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The Social Justice of Site Value Rating
The Efficiency of Site Value Rating
How Valuations would be Made
Both for reasons of social justice and for reasons of economic efficiency, site value rating deserves a continued place in the programme of the Liberal Party.
The case for site value rating in terms of social justice is founded on two understandings: first, that the value of land in the absence of economic development is the common heritage of humanity, and second, that increases in the rental value of land arising from economic development and government expenditures should be collected by governments to finance those activities. What is meant by "land" is the unimproved value of sites and the value of extractable natural resources such as North Sea oil.
While there may someday be institutions capable of implementing a recognition of land as the heritage of all humanity on a worldwide basis, in the absence of such institutions each nation should implement a recognition that land within its boundaries is the common heritage of its citizens. This is accomplished not by making the nation a gigantic Common or by instituting government management of all land, but rather by requiring all persons and corporations that are granted the use of land to pay a fee or tax equal to what the rental value of the land they control would be if it were in an unimproved condition.
The case for site value rating in terms of economic efficiency is founded on the fact that a tax on resources that are not produced by human effort is one of the few sources of government revenue that does not reduce incentives for people to be productive. Two other revenue sources that have this virtue are taxes on other government-granted privileges such as exclusive use of radio frequencies and taxes on activities with harmful consequences, such as polluting the air. An economy will be more efficient if revenue sources that do not diminish productivity are employed to the greatest possible extent before any use is made of taxes that impede productivity.
What makes a tax efficient is that the amount of tax that is due cannot be reduced by reducing productive activities. When incomes are taxed, people can reduce the amount of taxes owed by working less. They do so, and the productivity of the economy falls. When houses are taxed, people can reduce the amount of taxes owed by building fewer house and smaller houses. They do so, and the housing shortage worsens. But when the unimproved value of land is taxed, there is no resulting diminution in the quantity of land. Thus taxes can be levied on land without diminishing the productivity of an economy. And shifting taxes from other, destructive bases to land will improve the productivity of an economy.
Subsequent sections explain in
more detail these social justice
and efficiency arguments for site value rating, describe procedures
for implementing such a tax system, and explain why a variety of
potential objections are without merit. ...
The whole practice of planning should be replaced by a system of charges for harmful consequences of land use and payments for beneficial ones. Planning is motivated by a concern for the harmful consequences that can result from land development. But the resulting restriction in land development makes planning permission all the more valuable to the few who receive it, with the result that vast fortunes are made by contriving to appear to have, in one's person or in one's projects, whatever attributes are regarded as attractive by those who grant planning permission. With so much money at stake, it is virtually impossible to avoid bias. A recognition of the impropriety of the large gains from receiving planning permission leads planning bodies to be ever more strict about granting it, and the result is ever higher prices of homes, to the detriment of first-time buyers.
When there are harmful
consequences of land development, these are
generally manifest in lower rental values of land near the land that
is developed. The effort that is now devoted to determining whether
to grant planning permission should be spent instead on identifying
the magnitudes of the harmful consequences of development. Then
everyone who wishes to develop land, and everyone who has title to
land that is already developed, should be charged those costs. Those
who have land that is adversely affected by development would be
compensated automatically through the reduction in the rates on their
land. ... Read the whole article
Nic Tideman: Basic Tenets of the Incentive Taxation Philosophy
When the principle that the value of government-assigned opportunities should be received by the public treasury is violated, the result is "privilege," which from its Latin roots means "private law," that is, law that permits one person to do what others are not permitted to do. Thus what we stand for is an end to privilege.
Numerous examples of privilege are incorporated in our institutions.
This list of examples of privilege, which is by no means exhaustive, contains some privileges, such as acreage allotments and import quotas, that would be best reformed by eliminating restrictions and permitting all to do what now only some may do. For other privileges, such as broadcast licenses and land titles, great productivity results from the social understanding that a specified individual will have the use of a given resource. For these privileges, the best reform is the introduction of the requirement that any person who is assigned such an opportunity must pay to the public treasury an annual fee equal to what the opportunity would be worth to someone else. ...
Making Housing Affordable
The implementation of our ideas would have a dramatic effect in making housing more affordable. The principal reason why housing costs have risen so much is that the price of land has risen enormously. Some increase in the price of access to land is a natural accompaniment of an increasing population.
But the very great increases of recent years, which have made it nearly impossible for young families to afford houses of their own, have additional causes. The implementation of our ideas would bring down the price of access to land in three ways.
Karl Williams: Landlording It Over Us
Geoism holds that there’s nothing necessarily wrong with being rich – indeed, an economic system exists whereby we could ALL be rich (in wealth, education or leisure time). The justification for riches all depends on whether a wealthy person has become so through creating wealth (in the form of goods and services that people willingly buy in a free and fair market) or through living off the wealth really created by others. Earned wealth might arise through talented or arduous inventing, writing, sports ability, entertaining, entrepreneurialship or whatever. ...
Geoism seeks to expose the many forms of unearned wealth, or privilege, that exist in our monstrous economic system. Monopoly rights are the more obvious examples of economic privilege, but less noticeable is the massive wealth to be gained by using the Global Commons (especially land) without reimbursing the rest of us. ...
