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The truth is, that the completion of the railroad and the consequent great increase of business and population, will not be a benefit to all of us, but only to a portion. As a general rule (liable of course to exceptions) those who have it will make wealthier; for those who have not, it will make it more difficult to get. Those who have lands, mines, established businesses, special abilities of certain kinds, will become richer for it and find increased opportunities; those who have only their own labor will be come poorer, and find it harder to get ahead -- first, because it will take more capital to buy land or to get into business; and second, because as competition reduces the wages of labor, this capital will be harder for them to obtain.
What, for instance, does the rise in land mean? Several things, but certainly and prominently this: that it will be harder in future for a poor man to get a farm or a homestead lot. In some sections of the State, land which twelve months ago could have been had for a dollar an acre, cannot now be had for less than fifteen dollars. In other words, the settler who last year might have had at once a farm of his own, must now either go to work on wages for some one else, pay rent or buy on time; in either case being compelled to give to the capitalist a large proportion of the earnings which, had he arrived a year ago, he might have had all for of himself. And as proprietorship is thus rendered more difficult and less profitable to the poor, more are forced into the labor market to compete with each other, and cut down the rate of wages -- that is, to make the division of their joint production between labor and capital more in favor of capital and less in favor of labor.
And so in San Francisco the rise in building lots means, that it will be harder for a poor man to get a house and lot for himself, and if he has none that he will have to use more of his earnings for rent; means a crowding of the poorer classes together; signifies courts, slums, tenement-houses, squalor and vice.
San Francisco has one great advantage -- there is probably a larger proportion of her population owning homesteads and homestead lots than in any other city of the United States. The product of the rise of real estate will thus be more evenly distributed, and the great social and political advantages of this diffused proprietorship cannot be over-estimated. Nor can it be too much regretted that the princely domain which San Francisco inherited as the successor of the pueblo was not appropriated to furnishing free, or almost free, homesteads to actual settlers, instead of being allowed to pass into the hands of a few, to make more millionaires. Had the matter been taken up in time and in a proper spirit, this disposition might easily have been secured, and the great city of the future would have had a population bound to her by the strongest ties -- a population better, freer, more virtuous, independent and public spirited than any great city the world has ever had.
To say that "Power is constantly stealing from the many to the few," is only to state in another form the law that wealth tends to concentration. In the new era into which the world has entered since the application of steam, this law is more potent than ever; in the new era into which California is entering, its operations will be more marked here than ever before. The locomotive is a great centralizer. It kills towns and builds up great cities, and in the same way kills little businesses and builds up great ones. We have had comparatively but few rich men; no very rich ones, in the meaning "very rich" has in these times. But the process is going on. The great city that is to be will have its Astors, Vanderbilts, Stewarts and Spragues, and he who looks a few years ahead may even now read their names as he passes along Montgomery, California or Front streets. With the protection which property gets in modern times -- with stocks, bonds, burglar-proof safes and policemen; with the railroad and the telegraph, after a man gets a certain amount of money it is plain sailing, and he need take no risks. Astor said that to get his first thousand dollars was his toughest struggle; but when one gets a million, if he has ordinary prudence, how much he will have is only a question of life. Nor can we rely on the absence of laws of primogeniture and entail to dissipate these large fortunes so menacing to the general weal. Any large fortune will, of course, become dissipated in time, even in spite of laws of primogeniture and entail; but every aggregation of wealth implies and necessitates others, and so that the aggregations remain, it matters little in what particular hands. Stewart, in the natural course of things, will die before long, and being childless, his wealth will be dissipated, or at least go out of the dry goods business. But will this avail the smaller dealers whom he has crushed or is crushing out? Not at all. Some one else will step in, take his place in the trade, and run the great money-making machine which he has organized, or some other similar one. Stewart and other great houses have concentrated the business, and it will remain concentrated.
Nor is it worth while to shut our eyes to the effects of this concentration of wealth. One millionaire involves the little existence of just so many proletarians. It is the great tree and the saplings over again. We need not look far from the palace to find the hovel. When people can charter special steamboats to take them to watering places, pay four thousand dollars for the summer rental of a cottage, build marble stables for their horses, and give dinner parties which cost by the thousand dollars a head, we may know that there are poor girls on the streets pondering between starvation and dishonor. When liveries appear, look out for bare-footed children. A few liveries are now to be seen on our streets; we think their appearance coincides in date with the establishment of the almshouse. They are few, plain and modest now; they will grow more numerous and gaudy -- and then we will not wait long for the children -- their corollaries. ... read the whole article
Henry George: The Crime of Poverty (1885 speech)
Poverty! Can there be any doubt of its cause? Go, into the old countries — go into western Ireland, into the highlands of Scotland — these are purely primitive communities. There you will find people as poor as poor can be — living year after year on oatmeal or on potatoes, and often going hungry. I could tell you many a pathetic story. Speaking to a Scottish physician who was telling me how this diet was inducing among these people a disease similar to that which from the same cause is ravaging Italy (the Pellagra), I said to him: "There is plenty of fish; why don't they catch fish? There is plenty of game; I know the laws are against it, but cannot they take it on the sly?" "That," he said, "never enters their heads. Why, if a man was even suspected of having a taste for trout or grouse he would have to leave at once."
