Land Value Taxation.
A paper from Greenweb,
the newsletter of the Green Party of Aotearoa, February 1997, and edited
extracts from email discussions, 2004-7.
Land Tax
by Alison Marshall, Greenweb, February 1997.
It was like old times to see the article on
land tax contributed by Betty Noble in Greenweb, May 1996. Betty Noble and I were two of the most
active advocates for land tax in the Values Party in the 1980s. I didn't agree
with everything in the Greenweb article, which was written by Australian Les
Hemingway. My reasons for agreeing or
disagreeing follow the relevant underlined extracts from Dr. Hemingway's
article.
"Australia
is facing debt and disaster because too many Australians grumble about land taxes
and rates, so governments tax everything else instead."
Assets
and capital gains taxes are two kinds of tax which are more politically
respectable, but in my opinion less economically respectable, than land tax.
The
value of a property might be estimated using the equation:
(real
interest rate + property tax rate) x (capital value of property) = (annual rent
of property).
This
equation shows why land taxes reduce prices, while taxes on "everything
else" cause an increase in prices.
Assuming that the annual rent of land is determined by the earning
potential of the land, and the capital value of manufactured assets such as
buildings is determined by the cost of replacement, these terms in the equation
are not affected much by rates or land taxes.
So any increase in rates or land taxes is paid for elsewhere in the
equation, as a decrease in the capital value of the land or an increase in the
annual rent of buildings.
The
administration of a fair assets tax would be time-consuming and costly, so for
manufactured assets and luxury goods I don't think it would be worthwhile. As
manufactured assets are usually sold at cost- plus prices, they have limited
speculative potential. There may be
speculation in luxury goods, but only connoisseurs and gamblers need get
involved. So I think that only
irreplaceable essential assets, such as land and other scarce natural
resources, should be taxed.
"Tax land not incomes or consumption."
Whether
land tax and natural resource taxes can raise enough to replace income tax is
controversial. When prices are stable
(in real terms) revenue from land tax should not exceed the annual rental value
of the land. As there are almost no
land taxes at present, rent is equivalent to real interest on the capital value
of the land, which was about $2 billion per year in New Zealand in 1990 when I
last worked it out. The revenue from
income tax was about five times as much as this annual rental value of land.
If
land tax was intended to replace all other taxes, there would need to be either
drastic cuts in Government spending to match the major reduction in revenue due
to the loss of income tax, or big increases in the prices of food, housing and
other land uses, so that the revenue from land tax increased to replace what
had been lost from income tax. These price increases would be like extra GST on
the very items which many people think should be exempt from tax.
"Stop taxing interest and dividends."
The
inflation component of interest should not be taxed. High interest rates have caused a lot of trouble, and it has been
unfair and illogical that some income has been taxed heavily, while capital
gains have been tax-free. Saving and
investment have been discouraged, and speculation has been favoured.
"Lift
... land taxes and/or rates until they absorb at least 90% of the gross annual rental value of every
freehold site."
I
think that only half the rent should be collected as tax. If all the rent was collected, the land
would have no capital value, so there would be no feedback from the market
about prices. Also if 90% or more of
the rent was collected, there might be too much pressure to exploit land rather
than use it sustainably.
"Stop handing site rent to foreigners and take it for revenue
instead."
Stop
handing all the site rent to any landholder, foreign or otherwise. I believe that fair taxes have a good chance
of being accepted, but unfair taxes are demoralising in the old-fashioned sense
of lowering the moral tone of society.
If residential property is exempted, or assets are taxed only when they
are sold, or the interest which compensates for inflation is taxed, then
investment decisions will be distorted and wealth will be redistributed
unfairly, as in the early 1970s when house prices doubled in 3 years, or in the
1980s before the sharemarket crash. We
would have fewer problems now if we'd had a land tax then, to damp down the
speculative gains. It would have
collected or prevented much of the profit made from houses in the 1970s and
from shares in asset-stripping companies in the 1980s.
I
hope that land tax in time will be sufficient to diminish the wealth gap, and
it would be difficult or impossible to reduce it fairly any other way. I don't think it should be eliminated
altogether, as there should be some rewards for work, saving, and luck.
"Compensate
farmers and anyone else whose irreplaceable assets disappear along with the price of land."