But the rewards of land go far beyond status, evidenced by how, over the centuries, the land-owning elite has pulled the levers of power in society, politics and the world of commerce. The Earl of Derby’s 1881 candid analysis of the benefits of owning land perhaps says it best,
Since then, the reform of the House of Lords has dented the political influence that was previously wielded by the landowning class (titles and land were once synonymous). But who needs status? – let’s get crass and just go for the cash. The great windfall profits which are dropped into landowners’ laps (which rightly belongs to the community) occurs with rezoning and the growth in residential/industrial values. In the UK between 1991 and 2001, the total return by this measure (including capital growth and rental income) averaged a healthy 12.6% per year.
The gross injustice of handing over community-created values to landowners is revealed by cold, hard figures. According to Yolande Barnes, head of research at FPD Savills, the average UK building plot – at £709,650 for a greenfield acre – is worth around 403 times the equivalent agricultural land. Nationwide, through this form of rezoning, around £5bn. windfall profit is handed over to UK landowners each year.
Barnes explains further, “In many parts of the South and Southeast, it is certainly true that prices are paid for agricultural land that wouldn’t be justified by its agricultural value.” She said further that it is impossible to know how much of this differential is accounted for by a "hope" factor – a speculative play on future change of use – and how much represents the premium for land’s amenity value when it is in such short supply. But she adds: “There has certainly been a deal of strategic holding and buying on city and town fringes by agricultural owners and farmers. New development land is usually designated in “fill-ins” and close to existing developments.” She added further that farmers buy around towns because they can’t lose. They’ll farm the land anyway, and if permission is given to build, they’ve won the lottery.
A great way to run a casino, but what sort of way to run an economy and a society? ... Read the whole article
Jeff Smith and Kris Nelson: Giving Life to the Property Tax Shift (PTS)
John Muir is right. "Tug on any one thing and find it connected to everything else in the universe." Tug on the property tax and find it connected to urban slums, farmland loss, political favoritism, and unearned equity with disrupted neighborhood tenure. Echoing Thoreau, the more familiar reforms have failed to address this many-headed hydra at its root. To think that the root could be chopped by a mere shift in the property tax base -- from buildings to land -- must seem like the epitome of unfounded faith. Yet the evidence shows that state and local tax activists do have a powerful, if subtle, tool at their disposal. The "stick" spurring efficient use of land is a higher tax rate upon land, up to even the site's full annual value. The "carrot" rewarding efficient use of land is a lower or zero tax rate upon improvements. ...
Owners paying higher land dues feel pressured to develop their land in order to pay their dues, and development is already blighting many suburbs and farmland. Won't the PTS force premature or excessive development, losing open space and ecologically sensitive areas? Environmentalists should understand that development is actually needed to spare land. Using some land more intensely means using other land not at all. The PTS stimulates construction in the most intensely-used locations; compact urban form leaves more surrounding countryside pristine. Since about one-fifth of urban areas are vacant or underused land, and half is devoted to cars, there's plenty of room in cities for growth. While suburban commercial centers compete with downtown for redevelopment, each new building, whether for business or residents, must find tenants.
Higher density is the expected result of the PTS, yet many people oppose higher density. However, the noxious component is not a higher density of population but of automobiles, creating congestion, noise, noxious smells, and danger. The PTS, by clearing out the infestation of vehicles, makes human habitats more livable and the added people unnoticeable.
Without coercion or remote planning, the PTS improves our settlement patterns. Regulations and zoning, some assume, might be vitiated or obviated, become obsolete. Instead, the PTS makes it easier for regulations and zoning to do their job. Since the land tax lowers land price, buying land for parks and reserves is more easily afforded. The loss in revenue from removing the newly public lands from the tax rolls would be offset somewhat by the corresponding rise in value of sites near the protected open space. Creating green spaces raises the density of already developed land, and thus its value. Furthermore, land dues reduce the profit from land development, making it a less attractive investment, and land use decisions of less economic consequence. After a while, people with deep pockets would turn to investments that, post-shift, would be untaxed. Reserving land for recreational or natural uses becomes less contentious; people could more easily determine an optimum proportion of green space to developed space.
Redirecting land rent from owner to government might merely pass the motive to exploit from owner to state, possibly the next implacable force against conservation. However, while an individual must use their own land most intensely to maximize profit, a government must optimize land use to maximize its land tax base. That is, land value thruout the jurisdiction is lower when there is border-to-border development; overall values are higher when some space is kept open. From the government's point of view, there's more rent to be collected when highest and best use includes nonuse. ...
A big problem needs a big solution which in turn needs a matching shift of our prevailing paradigm. Geonomics -- advocating that we share the social value of sites and natural resources and untax earnings -- does just that. Read the whole article
Michael Hudson: The Lies of the Land: How and why land gets undervalued
Turning land-value gains into capital gains
Hiding the free lunch
Two appraisal methods
How land gets a negative value!
Where did all the land value go?
