1: Land Value Taxation
The Economic Definition of Land
Scrabble and many other games have fixed numbers of pieces which are allocated by chance. Success depends on the skill with which you use your share. In games like this (Rummy is another example) holding a high value card is risky, for if you're caught with it it scores both against you and for your opponent. But in Monopoly once you have got your hands on one of the twenty-two "sites" or parcels of "land" you can hang onto it without paying anything, however valuable it may be and even if your opponents go broke trying to pay you the rent due. Monopoly is a nasty game, invented to show the evils of landlordism, but even so it is not as nasty as life, because in real life most players don't get dealt a hand until other people have already grabbed all the property.
The rules of Real Life Monopoly are called Economics -- the study of how resources are allocated. Two and a half centuries after Adam Smith laid the foundations of modern economic thought and a century after it was established as a university discipline, the allocation of resources is more unfair than it has ever been and the gaps between rich and poor are widening. Can the discipline of economics offer any explanation or remedy? Is it any use? What is going wrong?
economist John Maynard Keynes wrote:
"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly under- stood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist".
Agreed; but the defunct economists also enslave new generations of economists who in their turn enslave the practical men of the future The economists of every age should, if they are not to be parasites, try to free themselves of the mistakes of their teachers. I want to show that modern economics textbooks - the material legacy of the defunct - create a very significant obstacle to freedom. That obstacle is their treatment of "land".
At an early stage students learn that there are three and only three factors of production: land, labour, and capital. Land in the economic sense is generally defined tersely and correctly as "all the aspects of the planet which are givens and which cannot be significantly increased by human effort". Examples are air, water, the ozone layer, and mineral deposits, as well as the land surface itself. The topic then disappears from view and "labour" and "capital" and the markets in those factors are treated at great length.
Keynes himself virtually ignored land. It is clear that he regarded land supply as having no impact on the operation of markets in labour and capital. Likewise, J. K. Galbraith, Professor of Economics at Harvard, sees economic thought as a "basic dialectic" between "capital and labour; capital versus labour" - land is not part of the dialectic, it seems. No wonder that economics lecturers are apt airily to say "land is virtually irrelevant in modern economics."
How can it be irrelevant? Land is essential for all human activity; access to it, and the uses to which it may or may not be put cause people huge problems and are a source of endless conflict. In the UK today there are enough homes standing empty to house all the country's homeless, while hundreds of thousands of acres of urban land lie derelict or under- employed, so that green belt land is under pressure from developers for whom lack of building land at afford- able rates is a chronically a major threat to the viability of the construction industry - that driver of the economy.
All the pollution problems we have heard so much about in the last thirty years are "land" issues, and so are many of the issues of maldistribution of wealth. Loss of topsoil - now destroying farmland at an annual rate equal to the area of the old west Germany - is surely an issue of failure to build land protection into economic systems. Third World cities are heaving with people who used to have access to land on which to grow their own food, but have been evicted to make way for cash crops for export to the West. The fact that there is no mechanism to compensate the dispossessed for the value of what they have lost is a land issue, and so is the fact that, once in the cities, the displaced people live on the streets, or in shacks on rubbish dumps and swamps. What of the famous McLibel trial - the longest-running libel case in British legal history? Transnational ham- burger giants McDonalds prosecuted two green campaigners who had accused them of destroying rainforest, among other things. McD's denied it and won, but the truth is that the market for beef encourages the land barons of Brazil to drive peasant farmers off the grasslands; the displaced farmers have no choice but to move into the forests, cutting trees or mining gold to scratch a living, and, in their turn, displacing the aboriginal forest dwellers. This pattern is being repeated in many parts of the world, encouraged by vast levels of debt and economic development plans promulgated by the World Bank. Land is not "irrelevant to modern economics"- it is absolutely fundamental. How much more so to Green economics, searching for a way to make the "invisible hand" of the free market wield its power with social and ecological responsibility? Green economists need to understand how a redistribution of the benefits of holding land might begin to undo the damage, and that this could be achieved by a relatively simple and robust fiscal tool - by taxing the values that society and human enterprise confer on land.
Land Value Taxation
Land Value Tax is levied on the annual value of each parcel of land. The annual value can be assessed in much the same way as the old UK rating system - that is, as a rental. Unlike the rating system, however, it would be assessed as if the site were bare and unimproved - that is, it is a tax on the value of the land alone, and excludes any structures or improvements (otherwise it would be a tax on capital as well as land). The use to which the plot of land may be put, under local planning or zoning (e.g. farmland, housing, light industry etc., etc.) is taken into account, and clearly has a major impact on value. Values are easily assessed; even if a plot already has a building on it an estate agent or valuer with local knowledge can put a figure on the site as if, say, the building had burned down.