As
an alternative to compensation, land tax could be phased in slowly (over 10
years or longer), so that its effect is to reduce future capital gains rather
than current land prices. I think the
land tax enthusiasts, such as the followers of Henry George and the writers of
Progress and Land & Liberty, might have achieved more in the last 100 years
if they had campaigned for a slow, fair phasing in of land tax, instead of a
sudden introduction of a full land tax or land reform.
Another
more precise way of phasing in land tax fairly would be to introduce it as a
form of capital gains tax. The tax
could apply only to any increase in land value above the general rate of
inflation since the date of introduction of the tax. This increase should be taxed annually, not just when the land is
sold. If land values continued to
increase above the rate of inflation, eventually there would be a negligible
difference between paying the tax on these capital gains only, or paying tax at
the same rate on the full land value, so the transition to a land tax could be
completed without much trouble.
"Unemployment,
homelessness, poverty and debt ...
could all be cured by a properly organised, uniform and substantial tax
on land."
Inequitable
ownership of land rent is not our only economic problem. Another problem is the
globalisation of the economy.
International co-operation is necessary to prevent excessive
concentration of wealth, and New Zealand should be a reluctant follower rather
than a leader when reducing taxes to attract business.
Also
I am a believer in the Kondratieff theory of long-wave international economic
cycles, and I think what happened in the 1970s and 1980s was the latest
Kondratieff depression. The depressions
in the 1930s and the 1890s are two other examples of the Kondratieff
"down-swing", which occurs every 50 years approximately. The Kondratieff cycle is controversial and
not understood. My theory about the
cause of these depressions was first published in Linkletter, the newsletter of
the NZ Values Party, no. 73, December 1987.
At
the same time as the latest Kondratieff depression, New Zealand had another
problem: our trading advantages with the U.K. were replaced by the
discriminatory trading practices of the European Community. The problems caused
by European subsidies to their farmers could have been avoided if the farmers
had been given universal basic incomes instead.
"Land
tax is not an optional extra. It is an
essential ingredient in a healthy socio-economic mix."
Either
GST or income tax should be abolished and replaced with the revenue from
resource taxes or tradeable resource quotas, as well as with an increase in
income tax or GST, whichever has not been abolished. It is an unnecessary duplication of administrative effort to have
both income tax and GST.
Like
other scarce natural resources, the annual value of land should be taxed at a
rate at least as high as income tax or GST.
The taxable value should be the estimated rental value including land
tax and rates. There should be
exemptions from land tax for indigenous forests and wetlands and Treaty of
Waitangi compensation.
Edited extracts
from email discussions, 2004.
If
land was taxed at the same rate as other investments, land price bubbles would
be smaller and less frequent. I think the economic jargon word for what is
different about land is elasticity. For land the supply isn't elastic and
therefore the price is. For manufactured goods the supply is elastic and
therefore the price is comparatively inelastic. So a tax is added on to the
inelastic price of manufactured goods, but causes the elastic price of land,
excluding tax, to drop. If land prices fell, house prices would make up a
smaller proportion of total wealth, as they do in other European countries.
Also land would be less attractive to speculators and second-home owners if it
was taxed more.
In
this latest land price bubble in the UK there has been an increase of 130
percent in the average house price since 1997. That's an annual increase of
12.6 percent, about 10 percent more than inflation. 10 percent of the average
house price is approximately equal to the average annual wage.
The
doubling of house prices in the UK between 1999 and 2004 took longer than the
doubling in 3 years in the 1970s in New Zealand, but its more disruptive
because inflation is at least 10 percent lower now than it was in the 1970s.
The 1970s doubling happened during the 3-year term of a Labour government, and
was probably a major reason for its defeat in the next election. The current
7-year UK bubble has also coincided with the reign of a Labour government.
The
Jubilee 2000 campaign for debt cancellation for developing countries was named
after an old Jewish custom of pooling and redistributing wealth in the Jubilee Year,
once every 50 years. (I think). The house price bubble of the last 7 years has
been like a negative Jubilee. There has been a massive redistribution of wealth
to landowners from everyone else.