A curious asymmetry
Site values as the economy's "credit sink"
Immortally aging buildings
Real estate industry's priorities
THE FREE LUNCH
* Its cost to citizens
* Its cost to the economy
YOU MAY THINK the largest category of assets in this countrly is industrial plant and machinery. In fact the US Federal Reserve Board's annual balance sheet shows real estate to be the economy's largest asset, two-thirds of America's wealth and more than 60 percent of that in land, depending on the assessment method.
Most capital gains are land-value gains. The big players do not want their profits in rent, which is taxed as ordinary income, but in capital gains, taxed at a lower rate. To benefit as much as possible from today's real estate bubble of fast rising land values they pledge a property's rent income to pay interest on the debt for as much property as they can buy with as little of their own money as possible. After paying off the mortgage lender they sell the property and get to keep the "capital gain".
This price appreciation is actually a "land gain," that is, it's not from providing start-up capital for new enterprises, but from sitting on a rising asset already in place, the land. Its value rises because neighbourhoods are upgraded, mortgage money is ample, and rezoning is favorable from farmland on the outskirts of cities to gentrification of the core to create high-income residential developments. The potential capital gain can be huge. That's why developers are willing to pay their mortgage lenders so much of their rent income, often all of it. ...
Two appraisal methods
PROPERTY IS APPRAISED in two ways. Both start by estimating its market value.
Note that the Fed's land-residual appraisal methods do not acknowledge the possibility that the land itself may be rising in price. Site values appear as the passive derivative, not as the driving force. Yet low-rise or vacant land sites tend to appreciate as much as (or in many cases, even more than) the improved properties around them. Hence this price appreciation cannot be attributed to rising construction costs. If every property in the country were built last year, the problem would be simple enough. The land acquisition prices and construction costs would be recorded, adding up to the property's value. But many structures were erected as long ago as the 19th century. How do we decide how much their value has changed in comparison to the property's overall value?
The Federal Reserve multiplies the building's original cost by the rise in the construction price index since its completion. The implication is that when a property is sold at a higher price (which usually happens), it is because the building itself has risen in value, not the land site. However, if the property must be sold at a lower price, falling land prices are blamed.
If it is agreed that any explanation of land/building relations should be symmetrical through boom and bust periods alike, then the same appraisal methodology should be able to explain the decline of property values as well as their rise. The methodology should be as uniform and homogeneous as possible. By that, I mean that similar land should be valued at a homogeneous price, and buildings of equivalent worth should be valued accordingly.
If these two criteria are accepted, then I believe that economists would treat buildings as the residual, not the land. Yet just the opposite usually is 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.
Charles T. Root — Not a Single Tax! (1925)
Michael Hudson and Kris Feder: Real Estate and the Capital Gains Debate
Most capital gains reaped by business partnerships accrue to real estate firms, which shelter personal income by avoiding incorporation. IRS statistics ranking capital gains in terms of how long the assets were held show that many of these gains represent quick “flips." Often these are land that has been rezoned from a low-value to a high-value use. Retaining the capital gains tax would have little effect on deterring such speculation. Read the whole article
Herbert J. G. Bab: Property Tax -- Cause of Unemployment (circa 1964)
The tax assessed on the improvements has discouraged the construction of more and better housing. At the same time, the tax assessed on land has been too low to induce owners to sell, improve, or replace their rental properties.
Property taxes shape the pattern of our cities.
Relatively low taxes on land and high taxes on improvements will discourage the owners of vacant lots or underdeveloped land, such as that used for parking lots, gas stations, hamburger stands, etc., from improving their land. It will encourage them to keep the land out of use and to sell later at a profit. This will create an artificial shortage of land, which in turn will lead to urban blight and irregular, leapfrog city growth.
This urban sprawl makes our cities look ugly, but it has many disadvantages besides:
It is generally believed that zoning laws are a very effective tool to control the growth of our cities. Zoning laws determine the best possible use of urban land. Yet nobody can be forced to improve his land and to build unless there is an incentive. This can be achieved by taxing land at a rate that will make it unprofitable to hold it without improving it.
The city planner needs land taxation just as he needs zoning laws. With both these tools the orderly growth of our cities will be assured, but -- as experience has shown -- without land taxation rational and efficient land usage becomes impossible.Read the whole article
Frank Stilwell and Kirrily Jordan: The Political Economy of Land: Putting Henry George in His Place
Mason Gaffney: 18 Fallacies
3. "You cannot take real property without compensation"
Wrong! Whoever said that has not been following zoning law. As a rule of thumb, zoning can take away about 85% of the use value of land before it is declared an unconstitutional 'taking' of property.
The owner must be left with some 'economically viable' use, meaning almost any use whose revenues exceed expenses, however small the net gain.
As to other property, well! No one has yet been compensated for losing the fruits of his sweated brow to the IRS, at rates which once soared as high as 90% in the top bracket. ... Read the whole article
Bill Batt: Stemming Sprawl: The Fiscal Approach
Frank Stilwell and Kirrily Jordan: The Political Economy of Land: Putting Henry George in His Place
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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper