1:    Land Value Taxation

Richard Bramhall

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?

The 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