The prerequisites are baseline assessments of the values of representative sites, and an accurate and up-to-date survey of land holdings and owner- ships. Once these are in place it is a simple matter (given appropriate legislation) to keep track of changes of ownership and movements in market prices. Registration of landed property transactions is now mandatory even in the UK, which is otherwise notorious for the secrecy surrounding land ownership; as for valuations, in Denmark, which has been using LVT for urban land for a hundred years, sites are held on computer data-bases and values are updated every four years on the basis of local property sales since the last valuation.
Such a tax satisfies all the canons of good taxation practice. The first two canons require that taxes should be cheap to collect, and that they should not be easily evaded. Compare LVT with income tax which, as Mark Twain pointed out, tends to make liars of us all. You can't hide land or move it across borders, and its value is a matter of public knowledge. The need for certainty of collection of taxes is becoming more important than ever in the 1990s, with electronic money escaping government scrutiny, and even Local Exchange Trading Schemes (LETS) being cited as a means of tax avoidance. If LVT were in use tax officials would have an easier time, since virtual money and LETS credits could be ignored - if they were indeed a significant part of the whole economy they would feed through into higher land values and thus into higher revenues.
The third good taxation canon is that a tax should fall lightly on production. It is well known that income taxes, sales taxes, VAT, employment taxes, employers' NI contributions and so on act as disincentives to production. What is less well known is that LVT acts as an incentive. It works in this way for two reasons. First, land values are surpluses, in the economic sense. This means that they are a sum over and above the wages of labour and interest on capital. Economists have long agreed that surpluses can be taxed away without penalising the employment of labour and capital and thus without discouraging production. The other side of this coin is the fact that land values form an indestructible tax base - a most important consideration in macro-economic policy. The second reason is that in addition to this non-disincentive function, LVT also acts as a positive incentive. So long as there is no tax burden on holding land it is an ideal speculative investment and landlords enjoy considerable power to determine its use according to their own self-interest. Crucially, this includes the power to keep land idle or under-used (surface car-parks on city centre sites is a classic example of the way landowners wait for conditions to suit them; the dereliction of the Guinness site in Wandsworth, London is another). But a tax on land values is levied whether the land is being used for its democratically determined purpose or is just left idle or in some lower grade use Faced with an inescapable annual charge, how- ever, landowners will compete with each other to employ labour and capital to make constructive use of their sites so that they have some income to pay the charge with - a job creation scheme of truly universal scope, which for once would give labour real bargaining power. Those who fail to attract labour and capital will either have to find the money from their pockets or sell the site to a more enterprising user, or convince the planning authority that there really is no market for their site in its designated use and that it should consequently be redesignated.
Greens may object (I suspect "will object") that they don't want the economy to perform any better, since more production equals more pollu- tion and resource depletion. However, the job of a green government is to channel enterprise into non-destructive patterns, rather than to protect the planet by impoverishing the people.
LVT combines practical advantage with moral justice. Landowners did not create the land, so, however legitimately they may have acquired it, land it is owned ultimately only by "right" of conquest. And just as landowners didn't create the land, neither do they create its value. Land values are conferred by the existence of the human community and its collective economic effort. It is therefore morally just to redistribute the advantages of holding (as opposed to using) land which otherwise accrue to private profit.
The political response to LVT
LVT as a policy option burst upon the awareness of public and politicians in 1879, with the publication of Henry George's Progress and Poverty . It was not an original idea, but by the 1890s the gloss which George gave it made it fresh and compellingly relevant to the miserable condition of millions of working people. The subtitle was An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth. In other words George was offering to explain why, when people could see the advance of industrial and technological know-how enabling them to produce all they needed to make life comfortable, wages were so low and destitution still so common. His answer, in brief, was that the demands and expectations of landowners were soaking up the lion's share of the benefits. Soon George was the best-selling American author ever, and was being invited to speak all over America, in the Oxford Union, in Irish and Scottish Town Halls, in Australia and New Zealand. His was a household name at a time when Karl Marx was almost totally unknown (although Das Kapital had been published 12 years earlier than Progress and Poverty).
