Value Capture and Land Value Tax

Land/Value Capture:
A Mission

22 Jan 06: Every page here is a working draft. Please comment & help us improve

22 Jan 05: What follows here is a rough first cut of our proposed revised and eventually upgraded Land Cafe website. While this address has been active for most of the last year, it has been little visited since just about all the action -- i.e., the email discussions -- was in the Land Cafe itself. But now we are preparing to move beyond this and toward a much more active configuration, which indeed has been our objective from the beginning. For now we are keeping the site private to the group, in the hope that in the weeks ahead we shall together gradually begin to upgrade, extend and provide greater versatility and usefulness to all that you find here in first draft form.

In brief (Working home page)

Manifesto: We (the public sector, citizens, the community at large) determine the social need, select the project, chose the location, painstakingly communicate and negotiate through all the levels and loops, put in the taxpayer money . . . and the project flowers, values in the area increase -- and we want that increase for future public investments. End of story!

Focus: Consistent with our chosen mission, we are focusing on the issues of value capture and land taxes in this context. Such larger and important challenges as land reform and redistribution, while important, are not brought directly into the discussions here. That said they provide an important backdrop to the issues that concern us, and there is every reason to remain up to date on the latest developments and shifts here are as well. (See News Alerts to left for more on that).

Diversity and the art of listening: With a topic like this, which for many people comes heavily trammeled with a long political and rhetorical past, there is a distinct tendency in many parts for, let's call it, non-dialogue. That is to note the marked tendency in rather too many places to want to state the 'truth' and then retreat into the bunker of a closed mind. But with an issue of such great importance, we simply cannot afford that. Thus the objective of this patch of The Commons is come together to create a base of knowledge and experience that can help our cities and societies to break this impasse and put this important tool to work for the good of all. And to do this, we have to become Master Listeners.

Proposed Schedule and Game Plan: The intention is to gather the group over the summer (here you can help with your nominations and lists), get to know each other, extend this site so that it provides us with hot links to all the related programs and sources of information and views on our subject (Right, Left and Center), and begin to exchange views and information, including identifying and linking outstanding articles and reports to be shared with the group.

Then sometime in September we should probably start to see what we can do to pound out something of an agenda and possibly even an action plan, since our goal is not to hum along with the choir but to advance the value capture agenda. How are we going to get together to do this? Well, that's what we can start to hammer out in September. (Comments on this are welcomed in our ever-agreeable Land Cafe.)

Letter to group of 15 January seeking counsel

15 January 2005, The Commons, Paris, France

Dear Colleagues,

Is there a program, is there a web site or source out there to which someone - say journalists, politicians, students, citizens, change agents, others who feel that we can do better that we are at present with out tax systems ---can easily go and once there be helped in a balanced and authoritative way with the following:

Here are specific places in the world in which LVT is working (nice clean, complete profiles of city, country, whatever project with full references) . . .
- With what results?
- How was it brought about?
- What will happen next there?
- And why has this message not been more broadly shared and profited from?
Here are places in which it has been tried and ultimately failed or ran into rough waters:
- What went wrong?
- What went right?
- What would (have been) be needed to turn it around and put it back in business there?
- Lessons
If you are looking for a consultant or agency with hands on experience and real world references to prove it, who are ready to work with you to step by step create a LVT package, tailor it exactly for local circumstances, and then carry out the outreach and communications program that is needed to turn the idea into reality . . . .
- Who are they?
- What are their references ?
- And what do you do next?
If you are a journalist looking for article support, or an organization or conference looking for a speaker or panelist:
- Who are some of the leading thinkers with whom you should be speaking (internationally, in your country, city, in some specialised sector)?
- Clear definitions, short profiles, references, contact information

If we can get together to do that, we have something to offer to the world. Of course it's always nice to chat and learn from each other, catch up on past references, say hi, etc., but it's an awfully short life and it seems to me that implementing change is the name of the game.

Eric Britton

Organization (in process)

What you see here today is the raw materials of a new (July 2004) program under The Commons which brings us to an important area of society and economy which till now has not had systematic consideration here. These are critical issues and underlie much of what can be done to move to a world that is more sustainable and just. So here we are at last.