There is no difficulty in discovering what makes those people poor. They have no right to anything that nature gives them. All they can make above a living they must pay to the landlord. They not only have to pay for the land that they use, but they have to pay for the seaweed that comes ashore and for the turf they dig from the bogs. They dare not improve, for any improvements they make are made an excuse for putting up the rent. These people who work hard live in hovels, and the landlords, who do not work at all — oh! they live in luxury in London or Paris. If they have hunting boxes there, why they are magnificent castles as compared with the hovels in which the men live who do the work. Is there any question as to the cause of poverty there?
Now go into the cities and what do you see! Why, you see even a lower depth of poverty; aye, if I would point out the worst of the evils of land monopoly I would not take you to Connemara; I would not take you to Skye or Kintire — I would take you to Dublin or Glasgow or London. There is something worse than physical deprivation, something worse than starvation; and that is the degradation of the mind, the death of the soul. That is what you will find in those cities.
Now, what is the cause of that? Why, it is plainly to be seen; the people driven off the land in the country are driven into the slums of the cities. For every man that is driven off the land the demand for the produce of the workmen of the cities is lessened; and the man himself with his wife and children, is forced among those workmen to compete upon any terms for a bare living and force wages down. Get work he must or starve—get work he must or do that which those people, so long as they maintain their manly feelings, dread more than death, go to the alms-houses. That is the reason, here as in Great Britain, that the cities are overcrowded. Open the land that is locked up, that is held by dogs in the manger, who will not use it themselves and will not allow anybody else to use it, and you would see no more of tramps and hear no more of over-production. ... read the whole speech
Clarence Darrow: How to Abolish Unfair Taxation (1913)
Nic Tideman: Applications of Land Value Taxation to Problems of Environmental Protection, Congestion, Efficient Resource Use, Population, and Economic Growth
When economists think about the contribution that land value taxation might make to economic performance, they are likely to think in terms of property tax reform. If taxes on structures are reduced or eliminated, one can expect that more structures will be built, and cities will be taller, more compact and more efficient.1 But more efficient cities are only the beginning of the contribution that land value taxation can make to improving economic performance. Land value taxation generalizes into the principle that people should pay for all of their appropriations of natural opportunities, according to the opportunity costs of those appropriations, and the resulting revenue should be shared equally. There are important applications of this principle to questions of environmental protection, relieving congestion, efficient resource use, population growth, and general economic growth. This paper discusses these more varied applications of the generalized principle of land value taxation. ... ... Read the entire article
Walter Rybeck: The Uncertain Future of the Metropolis
The single element that makes me apprehensive about the future of our cities is our land system. Tentacles of our misguided land policies are choking almost every vital aspect of metropolitan life. This is doubly worrisome, because the full dimensions of the land problem have barely surfaced in the public consciousness. To put it in the vernacular, most of us don't know what's eating us.
We have scarcely begun to identify the causes of today's city land problems. This is not to denigrate the legions of good folk -- officials and citizens alike -- who are trying desperately to cope with the daily disasters. But without a better notion of what is producing these disasters, we are unlikely to stem the flood.
A major problem, certainly, is our distorted land system that operates around the clock and around the calendar, and under the full sanction of the law. It rips off the poor, saps small business, and deprives municipalities of their rightful revenue.
The people as a whole create land values, not only by their presence, but also through participation in government, as taxpayers. Schools, firehouses, streets, police, water lines -- the whole gamut of public works and services that enhance a neighborhood are converted into higher land values. The taxpayers of the entire country, through federal aid for our multi-billion-dollar Metrorail project, have been boosting Washington, D.C. land values mightily.
Not all land values are manmade. Inherent qualities also give land special advantages: fertile soils in farming districts, scenic views in residential areas, subsurface riches of coal, oil, and minerals. None of us, as landlords, tenants, or governments, can lay claim to having created these values. The people who have been drawing up an international law of the Seas have characterized these natural endowments as "the common heritage of mankind", where no people, individually or collectively, produce these land values, it is difficult to argue with the conclusion that they belong to all people equally.
If the institution of private property has a sound foundation, and I believe it does, then it rests on the principle that people have a right to reap what they sow, to retain for themselves what they themselves produce or earn. Land values, produced by all of society, and by nature, do not conform to this prescription. ...