In the forty years following publication of Progress and Poverty LVT rapidly became a movement which swept across much of the world. Mason Gaffney's book The Corruption of Economics, which ought to be required reading for all economics students, summarises the history of it. Here is just one extract:
Henry George [was] a scrappy marginal journalist. Yet his ideas exploded throughout the sophisticated metropolitan world as though through a vacuum. His book sales were in the millions. Seven years after publishing "Progress and Poverty" in remote California - a raw, naive new colony - he nearly took over as Mayor of New York City, the financial and intellectual capital of the nation. He thumped also-ran candidate Theodore Roosevelt and lost to the Tammany candidate A.S. Hewitt only by being counted out. Three more years and he was a major influence in sophisticated Britain. In 1889, incredibly, he became "adviser and field general in land reform strategy" to the radical wing of the Liberal Party [which] ...adopted a land-tax plank in 1891 and came to carry George's (muted) policies forward under the successive Liberal governments of Campbell-Banner- man, Asquith, and Lloyd George.
Gaffney goes on to tell how land value taxers were so successful that land was separately valued in almost every American state and in most Canadian provinces. Taxes on land values were used very widely, their use being extended until well into the 1920s. (They are still in use in many cities). LVT was adopted in many municipalities world-wide, from China to South Africa, to Denmark, Jamaica, Australia, New Zealand and others. In 1909 in the UK the Liberal government introduced a Finance Bill which attempted to implement a modest tax on land. At this time, however, the House of Lords still had the power to block measures passed by the Commons, and rejected it on the grounds that it involved a land valuation scheme, which was not, in their Lordships' view, legitimately part of a finance bill. There followed a constitutional crisis as the Govern- ment tried to force its will on the aristocracy. In 1910 Asquith called two General Elections; one (in January) on the Budget issue, and one (in December) to force through a constitutional reform of the powers of the Lords. The January election is the one of interest to us - the speeches of Liberal candidates (including Winston Churchill) on the land tax are pure Georgist logic. The Liberals won, and the crucial rating survey (cadastral survey) was begun. The Great War, however, was looming, and by the time it was over the political map had changed in Britain. Socialism was waxing, and the UK cadastral survey had been discontinued, its data consigned to county archives, where they rot to this day.
From the publication of Progress and Poverty onwards, battle lines were drawn all over the world as philosophers, academics, religious leaders, land-owners, and politicians took sides. The opponents ranged from unknown country squires to Pope Leo XIII; the proponents range from Sun Yat Sen and Count Leo Tolstoy to the British bulldog, Winston Churchill, and reforming politicians world-wide. On the "anti" side a vast amount of literature was produced in an attempt to discredit the idea of taxing land values. In addition to Gaffney, I recommend the introduction to The Critics of Henry George for an overview of the antis' titles, their context and arguments, and their many logical inconsistencies.
But the outstanding feature of this episode in human history is that after about 1925 LVT as a policy option faded from the status of a mass movement to that of a fiscal oddity. It has kept its place in some parts of the world; it is making headway in a handful of US cities and in Mandela's South Africa (with distinct benefits to patterns of urban development); and it is the subject of debate and experiment in post-Communist Russia. But otherwise its fate in the UK is typical; it was quietly dropped by the Labour Party in 1946, after years in obscurity; in 1993 Labour muffed a chance to review it when despite initial expressions of enthusiasm the Commission on Social Justice ignored substantial and well argued submissions on LVT on the bizarre grounds that "it was considered to be outside the area of the Commission members' expertise." The Liberals stopped talking about their version - Site Value Rating - in the 1970s, 'though it lives on (unknown to most LibDems) as the LibDems' alternative to National Non-Domestic Rating. On the plus side, it is UK Green Party policy (unknown to most Greens), and is beginning to be discussed by some Scottish Nationalists (it is to be hoped that nationalists will understand that LVT is a way of preventing foreign landowners from draining wealth out of domestic economies).
