The elder Mirabeau, we are told, ranked the proposition of Quesnay, to substitute one single tax on rent (the impot unique) for all other taxes, as a discovery equal in utility to the invention of writing or the substitution of the use of money for barter.
- Henry George
Milton Friedman’s ‘least bad tax’ goes by many names: ‘land value tax’ (LVT), site value rating (SVR), resource rentals, etc. ‘Location value charge’ (LVC) would perhaps be most accurate.
It was David Riccardo seeking an explanation for sudden changes in food prices who added understanding to the work of the early French Physiocrats, and then Henry George who sought an explanation for the development of poverty beside wealth in America’s new and prosperous settlements. Many have been inspired by his book ‘Progress and Poverty’.
instein commented: ‘Men like Henry George are rare, unfortunately. One cannot imagine a more beautiful combination of intellectual keenness, artistic form, and fervent love of justice.’
Yet nearly all current taxation seems modelled on the advice Colbert gave Louis XIV: ‘Taxation is the art of extracting the maximum number of feathers with the minimum amount of hissing’.
Value added tax (VAT), for example, extracts a little bit on each of a chain of transactions. UK ‘National Insurance’ contributions are taken from both the employee and his employer. Every transaction of every kind it seems, is fair game for taxation. Each creates a bureaucracy of tax collectors vying with millions of accountants to collect or minimise tax. It is a massive misdirection of effort. Transactions are themselves discouraged distorting business priorities. Big business benefits over small because many transactions necessary to a small business are internal in a big business. The burden of current complex taxation has been estimated by ‘flat tax’ enthusiasts. They show that in US $100 of public revenue imposes $140 cost on the economy, and also creates a huge ‘black economy’ outside the reach of the tax man. LVC would be even simpler than the ‘flat tax’ they advocate.
It is generally assumed that taxes that minimise ‘hissing’ also produce least distortion of the economy. But not all taxes are bad. Some, such as LVC, can have positive effects.
LVC however is not the way to tax exhaustible resources such as oil or minerals. They should be taxed by the amount mined or landed on our shores. This drives the market to more economical use of the resource. Yet again the complex system of trading pollution rights is not the most effective nor the lowest cost tax regime to combat global warming, but one designed to minimise ‘hissing’.
This article however is about the value of location. The value of a field is not what it is growing, but what it could grow. The value of a house depends on its location too. A journalist would value a house within easy reach of Fleet Street in the City of London much higher than one in the port of Grimsby. A fisherman might take a different view. In addition to job opportunities, both would take into account the quality of schools, hospitals, transport, cultural and leisure opportunities, etc. These, unlike mineral values continue day after day. LVC does not work in terms of the sale value of the house, but in terms of daily or ‘rental’ values.
The value of a house does not depend on the value the current occupier places on it, but on its value to other would be occupiers. A would be occupier will consider how much of his income he can commit to a loan to offer to buy the house. Likewise someone with savings might compare how much he’d have to withdraw to buy the house outright instead of renting it out of the interest on his savings. The amount he’d have to withdraw is the ‘capital’ value. The interest he’d lose is the ‘rental’ value. (Roughly 70% of the money in circulation takes the form of loans ‘secured’ against real estate. It is these loans or mortgages and the interest rates on them than link money and debt to land.)
Similar London and the Grimsby houses will have cost much the same to build. The bricks, mortar and labour are similar. But that is only part of the value. The rest is its location value. The owner of the London house would do well to ‘down size’ on retirement not by taking a smaller house, but by moving to Grimsby. What entitles him to a windfall by doing that? Has he worked harder than the fisherman?
Can that injustice be corrected? The LVC answer is to levy an annual charge, or ‘ground rent’, on both properties based on their location value. Note that this is not a transaction tax but a tax on ownership. The moral argument for the tax is that an owner occupier of land excludes everyone else from occupying that location. It therefore excludes them from sharing in the quality of life that that site confers on its owner: job opportunities, schools, leisure, etc. none of which he has created. These values are encapsulated in the location value of the site. They are not created by the owner, but by the community as a whole. Therefore the owner occupier should pay the community for the privilege of occupying the site.
This community revenue enables conventional taxes to be reduced, or perhaps eliminated altogether. Or perhaps all or part of it could be redistributed as a ‘citizen’s income’ or ‘homestead allowance’ either in cash or as a ‘nil rate tax band’.
Though nowhere has LVC been imposed at full location value, it has been used at low levels as a local tax. Nick Tideman’s economic model suggests that LVC has a nine times multiplying effect on the value of development activity. Empirical evidence for its strong effect comes from Pensylvania, S Africa, Hong Kong and elsewhere.
In simple terms there is no tax penalty in building a high value building on a vacant site compared to just leaving it as a car park. If there is community approval for a high value building, the LVC will be set accordingly and would not earn enough as a car park to cover the LVC. Its owner is then driven to develop or sell to someone who will.
Now suppose the LVC is set at 80% of the location value. It follows that the capital value of the site is reduced to 20% of its value. A developer could therefore buy it for much less. His total outlay for the site as well as bricks and mortar will be less, and the price at which he can sell the development will be much less affected by changes in land value outside his control. His risk will be much lower.
In this way LVC encourages development and penalises under use and dereliction. That in turn reduces the need to spread urban development into open country.
