enormously multiply the effective power of labor. Will, in ten years, interest be any higher?"

He will tell you, "No!"

"Will the wages of common labor be any higher; will it be easier for a man who has nothing but his labor to make an independent living?"

He will tell you, "No; the wages of common labor will not be any higher; on the contrary, all the chances are that they will be lower; it will not be easier for the mere laborer to make an independent living; the chances are that it will be harder."

"What, then, will be higher?"

"Rent; the value of land. Go, get yourself a piece of ground, and hold possession."

And if, under such circumstances, you take his advice, you need do nothing more. You may sit down and smoke your pipe; you may lie around like the lazzaroni of Naples or the leperos of Mexico; you may go up in a balloon, or down a hole in the ground; and without doing one stroke of work, without adding one iota to the wealth of the community, in ten years you will be rich! In the new city you may have a luxurious mansion; but among its public buildings will be an almshouse. ... read the whole chapter

Bill Batt: Comment on Parts of the NYS Legislative Tax Study Commission's 1985 study “Who Pays New York Taxes?”

Henry George’s Solution: Taxing the Flow of Land Rent

If land values are really the present values of anticipated future ground rents, one can certainly treat them as flows rather than stocks, just as community services are continuous flows. The amount of rent flowing through a site and through the economy is not negligible; what estimates have been made, where indeed the economic data allow it to be made, suggest that it is roughly a third of a nation’s GDP.29 The question is whether it makes more sense to. Should we elect to continue property tax regimes as we do, it would make better sense to tax buildings as stocks and lands as rent flows. But this raises the question whether real property should be exempt from all taxes, as some have argued.30 What rationale exists for taxing lands, whether as stocks or flows; and why do we tax buildings? I will argue below that taxing buildings and the failure to adequately tax land both have deleterious consequences for the whole economy.

Little justification exists for taxing buildings, or improvements of any sort, so this question is easily disposed of. The practice is explained largely as a matter of historical inertia. Only in the recent century or two have buildings represented any significant capital value; prior to the rise of major cities, the value of real property lay essentially in land. American cities today typically record aggregate assessed land values – at least when the valuations are well-done – at about 40% to 60% of total taxable value, that is, of land and buildings taken together.31 Skyscrapers reflect enormous capital investment, and this expenditure is warranted because of the enormous value of locational sites. Each site gets its market price from the fact that the total neighborhood context creates an attractive market presence and ambience. By taxing buildings, however, we impose a penalty on their optimum development as well as on the incentives for their maintenance. Moreover, taxes on buildings take away from whatever burden would otherwise be imposed on sites, with the result that incentives for their highest and best use is weakened. Lastly, the technical and administrative challenges of properly assessing the value of improvements is daunting, particularly since they must be depreciated for tax and accounting purposes, evaluated for potential replacement, and so on. In fact most costs associated with administration of property taxation and appeal litigation involve disputes over the valuation of structures, not land values.

Land value taxation, on the other hand, overcomes all these obstacles. Locations are the beneficiaries of community services whether they are improved or not. As has been forcefully argued by this writer and others elsewhere,32 a tax on land value conforms to all the textbook principles of sound tax theory. Some further considerations are worth reviewing, however, when looking at ground rent as a flow rather than as a “present value” stock. The technical ability to trace changes in the market prices of sites – or as can also be understood, the variable flow of ground rent to those sites – by the application of GIS (geographic information systems) real-time recording of sales transactions invites wholesale changes in the maintenance of cadastral data. The transmittal of sales records as typically received in the offices of local governments for purposes of title registration over to Assessors’ offices allows for the possibility of a running real-time mapping of market values. Given also that GIS algorithms can now calculate the land value proportions reasonably accurately, this means that “landvaluescapes” are easily created in ways analogous to maps that portray other common geographic features. These landvaluescapes reflect the flow of ground rent through local or regional economies, and can also be used to identify the areas of greatest market vitality and enterprise. The flow of economic rent can easily be taxed in ways that overcomes the mistaken notion that it is a stock. Just as income is recognized as a flow of money, rent too can (and should) be understood as such.

The question still begs to be answered, “why tax land?” And what happens when we don’t tax land? Henry George answered this more than a century ago more forcefully and clearly, perhaps, than anyone has since. He recognized full well that the economic surplus not expended by human hands or minds in the production of capital wealth gravitates to land. Particular land sites come to reflect the value of their strategic location for market exchanges by assuming a price for their monopoly use. Regardless whether those who acquire title to such sites use them to the full extent of their potential, the flow of rent to such locations is commensurate with their full capacity. This is why John Stuart Mill more than a century ago observed that, “Landlords grow richer in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.”33 Absent its recovery by taxation this rent becomes a “free lunch” to opportunistically situated titleholders. When offered for sale, the projected rental value is capitalized in the present value for purposes of attaching a market price and sold as a commodity. Yet simple justice calls for the recovery in taxes what is the community’s creation. Moreover, the failure to recover the land rent connected to sites makes it necessary to tax productive activities in our economy, and this leads to economic and technical inefficiency known as “deadweight loss.”34 It means that the economy performs suboptimally.

Land, and by this Henry George meant any natural factor of production not created by human hands or minds, is ours only to use, not to buy or sell as a commodity. In the equally immortal words of Jefferson a century earlier, “The earth belongs in usufruct to the living; . . . [It is] given as a common stock for men to labor and live on.”35 This passage likely needs a bit of parsing for the modern reader. The word usufruct, understood since Roman times, has almost passed from use today. It means “the right to use the property of another so long as its value is not diminished.”36 Note also that Jefferson regarded the earth as a “common stock;” not allotted to individuals with possessory titles. Only the phrase “to the living” might be subject to challenge by forward-looking environmentalists who, taking an idea from Native American cultures, argue that “we do not inherit the earth from our ancestors; we borrow it from our children.” The presumption that real property titles are acquired legitimately is a claim that does not withstand scrutiny; rather all such titles owe their origin ultimately to force or fraud.37

If we own the land sites that we occupy only in usufruct, and the rent that derives from those sites is due to community enterprise, it is not a large logical leap to argue that the community’s recovery of that rent should be the proper source of taxation. This is the Georgist argument: that the recapture of land rent is the proper – indeed the natural – source of taxation.38 ... read the whole commentary

Alanna Hartzok: Ethical Land Tenure