Like all programs under The Commons, this is an open international networking initiative, and has at its core the belief that you never know where the next good idea is gong to come from. So for that reason we should try to listen to different people with different ideas, from right, left and center. And in this important area of social and economic organization you will quickly see that there is a very wide spread range of views and values, so it can be expected that the discussions and exchanges will be vigorous.

For now we will content ourselves with an outreach effort that will have as its first stage that of identifying the various centers of thought and action world wide that should be brought into this network. You have a first cut of these to your right, so for now we would ask you to have a good look and get back to us with your candidates and ideas.

Note: In these first instances at any event, we anticipate that much of the attention will be given over to discussions concerning the use of various value capture approaches to finance transport investments. While a good beginning, this by no means should be the end.

To get the ball rolling, we invite you to have a look at Mason Gaffney's essay on Land Taxes. You can be sure there will be more of the same to follow.

Mason Gaffney - Introductory Essay on Land Taxes

Taxation is the form of socialization used in market economies. Choosing what to tax is choosing what to socialize. Rather than socialize labor or repel capital it is possible to tax land.

Land holds a unique place in the distributional ethic because it is (by definition) of natural origin. Man did not create Earth with its resources but rather fights over it. Land is also (with exceptions) more nearly permanent than man or his works. Thus, rent as private income neither elicits the supply nor preserves it. Its main function is to allocate the fixed supply among uses, but it is arguable that land taxes, when based on land's capacity-to-serve, are at worst neutral to this function and at best improve on it.

The philosophical rationale for land taxes is strongest under an organic theory of the polity. It is no accident that Henry George (prominent protagonist of land taxes) crystallized his ideas after reading Andrew Bisset's Strength of Nations on feudal levies. Landholders have a privilege from the State and in return are liable for taxes in perpetuity.

The entire value of land, now and forever, is here regarded as a benefit received from government. This is consistent with A. Marshall's concept, "the public value of land", where value is the product of three things: nature; government; and spillover values from development of adjoining and linked lands. All these values being unearned by the individual landholder they are fit to be taxed.

The organic view distinguishes the land from its holder. Land taxes may be paid by income the land earns, not by the holder as a person unless we identify him with the land and regard him as having a prior right to own land free of liabilities to the public from which he holds title. The contractual theory, by contrast, treats government as a kind of business extending services to specific lands whose holders need pay only for recent benefits received, construed narrowly.

The rationale for land taxes presumes a functional attitude toward distribution, regarding property not as an end in itself but a means to get things done. A land tax based on market value, not varying with actual use, is a fixed cost that sharpens marginal incentives. Critics today seldom argue otherwise, but oppose land taxes precisely because they do force landholders to respond to the market, which may have its own faults in a world of "second-best".

Land taxes are in rem and so disregard the holder's personal circumstances, a drawback in some opinions. On the other hand landholdings are much more concentrated than the receipt of income or taxable consumption or payrolls, and land taxes are not shifted, making the tax inherently progressive even though but loosely correlated with taxable income. Avoiding land taxes is next to impossible, even though collection enforcement is limited to seizing the land, not the person or any other asset.

The rationale includes a concept of landholder stewardship. A limited number of land titles were issued in order to get land under tenure to assure best use. So far so good, but those not receiving or inheriting land need a counterpoise to assure they receive their share. Land taxes do so in three ways: by supporting government; by pressing landholders to produce goods and services; and pressing them to hire workers to do so. Land taxes act as a kind of social audit and performance standard of stewardship to promote equity towards those excluded.

There is also more equity among landholders, which in turn promotes efficiency. Absent land taxes there is pressure on governments to do as much for A's land as for B's. Efficiency however calls for specialization and differentiation, meaning high values for some land and low values for other, with windfalls and wipeouts. Land taxes automatically compensate the losers from the gains of the winners, thus freeing land planners to maximize the joint benefits.

The rationale of equity for the excluded says that lands with open general access like parks and roadways should be exempted in whole or part. But such exemption can lead to overcrowding, to meet which it is clear that some user charges on such land can be construed as special kinds of land taxes. An obvious example is a charge on large trucks in downtown streets. Lacking any such constraint the crowding might in turn lead to indefinite expansion of the exempt land use.