Decade after decade, billions of dollars in urban land values are being siphoned off by a narrowing class that has no ethical or economic claim to them. To be outraged when a few ghetto dwellers, in an occasional frenzy of despair, engage in looting on a relatively miniscule scale, but to remain indifferent to this massive, wholesale looting, is worse than hypocritical. It is to ignore a catastrophic social maladjustment, more severe, I believe, than anything the U.S. has experienced since slavery. ...
But I sense that we are drifting rapidly towards a landlord-dominated society. ...
Before that happens, the opportunity awaits to see whether a reasonably free economy can still be made to work. Unless we tackle the land question, and the looting of America, that game may be forfeited.
The future of the metropolis is uncertain. The choice is ours. We can intervene in the way society is now headed, to preserve the American dream. Or, we can continue along the present path and await the American nightmare. Read the whole article
Lindy Davies: The Top Ten Reasons Why Land is More Important than Ever
The Georgist economic proposal insists on the primary importance of land as a factor in the economy. Many people dismiss that as a quaint, agrarian notion. "Perhaps," they scoff, "land was that significant back when most people had to work the soil for a living, but modern agriculture has moved far past that! Nowadays we deal with modern issues of technology, global markets, information -- land is no longer a big deal."
10. There's no place to dump your trash for free. ...
9. Scratch a financial crisis, find a real estate bubble. ...
8. Information (like railroads) needs routes. ...
7. Cities can no longer afford to be inefficient. ...
6. Global climate change is too likely to ignore. ...
5. The loss of biological diversity cannot be reversed. ...
4. Two out of every five people lack a safe and dependable source of drinking water. ...
3. The myth of overpopulation causes cultural sickness. ...
2. We have forgotten what nations are. ...
1. "The land shall not be sold forever, for ye are strangers and sojourners with Me." ...
Mason Gaffney: Full Employment, Growth And Progress On A Small Planet: Relieving Poverty While Healing The Earth
Cities are the cores of specialization and exchange, which in turn are the mainsprings of productivity and technical progress. Urban land is therefore highly productive, so that most land values are found in cities. So are most of the best jobs, and investment outlets.
are the site of most “downstream” production,
which uses more labor per unit of natural resources than the primary
production outside cities. Modern “ecological footprint”
thinking seems to deny or overlook this important fact. Cities earn
their keep by providing the rest of the world with manufactures,
medical care, education, research, and many other urban products and
services that enhance rural output and welfare. (Even the Sierra Club
and Audubon Society have downtown urban headquarters.) ...
Cities, if compact and with good circulation, are resource-conserving (Gaffney, 1978, 1980). Free land markets, absent institutional biases and land speculation, would work to make cities compact. Land speculation is the worm in the apple of land markets, however, resulting in urban sprawl. Taxing land on the basis of its market value overcomes such speculation and lets the market make cities compact (Gaffney, 2001). ... Read the whole article
Mason Gaffney: Land as a Distinctive Factor of Production
Land is reusable. All the land we have is second-hand, most of it previously-owned. Our descendants, in turn, will have nothing but our hand-me-downs. As there is never any new supply, the old is recycled periodically, and will be in perpetuity, without changing form or location. Melded briefly with fixed buildings, land survives them to go one more round of use. Even while melded with capital, land is fit for another use at any time, unlike the capital on it. Land retains a practicable, measurable, meaningful opportunity cost. Land value in cities may be defined as "what is left after a good fire"; arsonists take that quite literally. In Beverly Hills, California, "tear-downs" are routine as taste-obsolescence races through fashionable neighborhoods where the land outvalues even the elegant buildings. These are dated after thirty years.
The opportunity cost of capital is fleeting. Capital loses most of it the moment it is committed to a specific form, whose physical alternative use is often only as scrap. Land's "opportunity cost" is real and viable at all times. The scrap value of capital is often zero or negative (radioactive waste supplying an extreme example).
Land may be afflicted with such "negative capital," the harmful waste from prior usage. An example is the spent carcass of an old building needing costly demolition. Some would class that spent carcass as a subtraction from the site value, but "negative capital" makes more sense, as may be inferred by considering the relations between a landlord and a tenant in a perfect market. The lease holds the tenant liable for damages he does and wastes he leaves; the prudent landlord requires of the tenant a deposit, or in larger cases a bond, to assure performance. Both acknowledge that damage done by use is imputed to the user, not to the land. Read the whole article
Mason Gaffney: George's Economics of Abundance: Replacing dismal choices with practical resolutions and synergies
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.
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 endure. ...
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. ...
Georgist tax policy helps renew cities, without subsidizing or administering teardowns and "clearance" of old buildings and neighborhoods. Georgist policy does not speed renewal by penalizing old buildings, but by encouraging new ones. It does not subsidize new ones, it just stops penalizing them. Teardown is never an end in itself; it only comes when incidental to releasing land for new buildings of greater capacity. This matter is covered in "How to renew a dying city," bound herein. ...