But
its too late to do anything about it now. A sudden introduction of a full land
tax would penalise not only long-term owners whose property value has been
mostly unearned and untaxed, but also recent first-time buyers who have paid
the full price for their land and are now at risk of negative equity.
This
crazy redistribution of wealth to landowners wouldn't have been so extreme if
land was taxed realistically. There is now probably plenty of time to phase in
land tax before any more land price bubbles are likely to happen.
The
purpose of land tax is the prevention of bubbles and speculation, and the
collection of some of the unearned rent, and I don't think a logical fair
economy can be achieved without it. Whether the revenue from land tax is used
for local or national purposes is a separate, secondary issue.
Edited
extracts from email discussions, 2007.
Without land value tax (LVT) on
residential homes the housing market is a huge, unfair, compulsory lottery,
with poverty as the punishment for people who don’t participate.
The value of buildings remains
close to the building cost plus interest, but the value of land builds up from
unearned scarcity value, because more land can’t be created. For example, if the value of a house worth
£300,000 with a rebuilding value of £120,000 has increased by the average
amount in the last 10 years, the capital gain is about £189,000, as house
prices have increased by about 170% in that time. If the rebuilding value has increased by 5% per year, a little
more than the official inflation rate, £46,000 of the capital gain is in the
building value. So the rest of the capital gain has come from the increase in
land value, at about 17% per year, from £37,000 to £180,000. If invested in a savings account for the
last 10 years, £37,000 would have increased to about £50,000. So if the property was bought ten years ago,
the unearned gain on the land is £130,000 and the owner has paid real money for
less than one third of the current land value.
Inefficient allocation of land is
the main obstacle to efficient allocation of housing. The demand for spacious
housing and the low number of housing starts are side-effects of the massive
redistribution of wealth to land owners in the last 10 years. LVT is more likely than capital gains tax (CGT)
or inheritance tax to reduce such instability and social inequality. As CGT and
inheritance tax effectively leave the increase in annual value untaxed in the
years between the increase and the eventual transfer or sale, they discriminate against mobility and
families with high death rates. LVT on
the annual value of land is fairer and would be worth more than CGT or
inheritance tax at the same rate on the sale or transfer of land.
Landowners who have benefited from
huge windfalls in the last 10 years are either a very large minority or a
majority. However LVT doesn’t just tax the windfall, so it should be phased in
slowly to avoid sudden changes in land prices and to reduce the unfairness to
recent first-time buyers, who are already very unfairly disadvantaged by the
current system. For example in the
first year local tax could be based on capital value, in the second year 90% of
local tax could be based on capital value and 10% on land value, in the third
year 80% on capital value and 20% on land value, etc., until in the 11th year
local tax would be based entirely on land value.
I don’t claim administrative
simplicity as one of the advantages of LVT.
But income tax and VAT are administratively complex too. All the time
and money that is spent on organising progressive marginal income tax rates
should be diverted to organising fairer more up-to-date valuations for LVT,
national as well as local. If income
tax is still needed as well as resource taxes, it should be a flat tax made
progressive by combining it with a universal unconditional citizens income, as
shown in www.geocities.com/ammpol/ammgraf. By flat tax I mean the same tax rate on all
income, not the same amount of poll tax paid by everyone.
I think LVT should be 50% not 100%
of annual value, to avoid pressure for maximum exploitation of land, and so
that there is feedback from the market about prices. That is effectively
nationalisation of half the land.
LVT should be a revenue-neutral
substitute for Council Tax and some income tax. Rent is based on what occupiers can afford to pay, and if they
aren’t paying Council Tax they will be able to pay more rent. But subsequent
variations in the amount of LVT paid by owners won’t necessarily be matched by
variations in the amount of rent that occupiers can afford to pay. So in the long term LVT paid by owners won’t
always be passed on to tenants.
LVT is financially equivalent to
the planning gains sometimes demanded from developers by local councils. With
LVT, the council and/or the nation effectively become owners of part of the
capital value increase, and collect the rent on it as LVT. Residents in the new developments pay
approximately the same amount either as LVT or as interest lost on money paid
for the planning gains if there is no LVT. If the money is borrowed, the
interim interest payments and the eventual repayment are financially equivalent
to the permanent loss of interest if the money is not borrowed.
Further reading:
Ashley
Seager, Guardian economics correspondent.