A new theatre in the vicinity of a house will very likely increase its value whereas a sewage works might reduce it. Home owners therefore campaign vehemently for or against such developments. The effect of LVC would give automatic compensation for either development as the LVC would change with the change in location value. Campaigns might become rather less heated.
It is an automatic compensator not just locally. LVC nationwide automatically reduces taxation in regions of lower economic activity. If LVC is set high enough to reduce other national taxes such as VAT, corporation and income tax there will be even lower overall taxation in such regions. This can make economic activities which are not currently viable there become viable. Regional stimulus packages are no longer necessary. LVC releases these resources and automatically equalises regions.
Public infrastructure is financed from public revenue levied on all citizens. It enhances location values. These accrue to owner occupiers and landlords compensating them for the contribution from their taxes. They do not accrue to tenants even though their taxes helped build the infrastructure. This injustice is corrected if the infrastructure is financed by LVC. The cost then falls on landowners but not on tenants. Another hurdle entrenching poverty is removed.
The cost of home ownership should hardly change. Whereas today a first time buyer makes large mortgage payments, under LVC he would have to make both LVC and mortgage payments. This however would apply not only to him, but to all home owners. All would have less income available for mortgage payment and could therefore borrow less. Therefore the price of property would fall back to the point that it became affordable to them. The ‘earnings multiple’ of their loan would be much lower, and their risk of serious negative equity much reduced. If, as supposed above, LVC was set at 80% of the location value, the land element of the house value would be only 20% of current values.
No one knows whether the ‘impot uniq’ or ‘single tax’ could meet all public revenue. There are now far more public services to be paid for than in the days of the Physiocrats. Yet there is logic behind the idea of total shift of all taxation to LVC. For every pound removed from conventional taxation it should be possible to raise a pound through LVC. Indeed, reducing a tax increases real estate values. This is often evident today at the border of local government areas. The lower taxed area commands higher values.
It should be borne in mind that this would apply not only to individual owners, but also to corporate bodies. Both own land, and both pay taxes. The tax base for LVC includes both.
Though ‘land’ is the most important of the ‘commons’ whose values morally belong to the public, it is not the only one. The ‘seigniorage’ that accrues to banks when they create money via loans at interest is close behind. A bank loan secured on a property is based on the ‘monetised’ value of its rent for the duration of the loan. This is why depressions affect both, and why either LVC or some form of banking reform would stabilise the capital value of land.
Other commons today include: the radio spectrum, (e.g. for mobile phones); airport landing slots; intellectual property and the incomes of celebrities. LVC principles are also applicable to these, and together with land might provide an adequate basis to remove all other taxes as argued by the Physiocrats of long ago.
The introduction of LVC is not easy however. Since it is not based on a transaction there might be doubt as to the value of the land. The same objection can be applied to current property taxes such as the Council Tax in Britain. Other taxes can be inaccurate too. The details of expenses, overtime, etc. can make income tax inaccurate. Professionals claim that land can be valued with sufficient accuracy, and it is certainly rare for them to differ more than 15%. These values should of course be revised annually. This does not necessarily mean an annual survey of the site.
This is well illustrated by the S African experience. A minority political group managed to force the Johannesburg city council to move property taxation from occupiers to owners and set it at one penny or more in the pound higher on the land value than on the building. As time went by the council officers found it easier to revalue the land than the building, and in Johannesburg itself the taxation of the buildings was gradually dropped altogether. LVC was found to be easier to value and less costly to collect.
The biggest problem is the fear of politicians that LVC will devalue house values. Yes, it will, and that will be unpopular. Some will be caught in ‘negative equity’ if it is brought in too quickly. This is a consequence of our use of loan instead of equity or partnership forms of financing for property purchase. In Johannesburg LVC came about because the initial rules set in motion a gradual change that suited the council officers.
Another example is Hong Kong. The first governor noticing the ‘land grab’ by the first traders decided to level the playing field by selling them leases. The only freehold he granted was for the cathedral!
Leases, franchises, etc. expire and so can be sold again and again. In that sense they are similar to LVC. A ground rent (an LVC) is also charged on Hong Kong leases. They have to be renegotiated with a new charge when planning permission (zoning) changes. Hong Kong has frequently raised over half its public revenue from ‘land sales’ which are really lease sales.
ncome tax is paid by less than half the population. Communist mainland China is now said to be moving from outright government ownership to something like the Hong Kong system of leasehold tenure. The Chinese 150 year lease of the New Territories of Hong Kong is itself an object lesson. British colonialism was time limited. Third world countries take note!
Perhaps this combination of leases plus ground rents is the best model of all. It might be introduced in the west by making land registration time limited so that freeholds become in effect leases. Other taxes could migrate gradually to LVC perhaps following the example of Johannesburg. The combination would match the Hong Kong system.
There is however a danger that LVC will be dismantled. Even where it has been in effect its benefits have not been understood by the public, politicians or civil servants. They have been easily persuaded that the whole property and not merely the land should be taxed. They have probably assumed that this would enable them to raise at least as much tax at a lower percentage of the value so that there would be less ‘hissing’. LVC is under threat in S Africa, and its incidence has been reduced in Denmark, to name but a few unfortunate cases.
On the other hand the Chinese have noticed that ‘it works’! If the rising generation of public servants come to realise that too, then we can look to a much fairer world which uses its limited resources much more efficiently.