Georgist policy lets a region, nation, or the world add population and/or capital without diluting its resource base. It is as though rescuers pulled drowning people into a lifeboat, and their presence made the boat expand instead of sink! Call it "The Accommodating Lifeboat Theorem." It sounds like the Miracle of the Loaves and Fishes, but it is a different kind of miracle: synergy. It comes from the power of enlarging the market, as described by George in his chapter on the effects of increased population, and Adam Smith in his aphorism, "the division of labor is limited by the extent of the market." An indication of it is that bigger cities around the world have more land value per head than small ones, as documented by William Alonso.
We must temper this claim. Bigger cities are often located on better land, so size isn't all that accounts for Alonso's finding. However, more than sheer size, and more than good natural location, is the internal circulation of a city. Georgist policies are essential to financing good circulation, containing sprawl, and inducing private land development complementary to the circulatory system. Read the whole article
Mason Gaffney: How to Revive a Dying City
Blight is not restricted to stagnant or declining cities. In booming Los Angeles, there is Watts. In nearby Riverside, one of the fastest growing cities in the nation, the CBD [Central Business District] is surrounded by blight which, among other things, frustrates years of subsidies aimed at reviving the moribund CBD itself.
These extreme cases are not anomalies, not simply ghettoes and embarrassments; they are symptoms of systemic malfunction. They could be portents and symbols for the rest of the economy. Blight may be defined as failure to maintain, replace, and renew capital inherited from the past. Studies indicate that all of American industry faces this problem, compared with vigorous foreign competitors. In learning to cure blight, we may learn to restore the greatness and pride of this whole troubled nation.
There is also good news: some cities have risen from the grave. Indeed, all land development is resurrection in a sense: all land has been used before for something. The history of a city lot usually shows that there were several antecedent improvements, layered like the ruins of ancient Troy. The goal should be to make renewal happen faster and more widely, while we are still here to benefit. ...
Some cities should be abandoned.
Towns around played-out mines are obvious examples. A farm town becomes redundant when new roads let customers patronize a larger or better town. Salvage what you can and move on.
Some would apply the same logic to all cities. Dead cities aren't lost, they say, but rebuilt elsewhere; they were cash cows that have been milked dry. Their depreciation allowances are reinvested on new frontiers; people and vitality move with the capital. It is an important half-truth, but a half-truth is also half wrong. The basic original site stays put; land cannot move. Public and private social capital cannot move, either.
We cannot afford throwaway cities in a finite world. New natural sites are not common. There is only one Hudson Valley with only one mouth, and here New York City has stood for 350 years. We cannot abandon the Bronx and duplicate its environment somewhere; we cannot rebuild the natural setting, and the sunk social capital is too costly. Relocating to suburbs involves commuting cost in terms of money and congestion. And then, when we tire of the new suburbs, where will we go next?
Furthermore, blighted areas have
high potential market values.
Picture a topographic map of a city where the contour lines represent
points not of equal elevation, but of equal market value per square
foot. The peaks, the Everests and McKinleys, are in the city retail
centers, where just one square foot rises to $2,000 (about $90
million per acre). Land just a few miles away from dizzying altitudes
can hardly be worthless. Harlem is near Park Avenue; Watts is near
Beverly Hills; South State Street is very near the Sears Tower.
Newark is 15 minutes by train from Manhattan. Newark office rents are
$25/sf per year. That is less, of course, than in Manhattan, but in
Riverside, California, we are throwing up offices to get rent of
$12/sf per year, while Newark stagnates.
George saw cities as foci of civilization's basic mechanisms. People with mutual access, associating on equal terms, expedite cooperation and specialization through the market. Multivariate interactions are synergistic. Indeed, while each parcel is developed in the stage of decreasing returns, the composite city is generally in a stage of increasing returns, thanks to synergy: the whole exceeds the sum of its parts, and increases to the whole yield more than the sum of increases to the parts. Synergistic surplus, said George, lodges in urban land rents. Thus he explained a phenomenon which other economists overlooked: the unparalleled rise in urban rents and land prices, and in owners' wealth and power. ...
To understand ground rents and land prices is to understand cities; not to understand is to remain mired forever in confusion and fallacy. Ground rent continues forever, generally tending to rise; therefore, to buy title to land, people pay prices that look high relative to current cash flows. ....
Urban land prices take your breath away.
Land prices vary extremely from city to city or block to block. The cost to build a square foot of floor space is fairly constant from place to place, but demand varies with location. A small rise in floor rental translates into a large rise in ground rent and land price, because the land owner gets everything above what is required to operate and amortize the building. Thus,
At key locations in bigger cities, land prices are not just high per square foot, they are higher per capita than in small cities. They are even higher relative to building values, in spite of the high-rise buildings. Remember that each additional floor adds more ground rent, because floor space rental is more than enough to cover the added cost.
Land prices across cities and neighborhoods are much more differentiated than other measures economists commonly cite. For example, the median income in upper east side Manhattan is about 8 times higher than north of Central Park, while the price of land per square foot is probably 40 times higher. Urban land is also highly concentrated in ownership; a handful of people and corporations own most of it. A growing share of income property is held by wealthy aliens, who want to diversify and acquire secure wealth they can manage by remote control. Aliens even hold a good deal of residential property in international "jet set" communities.
Because urban rents are a social surplus, not a payment for anyone's making or supplying land, parties other than the landowner have a claim. A good deal of American politics deals with how to assert that claim and share in the surplus.
Dividing a big pie seems a pleasant enough task, but Confucius knew better: "It is easier to face a common enemy than to share a surplus." The common ways of sharing surplus are clumsy, divisive, and destructive; they bear some responsibility for dead cities. With too much quarreling over spoils, there are no spoils to dispute. Consider how spoils are shared, and how we might do better.
Economists call such schemes "postage stamp pricing," because postal rates do not vary with delivery costs. Manhattan has 64,000 residents per square mile; Montana has 5.4. It costs a lot more to collect or deliver mail in Montana. The reason postal rates rise is that the U.S. urban population is spreading out more like Montana and less like Manhattan (which once had over 100,000 per square mile). Here are five other examples:
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.
"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 from use.
George's land tax promotes equity toward the landless in at least four ways:
This is supply-side economics with a kick. ... George's program not only reconciles efficiency and equity, it squares taxes and incentives. What more can we ask of economic policy than to resolve stand-offs that have confused us, and dead-locked constructive action, for generations? ...
Camden has the highest tax rate in New Jersey, causing a vicious circle as high rates drive away capital and further erode the tax base. What if only land value were taxed? The depressant would become a stimulant by the simple magic of converting a variable charge into a fixed, unavoidable one. So it is with most depressed cities, which today look vainly to Washington for salvation. They need enabling legislation from their states, on the Pennsylvania model, but given this power can save themselves.
The counterpart of sharing rent through taxation is to untax things, like buildings, that involve human endeavor. This doubles the incentive effect. If land tax is the stick, untaxing buildings is the corresponding carrot, and George's program makes both larger. Every lot with an old "Defender" building has a potential replacement, the "Challenger." Taxing buildings rigs the fight against the Challenger. Say the lot-cum-Defender is worth $100K, and the Challenger would cost $500K to build. Challenger cash flow must exceed Defender cash flow by enough to pay $500K, plus added taxes based on it.
Georgist tax, by contrast, is impartial between Defender and Challenger; the market decides.
New buildings face liquidity crises; almost all are built on credit and need time to yield cash. The timing of tax on a building maximizes the damage during the crisis period, for any given tax yield over time. Of course, every building uses public services, but new buildings in older cities pay for more than they receive, while old ones receive more than they pay for. Think of building tax as a forced loan to the Treasury, to be recovered when the building is older. What could be more counterproductive than forcing a loan from a builder passing through a credit crisis? The Georgist tax is low when the builder's cash needs are pressing, and rises slowly over time as the site ripens to its next best use.
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 slows the neighborhood in a vicious, downward spiral. Conversely, new buildings stimulate renewal. There are exceptions; some new buildings sterilize blocks with blank walls.
But the exception is not the rule, and abuse is not the precept. The rule is that new buildings draw tenants from old and weaken other Defenders, so that other owners also renew. When they do, where better than next to the newest building? Renewal, like blight, is cumulative, but in a benign, upward spiral. Competition for sites raises the tax base if land values are derived from ground rents. The higher base allows the city to improve public services without taxing buildings or scaring away generators of fiscal surpluses. In this scenario, buildings raise the tax base indirectly, by raising the value of land around them.
Riverside built a downtown pedestrian mall when they were in vogue, and has been sorry ever since. It did not work; retailers deserted, and half the stores are empty. I asked the developer of a successful mall why he thought downtown failed, and got a two word answer: "absentee ownership." I should have known, having preached it for years.
Farm advisers say, "The best dressing for soil is the owner's shadow, applied daily." In town they ask, "Who's keeping the store?" Absentees aren't the only negligent owners, nor are they all bad. Torpid owners are the problem, and they come in many forms. A city wants to be rid of owners who see real estate as a cash cow for their retirement, and to replace them with owners who see it as a vehicle for enterprise and who apply their shadows daily. The shadows follow them to local civic clubs and to enterprising downtown or neighborhood associations for making joint improvements.
The surplus to land attracts outside buyers. Absentees, redundant parties in production, are often top bidders for pure ownership, which is the legal right to receive land rent plus unearned increments that accrue over time. Georgist taxation cuts directly into rents and unearned increments, which attract absentee owners; it spares the rewards of enterprise. It thereby effects a market transfer of ownership from absentees to occupants, with the community benefits that follow. In a period of rising concern over alien takeovers of U.S. real estate, these points merit focused attention. 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.
