Thursday, 12 February 2015

A Brief Guide to Land Value Taxation

If you're yet to be convinced by the idea of  a Land Value Tax - either in pure form or as a political compromise like a Mansion Tax - here's my (hopefully) concise argument as to why such a system would be desirable not just economically, but also ethically.

Land is location. In the housing market, both rents and selling prices are a split between the value of the buildings/improvements that sit on the land, and the land/location value. Compare two ordinary 3-bed houses, one on the end of a farm track in rural Lincolnshire, one in a leafy London suburb. Both cost the same to build/maintain, so the building value is identical, but the land value will be vastly different. Why?

The difference is 'locational advantage'. The London house has a good school next door, a tube station at the end of the street, and lots of high-paying employers in the area. These are real benefits that people will pay a lot more money to obtain, hence higher land value.

The crucial bit is this: the landowner does not, and cannot, create this value. He didn't build the school, or the tube line, or provide the high-paying jobs. These are built by the collective efforts of the community. What right does the landowner have to enjoy these unearned benefits, whether he is receiving them in cash (as a landlord charging rent, or a bank charging mortgage interest) or indirectly through the economic advantages available at that location (as an outright owner-occupier)?

Once you understand this, you'll find it asks severe questions about the moral basis for private land ownership, and by extension, whether it can be just bought or sold like any other good.

Buildings are different, they behave much like any other good. At some point in the past, they had to be built. The builder was paid a fair price for his labour, as were various suppliers for bricks etc, that's fine, everybody is square. They also depreciate over time if not maintained, and selling prices take this into account, so private buying and selling is perfectly fine too.

Land, though, presents a problem. Obviously there was no original cost of production. When you buy land, either on its own, or as part of a "property", you're paying the previous owner for the permanent right to enjoy his locational advantage. But he didn't pay for the creation of any of those benefits, any more than the owner before him did, or the one before that, and so on back to the dim and distant past when the land was first appropriated (most likely by the use of force).

Land value is community created value. While it's pretty easy to put a figure on the total value (just deduct building rent from total market rent), it would be impossible to track down every last person who has contributed to increasing land value over the course of a year, and then compensate them fairly for their efforts, in respect to each individual location.

Yet we still need a system of exclusive occupation; people want to live private lives, and businesses need space to operate. So unless we prefer feudalism - where a few individuals divide all the land between them according to relative strength of force, and everyone else has to work there in virtual slavery in return for a subsistence - or communism - where an all-powerful and certainly corrupt state divides up the land according to what it thinks is best - then we need a fair free-market solution.

LVT is the simplest and least "statist" solution. All land is taxed at 100% of its rental value, leaving buildings and improvements untaxed. Rights of exclusive occupation are unaffected, but the unearned benefits at each location are not allowed to accrue to landlords, banks, or owner-occupiers. The state then redistributes the revenue evenly, first through cuts to existing taxes on the productive economy, then through a citizen's dividend; a universal, non-withdrawable benefit paid to every citizen regardless of status.

With this system, each person pays a fair price for the value of the land they occupy, and everybody else is fairly compensated for the value of the land that they can't use.


  1. Good one. Except, like all LVTers(me included), you should not get drawn into saying it is the community that creates land values by providing infrastructure etc. Objectors can then easily point to extreme cases that disprove that rule(even though it is generally true).

    It doesn't really matter who or what makes one bit of land more valuable than another. As land by definition is unreproducible, occupying valuable land places a burden on those excluded. That is the important point, we don't burden anyone by being born with talent, earning income, or purchasing capital. Quite the opposite.

    Land rent the market value of compensation that should be paid for the externality that exclusive occupation/use of land causes.

    1. Hi Ben,

      I think I see your point. It's not just unfair that a landowner receives economic advantages at his location that he doesn't "deserve", he places an actual cost on everybody else who is denied access to those advantages, for which no compensation is offered.

      I guess the same is true of unearned income. The unfairness is not just a case of some folks having the good fortune to receive money that others don't. That wealth did not just spring out of the ground, somebody at some point had to create it; so if you didn't earn it, you are extracting it from those who did. You are an actual, measurable drain on the productive economy, not just set apart from it in a privileged "bubble".

      You mention extreme examples; are you talking about a Disneyland-type scenario where one big landowner creates much of their own infrastructure, and provides some of the local services like a kind of mini-state? Very rare, as you say, but I can see in these cases the landowner may have a moral claim on *some* of the land rent (remembering that they still benefit greatly from the wider state providing defense, legal services, economic stability and other national services like transport links).

      But, I'm not sure even then that this would be desirable from a purely economic perspective.