The Political Attack on LVT
The eclipse of LVT demands explanation. The answer is that those who had most to lose from the spread of George's ideas - the big landowners in the US who were growing rich on grants of government land - attacked the theoretical basis of taxing land values by subverting the academic discipline of economics. At that time they were endowing universities and quite literally bought the loyalty of the teachers of economics. Gaffney's The Corruption of Economics is indispensable reading on this topic. He identifies the original "myrmidons" of the land- owners and shows how their ideas - "smoke and mirrors" - were used to "addle, baffle, boggle and dazzle the laity". He reveals one of their tricks - the bogus redefinition of "land" so that it appear to be a type of "capital" and therefore legitimate private property. But what he does not show is the precise detail of how those economic theorists altered a fundamental definition to make the idea of LVT appear unsound and impractical. For in order to serve their masters the myrmidons had not only to confuse the laity; they had also to prevent other economists from spotting where the mirrors and smoke nozzles stood, and to do that they had to be clever. So as the girl in the shampoo advertisement says, "Here comes the science; concentrate". It's worth it if you're interested in truth since, 'though it isn't hard to see that the world is going to hell at the behest of the rich and powerful, it isn't easy to work out just how they get away with it, and as is so often the case, the devil is in the detail.The corner stone of LVT is a concept called economic rent. Consider two news-stands, one is located outside a city railway terminus, and the other is near the station in a quiet suburb. The two kiosks are identical in construction and cost the same amount to build, the newspapers cost the same, and the staff get the same wages. The kiosk in the city clearly can do a great deal of business, while the suburban one will only just sell enough papers to be viable - in econospeak it is a "marginal" site. The difference in returns to the two news-stands is an inherent function of their locations and the peculiar advantage offered by the frantic human activity that daily scurries around the city terminus.
Three points are important: one is that this difference in returns to the two sites is economic rent as defined by the classical economist David Ricardo (present-day academics still accept that this definition is valid.) The second is that it is a surplus and that, as I discussed under the canons of good taxation, it can be taxed without discouraging production. The third is that (as any Monopoly player will assume without conscious reflection) most of, or all of, or even a bit more than all of the difference will go to pay for rental to secure the kiosk owner's access to the city site. So although the relative advantages of sites are never created by the land- owner but by society and by nature, they go into the landowner's pocket, so long as no tax is imposed to recoup them.
The precision of LVT depends on whether it is possible to tell just how much of the returns to a particular site are economic rent, for that is the "surplus" which the Chancellor could take without penalising labour and capital. In the example I have just given it is obvious. In real life it is easy, as any businessman weighing up the relative merits of possible locations for a supermarket knows, for example. But enter the Villain! "Unfortunately", say modern economists, "you cannot quantify economic rent"! If you don't believe me look at any textbook in University or A-level economics departments (repeat any, bar one that I know). The trick is done by hijacking the term "economic rent" and applying it to labour and capital as well as land. And since land is thought to be "irrelevant" the textbooks ignore the fact that the term "economic rent" is rooted in the unique and inherent qualities of land and that it measures the advantage enjoyed by the user of a well-favoured site as measured against the yardstick of the least-favoured site in use within the same industry. They use it for another purpose altogether - that is, to describe the way the factors of production are allocated to (or choose between) different industries. Thus modern students of economics no longer compare a rich wheat field with a marginal wheat field (i.e. one only just worth ploughing and sowing), or a city centre kiosk site with a quiet suburban one; they are, instead, asked to understand economic rent as the difference between what the kiosk could make as a news-stand and what it could make in its "next best use" (as a tool shed?), or what the wheat field could make if it became a housing estate or how much more a football player earns than she did in her previous job.
Luciano Pavarotti makes frequent appearances in these textbook versions of reality, and they have defined virtually all his income as economic rent, since unlike the tool shed no-one can think of more than one use for him. This analysis is useless except to deceive, because it makes a hopeless confusion between macro-economic and micro-economic issues. The alternative uses of fields, kiosks and fat tenors are of purely micro-economic interest; in other words, it is not the Chancellor of the Exchequer who wants to know whether the tool shed could more profitably be used as a news-stand, but the "firm" or the individual entrepreneur. The worker has an interest in her earning prospects, but this is irrelevant to society's macro-economic concern for taxation policy, the optimum use of finite resources, and the fairest possible distribution of opportunity and the blessings of the planet.
The purpose of the trick is to make it impossible to tell exactly what the quantity of economic rent is, for you cannot tell what you would be earning if you weren't doing what you do - it is hypothetical. The textbooks there- fore conclude that taxing economic rent is unworkable. And as if that were not enough, once they have confounded economic rent with personal earning power, its tax exempt status also becomes a matter of individual freedom. Hey presto! - their trick is complete. They have subverted the terminology of their discipline, destroyed Henry George, written off his great egalitarian idea as a madman's heresy, painted Land Value Tax as unworkable, anti-libertarian, and counterproductive (the exact opposite of the truth) and dumped a valuable fiscal tool on the scrap heap of history, leaving the burden of tax to fall on labour and enterprise, while the landowner grows fat doing nothing.
First published in Green Economics – Beyond Supply and Demand to Meeting People’s Needs, Green Audit, 1999