There is the answer to Governor Wilson' dilemma. I hope here in The Empire State you will supply a practical demonstration of the answer, one we may then use to inspire The Golden State. California now, following Proposition 13, has become a morality play, a gruesome object lesson in what happens when the property tax is pushed down toward zero. It forces higher taxes on production and exchange. Non-property taxes, you know, mostly have the character that they "shoot anything that moves," penalizing and discouraging economic activity. New buildings gain by having a lower property tax burden, it is true; but they bear the brunt of these new taxes and impost fees up front, at the time they are built. These offset the benefits of their lower property tax rate. ...
The property tax, rather than "shoot anything that moves," is a charge on inactivity. It taxes both lands and buildings on their market value, regardless of how they are used. "Hold on," you might say, "how about the very activity of constructing those buildings?" Yes, touché, the property tax does shoot at that, and shoot hard. However, that is why we are here today, to consider modifying the tax to exempt buildings. The proposal is to make it a tax mainly, or even purely, on "land ex buildings," a tax on inactivity, a tax just for sitting on a piece carved from the world's fixed, limited land supply. ...
I have here data (Gaffney, 1970, submitted herewith) I worked up
in Milwaukee from 1969 data indicating that, if land were assessed
correctly, the land fraction of the real estate tax base would be over
twice what the City Assessor reported. His fraction was 31%; it should
have been 70%.
For example, in West Allis, Wisconsin, the southwest corner of the Allis-Chalmers plant occupies the northeast corner of the 100% location, the most valuable commercial site in town. That land, with the same retail potential as the other three corners, is assessed as raw industrial acreage, as though it were in the boonies, with no recognition of its high location value for retail/office use. To make a land tax work, the assessor must be reinstructed to value that land at its highest and best use rather than as ordinary raw acreage. Exempting buildings would create the necessary pressure, thus solving the very problem that otherwise might be taken as a point against it. As noted earlier, the U.S. Census of Governments gives us no data on this point. You, however, can find it easily enough: tax assessments are public records, and you know your own town.
In still other cases "industry" surrounds and intersperses itself with vast swaths of vacant land. They hold it for open storage, parking, purported "future expansion," accessways, buffers, backlots, discouragement of competitors, etc. Many of Los Angeles' swankiest buildings of today arose over the former surplus lands of the cinema industry, which disgorged them before 1978 because they used to have to pay substantial taxes on surplus lands. ...
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.
I once wrote a long chapter
on this subject, "The
Adequacy of Land as a Tax Base" (Gaffney, 1970). It came out
of two years of research, and is too long even to summarize now. I am
delivering it to Pat Salkin, however, and hope she may add it to the
record of this conference. I also attach a short bibliography of
articles that expand on topics covered above, for whoever is moved to
study more on this fascinating subject. I hope you think it as
important as I do. Please pick up this ball and run with it.
Nobody said it was going to be easy. There are some bone-crushing
line-backers out there, like Greed, Ignorance, Myopia, and Inertia.
So much the more credit to you when you cross the line: your fans
will love you for a touchdown. They really need a lift; they've
waited so long! Read the whole article
Urban growth is desired because it raises peoples' incomes. In a market economy, incomes can be divided into components derived from four factors of production:
Thus a successful urban growth strategy in a market economy must either increase the amounts of land, labor, capital and entrepreneurship that are used in a city or increase the payments that are made per unit of each factor, or both.
The land that a city has is fixed (or if it changes, it does so at the expense of other administrative units). Therefore, with respect to land, socially productive urban growth means adopting policies that raise the productivity of land. Labor, on the other hand, is reasonably mobile, and capital is highly mobile. Entrepreneurship springs up and fades away with the rise and fall of opportunities. Therefore, in a market economy, the payments that must be made to attract these factors are substantially outside the control of a city. Thus the growth of a city with respect to labor, capital and entrepreneurship is achieved primarily by making the city a place that attracts more of these factors, taking the rates of wages, interest and profits that must be paid to attract them as given by market forces.
Tax policy is critical for urban growth because taxes on the earnings of labor, capital and entrepreneurship drive these factors away. A city that desires to grow should refrain from taxing wages, interest or profits and concentrate its taxes on land, which does not have the option of moving away.
Certain other sources of public revenue, in addition to the rent of land, have the characteristic of not discouraging growth. These sources of revenue involve either charging people for using scarce opportunities that no one created, as with land, or charging people for the costs that their actions impose on others.
A city that wishes to grow should confine its search for revenue to these sources. In this way it will attract more labor, capital and entrepreneurship, thereby raising the rent of land, which can be collected publicly without discouraging growth.
Additions to the stock of capital are extremely important for urban growth, because of the impact of abundant capital on wages and rents. When capital is abundant, labor and land are more productive, and the more productive they are, the higher wages and rents are. ...... Every activity that is continued should pass a test of providing adequate value for money. Most of the worthwhile activities of local governments raise the rental value of the land in the vicinity of the activity by enough to pay a substantial fraction if not all of the costs of the activity.