The rationale is only partly consonant with personal ability to pay. Landholding confers potential ability to pay, but that is only realized upon one's using the land well. And earned cash is not tapped at all. A land tax is a fixed periodic charge. It is based on qualities inherent in the land with few concessions to the landholder's personal illiquidity, weakness, setbacks or aging. "Use it or sell it" is the message, which many consider too harsh.

What is harsh for the distressed holder, however, is accommodating to frustrated buyers, and it boils down to which group shall be accommodated. Since liquidity is known not to increase in step with total wealth, imposing taxes on landed but illiquid holders has a strong progressive effect. The regular flow of land taxes also accommodates governments, especially small local ones needing steady revenues that are not turned on and off at the convenience of others.

It is not always a question of selling complete units. Land around homes and enterprises is subject to sharply diminishing marginal utility or productivity and a function of land taxes is to constrain horizontal extension of holdings, to the end that the nucleus of each holding may be closer to others to facilitate trade, cooperation, linkages, sharing common costs, and other synergies. The "highest and best use" of land is usually that which most relates to and complements its neighbors and trading partners, who must not be held too far distant.

There is also a diminishing return to time as buildings age, and a function of land taxes, in conjunction with building exemption, is to advance (and/or stop retarding) renewal of sites, neighborhoods, cities, regions and whole economies.

Locke, Quesnay, Adam Smith and others have shown a tendency to shift all taxes to land, whatever the nominal base or event, assuming elastic supplies of labor and capital. This leads some to conclude that all taxes alike just tap land rent. But one cannot tap rent where there is none. Taxes on other bases simply abort the taxed input or activity at the no-rent margins of land use, both extensive and intensive. This excess burden in turn puts an upper limit on the possible tax rate, thus sparing much rent from being taxed at all while destroying other rent completely. The only way to tap much rent is to tax land directly.

Land value and capital are not convertible into one another (excepting exhaustible minerals, not treated here). From this it follows that efficiency does not require equal tax rates on the two, but only uniformity within each class. Uniformity is impossible with capital because of differential concealability. But land is uniformly non-concealable. The case for neutrality of land taxes is stronger under uniformity, but mainly requires that the tax not be a function of use.

A land tax may be based on the current potential rent, or on value. In most countries other than Britain it is the latter. Values are not simply proportional to rents because many land values are elevated above that by expected higher future rents. In such cases taxes rise high relative to cash flow, and at a stiff rate may even be higher. This subjects the holders to a cash drain. The extra tax may be shown, however, in general to tax the unrealized increment, in the manner advocated by Haig-Simons, at the time it accrues. There is some recent falling-away from Haig-Simons, and to one school now this is "double taxation", an issue currently mooted.

The most controversial question in land taxation is the effect on appreciating land. Most hands agree the land tax advances conversion to the higher use. To Henry George this "sovereign remedy" would correct a market failure and unlock speculative holdings with profoundly beneficial effects. To several modern writers following Richard T. Ely the advance of conversion is unneutral and somewhat wasteful. Speculation is seen as efficiently keeping land from premature commitments. To this writer it seems mathematically obvious that an efficient adaptation to rising future incomes would result in advancing, not retarding conversion. But the issue is now moot.

Land taxation at the local level has a natural cap in local particularism as expressed in "Don't swamp the lifeboat". Land taxation by a central national government might go much heavier, and accordingly statesmen like Austen Chamberlain in Britain and James Madison in America have contrived to divert land taxation to local governments. Colin Clark, on the other hand, has published a plan to nationalize land through taxation without depriving the poorer localities. He would rank the local jurisdictions in order of land value per capita, and apply a central government surtax starting from zero but graduated upwards according to this ratio. The scheme basically has central government apply to local ones the same principle of direct land taxation that local governments can apply to individuals, tapping the rich rents without destroying marginal rents. Clark, like George, may have been reading Bisset's Strength of Nations.

Now let's have a look about how we can put all this to work. Click to navigate.