Thus the rental value of land is a natural first source of financing for local public expenditures.
Making the rental value of land a principal source of local public revenue has both an equity rationale and an efficiency rationale. The equity argument for social collection of the rent of land is founded on a recognition that the rental value of land has three sources.
The efficiency argument for social collection of the rent of land has two parts.
To achieve the potential efficiency of public revenue from land, it is important that people not be charged more for the use of land, just because they happen to be using it particularly productively. The rental value of land should be reassessed regularly, the values that are determined should vary smoothly with location, and they should be available for public inspection so that all users of land can see that they are being charged amounts commensurate with what their neighbors are being charged.
Social collection of the rent of land also facilitates the privatization of land. If every user of land is charged annually according to the rental value of the land that he or she holds, then it is possible to undertake a just privatization of land simply by passing out titles to the current users of land.
No one will be disadvantaged by not receiving land. Future generations will not be deprived by not having been awarded shares. And the community will have a continuing income from the rent of land.
The efficiency that is entailed in using the rent of land to finance public activities applies to certain other sources of public revenue as well:
1. Charges on any publicly granted privileges, such as the exclusive right to use a portion of the frequency spectrum for radio and TV broadcasts.
All of the above taxes are positively beneficial and should be collected even if the revenue is not needed for public purposes. Any excess can be returned to the population on an equal per capita basis. If these attractive sources of revenue do not suffice to finance necessary public expenditures, then the least damaging additional tax would probably be a "poll tax," a uniform charge on all residents. If some residents are regarded to be incapable of paying such a tax, then the next most efficient tax is a proportional tax on income up to some specified amount. Then there is no disincentive effect for all persons who reach the tax limit. The next most efficient tax is a proportional tax on all income.
It is important not to tax the profits of corporations. Capital moves from where it is taxed to where it is not, until the same rate of return is earned everywhere. If the city refrains from taxing corporations they will invest more in St. Petersburg. Wages will be higher, and the rent of land, collected by the government, will be higher. The least damaging tax on corporations is one that provides a complete write-off of investments, with a carry-over of tax credits to future years. Such a tax has the effect of making the government a partner in all new investments. With such a tax the government provides, through tax credits, the same share of costs that it later receives in revenues. However, the tax does diminish the incentive for entrepreneurial activity, and it raises no revenue when investment is expanding rapidly. Furthermore, the efficiency of such a tax requires that everyone believe that the tax rate will never change. Thus it is best not to tax the profits of corporations at all. If the people of St. Petersburg want to share in the profits of corporations, then they should invest directly in the corporations, either privately or publicly. The residents of St. Petersburg would be best served by refraining from taxing the profits of corporations. Creating a place where profits are not taxed can be expected to attract so much capital that the resulting rises in wages and in government-collected rents will more than offset what might have been collected by taxing profits.
The taxes that promote urban growth have at least one of two features.
Jeff Smith: Sharing Natural Rents to Sustain Human Society
To get rich, or more likely to stay rich, some of us can develop land, especially sprawling shopping centers, and extract resources, especially oil. While sprawl and oil depletion are not necessary, they are more profitable than a car-free functionally integrated city. Under the current rules of doing business, waste returns more than efficiency. We let a few privatize rent -- ground rent and resource rent -- although rent is a social surplus. As if rent were not profit enough, winners of rent have also won further state favors -- tax breaks, liability limits, subsidies, and a host of others designed to impel growth (20 major ones follow herein).
If we are to sustain our selves, our civilization, and our eco-system, we must make some hard choices about property. What we decide to do with rent, whether we let it reward our exploiting or our attaining eco-librium, matters. Imagine society waking up to the public nature of rent. Then it would collect and share its surplus that manifests as the market value of sites, resources, the spectrum, and government-granted privileges. Then we could forego taxing labor and capital. On such a level playing field, this freed market would favor efficiency -- the compact city -- not waste -- the mall and automobile. ...
Drawing their cue from the public, governments tolerate "rentention", the private retention of publicly-generated land values. Lacking this Rent, states turn to taxes. But to grow the economy, all governments -- left, right, or undecided -- hustle to stimulate development; they cut taxes and slop subsidies. Going beyond the call of duty, the state excuses producers' their routine pollution and limit liability, thereby cutting the cost of insurance. Companies that don't impose on nature, worker, or customer are not benefited at all but lose a competitive advantage. On this tilted playing field, one with the lumps of subsidies and the tilts of taxes, technologies lean and clean have a hard time competing as suppliers of materials, homes, food, rides, and energy. ...
To sustain that which we love, we must transform our relationships to nature, to government, and to each other. We need to become geonomists in worldview, theory, discipline, and policy. Geonomics creates an economy that's not at war with but aligned with the natural world. ... Read the whole article
Dan Sullivan: Are you a Real Libertarian, or a ROYAL Libertarian?
Even the indirect effects are substantial. Land speculations gone sour chew up inner cities, so poor people turn to crime (if drug selling and prostitution be crimes) and the government gets an excuse to beef up the police state.
Politically connected real estate
interests see that they can buy
up land in the boondocks for a pittance and then get other taxpayers
to build them a superhighway, increasing the value of their holdings
by orders of magnitude. With land value tax they would have
ultimately paid for their own highway or more likely would not have
had it built in the first place.... Read the whole piece
... The failure to collect site rent leads to a distortion in land use configurations. If patterns unfolded along the lines of both social preference and economic efficiency, high value landsites would tend to have high value buildings, and low value landsites would tend to be vacant or have very modest buildings. Consistent with this, urban centers sites would tend to have office and commercial use, surrounded by lower-value residential land uses, and still further out would be farms and forests. The ratio of building to land value, land to total value (or for that matter any other ratio between buildings, land, and total values) would be relatively constant throughout a region. Instead, the ratio of land value to total value consistently tends to reveal a patchwork of random development. This inefficient settlement of land sites is what we know as sprawl. ... read the whole articleBill Batt: The Compatibility of Georgist Economics and Ecological Economics
And yet, for pricing to work at all, there must be both supply and demand; the lack of either results in there being no market price at all. Is it possible, perhaps, that policies might be developed where demand for certain resources are reduced to zero — and hence no price? To some extent this is how the Georgist economics approach works. It leaves certain realms of the commons unthreatened by exploitation for the reason that the attention of the market is focused elsewhere. By the collection of economic rent the prices of resources are effectively shifted, so much so that the market arena is profoundly altered. Resource prices are shifted in such a way that their use is curtailed and their consumption concentrated. It was noted earlier, for example, that collection of land rent tends to reverse the centrifugal forces of sprawl, actualizing demand at the core of urban areas and leaving remote regions uninhabited and intact. Economic rent accrues to sites that have high demand and frequent use; collecting that economic rent tends to concentrate their use in ways that discourages speculative practices, allocate their use to those who can best maximize their utility, and leave other sites and commodities in remote areas less affected by human activity. So also with charges for other public resources such as radio frequencies and airport landing slots. Pricing incentives are established in such a way that economic activity is intensified, concentrated, and integrated without the need of artificial CAC instruments such as zoning, urban growth boundaries, community land trusts, and other devices which are expensive to implement and have notable records of failure.... read the whole article
TPR - Explain exactly what would happen if America began shifting taxes off of everything else and onto land value.
MG - Exactly? The effects are too great, too pervasive to predict exactly.
One could go on at length, but Henry George summed it up in three words: "Association in Equality." Civilization advances when those conditions are met, and declines when they are denied. America has been denying them; we are all paying the price. ... read the whole article
Ted Gwartney: A Free Market Strategy to Reduce Sprawl
A Strategy for Urban Renewal
Established cities could adopt some very practical long-term measures that will make the city a place where people can and will want to live, work, and play in safety. What few city leaders understand is the destructive role that taxation has played in the out-migration of people and business.
What is needed is a continuously self-renewing city and a public policy that can work effectively. Buildings have a limited useful life. Continuous maintenance and frequent retrofitting sometimes extends this life span. Other buildings reach a point where they should be replaced. Some buildings sit vacant for decades even in the city's central business district. Valuable parcels of land are left undeveloped or paved over and used as surface parking lots. The result is a lower tax base and an eyesore.
As urban buildings deteriorate, owners often don't renovate, remodel or make repairs because their property tax may rise. Thus the typical property tax creates suburban sprawl and urban decay. Shifting the property tax off buildings and onto land reverses these processes. Taxing land more than buildings usually reduces taxes for homeowners.
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.
This is where the anti-sprawl component appears. As the city begins to renew itself -- as property owners are no longer penalized when they renovate or build new structures -- businesses and people will increasingly see the city as a more desirable place and not just in a few neighborhoods that now benefit by abatement programs and public subsidies.
Exempting property improvements from taxation and collecting all of the property tax from land values (which are created by the community as a whole and not by individuals) is the cornerstone to continuous self-renewal and the reduction of urban sprawl. Community leaders, residents and business owners can discuss how this renewal will take place, to ensure that neighborhoods retain existing amenities and create new ones that will make every neighborhood vital and attractive. By correcting this serious structural flaw in tax policy that has existed for so long, people will gradually return to city, contributing to its self-renewal.
By utilizing land within cities
efficiently and in response to the
demand for its use, open space and natural habitats outside the city
will be conserved. If urban land is used to its highest and best use,
farm land and environmentally sensitive land will not be required for
inappropriate uses. Builders and developers would not have to bypass
serviced but vacant land to construct housing at a further distance
from where it is needed or wanted. ... Read the
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper