The Promise of Land Value Taxation Sustainable Growth, Justice and a Blueprint for Switzerland

Andres Batista Center for Applied Transect Studies 1035 SW 25th Avenue Miami, Florida 33135, USA [email protected]

February 2014

______Table of Contents:

1. Introduction & Summary

2. General Theory and Practice of a 2.1 Background 2.2 Raw Land or “Residual Land Value” 2.3 Economic Efficiency 2.4 Ricardo’s “On Rent” and Social Implications 2.5 General Considerations of a LVT 2.6 Objections Against a LVT

3. Practical Application: Swiss Land Value Tax Proposal 3.1 Swiss Personal Taxation: Introduction 3.2 Implementing a LVT: Revenue Neutrality, Simplification and Substitution 3.3 Main Analysis 3.4 The Choice of Tax Rates 3.5 Sensitivity to Construction Costs 3.5 Assessment of Land Values and Collection of Information 3.6 Implementation over Time

4. Social and Economic Benefits 4.1 Fairness, Transparency and Compliance 4.2 Applications for Land Management Impact on the Swiss “Lex Weber”, Secondary Homes and Resort Areas 4.3 Smart Land Use – Density 4.4 Environmental Tax 4.5 Construction Activity 4.6 Redistribution and Compliance: Capital Gains vs. LVT

5. Conclusion

6. References ______

1 Introduction & Summary

This paper proposes the return of a simple idea to deliver economic stability and fight inequality. Traditional taxes on income and wealth should be substituted in part or in whole by a land value tax (LVT), a tax on the value of the underlying land of real . The type of levy eliminates many of the inefficiencies of traditional taxes, stimulates healthy economic activity and redistributes wealth appropriately. Its characteristics have been well understood since the 19th century. In the past its implementation had practical problems with surveying and valuations. Today with modern information technologies many of those problems are no longer a concern.

To illustrate how a land value tax can be applied in practice and what the impact might be, this paper will look at land use and taxation in Switzerland. In this small dense country the LVT has immediate applications in controlling urban sprawl and the destruction of natural spaces. This is a critical concern with which the Swiss are struggling. Subsequently land management can resolve greater social problems because inequality and the politics of land ownership are intrinsically connected through economic mechanisms. Addressing one is addressing the other.

The solution proposed here is to eliminate the Swiss federal personal tax on income and replace it with a LVT on residential land. This substitution will be neutral in the revenue generated. It will not increase taxes. The levy will provide an effective tool to fight land waste and will simplify personal reporting. These benefits should make the proposal politically acceptable instead of raising the fear of more taxes. The monetary impact on individuals can be summarized as follows: • Owners living in their homes will no longer contribute to the federal tax on income but will contribute instead to a LVT corresponding to approximately 0.5% of the valuation. Their overall yearly tax liability or cash disbursements will not change. • Tenants will also not contribute to the federal tax. They will not have to pay the land tax as they do not own the land. Their tax liability will fall. • For , or owners who do not live in their homes, the land value tax is now an additional expense to them in relation to their existing rental operations or ownership. The cost will translate in approximately 10% of gross rental proceeds.

Effectively landlords are now paying what tenants used to pay as personal taxes on income. The theoretical foundation of the LVT, which will be discussed later, explains how this can be reasonably suggested. If this seems, in the immediate, unjust, one should consider a reverse situation when an owner books substantial profits on the appreciation of a piece of land on which he has provided no improvements. Classic economic theory addresses this problem and its impact.

To put in place this proposal, authorities will have to develop a sophisticated system to survey, record and evaluate all land, assets and construction components. By necessity, this setup will be fully transparent bringing greater efficiency to other activities in the real estate industry. Once the recording system is in place, the LVT approach can be expanded and employed for other types of assets and usages with varying rates. This method will effectively apply market-based incentives to development rather than impose regulatory solutions. The LVT becomes a proxy for non-accounted costs or externalities.

The hope is that a subtle and gradual implementation of the land value tax for certain specific uses in urban development will bring steady acceptance of what the LVT is, in Switzerland and elsewhere. Individuals will come to understand its theoretical foundation and practical advantages. The land value tax is an essential tool to manage, with greater efficiency and fairness, society’s most basic resource, land. It will enable greater prosperity and eliminate a major impediment to a more sustainable society.

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2 General Theory and Practice of a Land Value Tax

2.1 History The land value tax has a long tradition. It is best associated with Henry George, the 19th century American political economist. In his landmark work from 1879, “Progress and Poverty” he advocates the substitution of all taxes by a single tax on undeveloped land values. He believed that the concentration of wealth, especially unearned wealth thru land holdings, was one of the root causes of poverty. He saw a land value tax as the solution to fight destitution. 1 Although he was never able to put his ideas in practice, he was very influential in his time and his book sold over 3 million copies.

Henry George was inspired by the work of David Ricardo who lived in Britain at the turn of the 19th century. Ricardo is one of the leading classical economists. His observations and analysis on how landlords can extract rent are a seminal work. They are the foundation of land value tax propositions. Over the years economists of diverse backgrounds have found the idea of a LVT appealing because its theoretical basis is strong and unassailable. Milton Friedman, the Nobel Prize winner and an ardent proponent of free markets is quoted as saying: “In my opinion, the least bad tax is the on the unimproved value of land, the Henry George argument of many, many years ago”2

2.2 Raw Land or “Residual Land Value”

A land value tax is not a tax on property but a tax on raw land or land without improvements (roads, utilities, buildings, etc.) This is formerly known as “residual land value.” The price of any property equals the sum of this component and all construction costs (i.e. improvements). Using residual land value is essential because only the land appreciates and cannot be substituted. The buildings depreciate like any other durable good and can be replaced. Residual land value is the key driver for an investment decision. It is used to determine which “” of a plot.

2.3 Economic Efficiency

A land value tax is considered the most efficient tax if not the only efficient one. Unlike other taxes, it does not burden the producer or consumer with additional costs also known as “deadweight loss of taxes.”3 A land value tax has no deadweight loss because raw land is in fixed supply. There is only one possible point of equilibrium between demand and supply. Conversely a LVT cannot be passed onto the consumer. The price of a piece of land is set only by demand or competition between consumers.

An alternative way of understanding this is to note that raw land just “is.” It is not created by anyone and requires no economic inputs. Taxing its value will not reduce the supply available.

2.4 Ricardo’s “On Rent” and Social Implications

In a groundbreaking analysis titled “On Rent,” David Ricardo made the fundamental observa- tion that the price of raw land is only a function of consumer competition. Using unexploited

1 http://www.econlib.org/library/Enc/bios/George.html 2 Mark Blaug. Economica, New Series, 47, no. 188 [1980] p. 472). 3 Textbooks illustrate this problem by comparing two equilibrium points in the supply and demand curve of a generic good with or without a tax at sale. With a tax the supply and demand curve need to shift because of higher costs to both producer and consumer. This displaces the equilibrium point with less goods produced or bought. The fall in activity between the old equilibrium point and the new one is known as the deadweight loss of taxes.

3 of 12 agricultural , a reliable paradigm for raw land, Ricardo shows how a price, or rent, for a given plot only arises as successive farmers begin competing for it. The value of the plot then becomes the difference in yield, for equal inputs, between a more desirable one and the next less desirable. Until this competition emerges, the price is nil. This observation has im- portant implications for taxation and wealth distribution.

Simply put the price is a function of what happens outside the boundaries of the plot. There is nothing the landowner can do to increase his asking price. Ricardo explains this in a succinct statement “Corn is not high because a rent is paid, but rent is paid because corn is high.” It is the actions of society that raises the value of land. Once this realization has been made, one should ask “ has the landowner really earned the full value of the appreciation? How fair is it that he/she should accumulate all these profits? Should these not be redistributed, at least in part, back to society?

There are many examples in real estate that confirm these observations. The phenomenon of flipping is one such case. In a successful flip, the owner makes a profit yet provides no inputs. His gains are the result of consumer demand.

On the other side of a successful flip, assets have been overpaid for and capital has been allo- cated to unproductive uses. This leads to malinvestment and boom-and-bust cycles from. So- ciety can have a hard time recovering from such protracted events. The misallocation of capi- tal and the debt burden is severe weighing on the whole economy. Yet it is concentrated on assets of no or limited production value.

A land value tax prevents such negative developments by imposing an ongoing expense on an owner for holding vacant or unproductive land. In turn this promotes more sustainable eco- nomic activity as capital is directed towards more productive assets. To paraphrase Ricardo, people don’t become prosperous because real estate is high but real estate is high because people are prosperous.

2.5 General Considerations of a LVT

Imposing a LVT does not reduce the profits to landowners or discourage real estate invest- ment4. Assuming a full LVT regimen in place, investors would simply seek assets at higher yields (i.e. lower acquisition prices) to take into account the additional expenses. Possible losses to owners would arise only during a transitional period from one fiscal system to the other. This problem can be mitigated by keeping the rates relatively low and by gradually phasing in the new levy so that markets have time to adjust.

A LVT achieves the following: • It links the tax burden directly to the amount of land utilized rather than expenditures or buildings. This encourages better thought-out development. • It imposes a cost on , discourages malinvestment and mitigate wasteful uses of land and sprawl. • It recaptures some the appreciation of raw land and returns it to the community. The current macro-economic environment would actually be an ideal moment to introduce a land value tax. Real estate assets have appreciated significantly in these last 20 years beyond what would be expected from the growth in incomes or rents. Very low borrowing rates have stimulated such increases. By keeping rates low, central banks have facilitated large gains for landlords. It is normal that some of those profits be returned to the public.

4 Dye, Richard F. and England, Richard W., Assessing the Theory and Practice of Land Value Taxation, Lincoln Institute of Land Policy, 2010, page 8

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2.6 Objections Against a LVT

If the LVT enjoys the support of economists of different persuasions and if its theoretical foundation rests on solid theory and is well understood, why is its application not more wide- spread?

The fundamental problem, in this author’s opinion, is that accepting the premises of this levy is recognizing that not all wealth is earned through personal achievements. The LVT implies that much wealth is gained and maintained thru the inputs of others, the protection of entitle- ments and the enforcement of monopolies. One has to acknowledge that wealth is not merely derived from personal merit or hard work and instead is often the result of unfair advantages. No one who has seen a private investment and their personal wealth grow significantly in value have an easy time accepting that and, surrendering some of their gains.

Furthermore the adage that an “old tax is a good tax” is simply a reflection of political reality. What has been around for a long time is ingrained in the activities and accepted norms of so- ciety. The LVT would be a new type of levy that also impacts some of the more powerful members of society. These interests can be expected to resist this and have the resources to do so. In the short term, it will also adversely affect anyone who is a property owner now matter how wealthy. In the long run of course everyone will benefit as the markets become more efficient.

One specific problem that needs to be addressed is what happens if a landowner sees a dra- matic increase in his property over a short period of time as the result of some external event. In this situation he might find himself with important liabilities that he was never able to plan for properly. Here a LVT law can be written with certain constraints limiting the sizes of yearly increases and allowing them to be smoothed over an extended period time.

3 Case Study: Swiss LVT Proposal

3.1 Swiss Personal Taxation: Introduction

Swiss taxation on individuals is not significantly different from that of other major developed economies. Income and wealth taxes are based on a person’s earnings while various fees and rates are taken from consumption or the exchange of goods and services. Taxes are levied by the federal government, the states (“cantons”) and local municipalities (“communes”). Personal returns are filed with the state which collects the monies.

The overall tax burden in Switzerland is lower than most European countries.5 The people have the right to challenge laws passed by the legislatures and demand that they be approved by popular vote (right of “referendum”). As such voters themselves have tacitly approved their fiscal burden.

For private individuals, the largest line items on their returns will be taxes on income and on wealth with a greater share going to the “canton.” At a federal level the majority of revenues come from taxes on the consumption of goods and services.

3.2 Implementing a LVT: Revenue Neutrality, Simplification and Substitution

To make a LVT acceptable and welcome, this paper proposes three essential strategies: 1. Revenue neutrality: There should be no increase in the overall tax burden. The new tax should simply replace existing taxes and return the same proceeds. 2. Simplification: The new tax should simplify tax returns and compliance. It should not

5 http://en.wikipedia.org/wiki/Taxation_in_Switzerland

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increase the burden of filing but make it easier. A LVT does not actually require any personal reporting. Public authorities do the whole work and simply send a monthly invoice. Basic property inspections will be required in the beginning and then subsequently at critical intervals. 3. Substitution: Consistent with objectives 1 and 2 above, the new tax should aim at eliminating or replacing another existing tax.

The recommendation here to eliminate altogether the Swiss federal income tax and replace it with a land value tax on residential property.

3.3 Main Analysis

Substituting)the)Federal)Tax)on)Personal)Income)by)a)Land)Value)Tax)on) Land)Zoned)Residential Analysis)of)Feasibility)and)Corresponding)Rate)For)A)Revenue)Neutral)Solution (All$values$2010) CHF$1$=$EUR 0.80 CHF$1$=$USD 1.06

A Total$Regular$Proceeds$From$the$Federal$Direct$Tax$on$Income $$$$$7,274,849,277 CHF $$$$$5,835,156,605 EUR $$$$$7,732,437,297 USD B Number$of$Taxpayers $$$$$$$$$$$$3,468,101$ $$$$$$$$$$$$3,468,101$ $$$$$$$$$$$$3,468,101$ C Average$Payment$per$Taxpayer $$$$$$$$$$$$$$$$$$$$2,098 CHF $$$$$$$$$$$$$$$$$$$$1,683 EUR $$$$$$$$$$$$$$$$$$$$2,230 USD D Total$Amount$of$Housing$Units $$$$$$$$$$$$4,079,060$ $$$$$$$$$$$$4,079,060$ $$$$$$$$$$$$4,079,060$ E Average$Size$of$a$Housing$Units $$$$$$$$$$$$$$$$$$$$$$$$$ 98 m2 $$$$$$$$$$$$$$$$$$$$$$$$$ 98 m2 $$$$$$$$$$$$$$$$$$$$$$$$$ 98 m2 F Total$Built$Housing$Area $$$$$$$$399,747,880$ m2 $$$$$$$$399,747,880$ m2 $$$$$$$$399,747,880$ m2 G Average$Property$Price:$OwnerYoccupied$Apt. $$$$$$$$$$$$$$$$$$$$5,860 CHF/m2 $$$$$$$$$$$$$$$$$$$$4,700 EUR/m2 $$$$$$$$$$$$$$$$$$$$6,229 USD/m2 H Average$Property$Price:$SingleYfamily$ $$$$$$$$$$$$$$$$$$$$6,100 CHF/m2 $$$$$$$$$$$$$$$$$$$$4,893 EUR/m2 $$$$$$$$$$$$$$$$$$$$6,484 USD/m2 I Average$Property$Price:$All$Object$Types $$$$$$$$$$$$$$$$$$$$5,915 CHF/m2 $$$$$$$$$$$$$$$$$$$$4,745 EUR/m2 $$$$$$$$$$$$$$$$$$$$6,287 USD/m2 J Average$Construction$Cost $$$$$$$$$$$$$$$$$$$$2,471 CHF/m2 $$$$$$$$$$$$$$$$$$$$1,982 EUR/m2 $$$$$$$$$$$$$$$$$$$$2,626 USD/m2 K Residual$Land$Value$per$Unit$of$Floor$Space $$$$$$$$$$$$$$$$$$$$3,444 CHF $$$$$$$$$$$$$$$$$$$$2,763 EUR $$$$$$$$$$$$$$$$$$$$3,661 USD L Proceeds$to$MakeUp$by$m2$of$Built$Floor$Space $$$$$$$$$$$$$$$$$$$$18.20 CHF $$$$$$$$$$$$$$$$$$$$14.60 EUR$ $$$$$$$$$$$$$$$$$$$$19.34 USD

M Effective)LVT)Rate)for)Land)Zoned)"Productive)Residential" 0.53% 0.53% 0.53% Notes: YLand$density$will$not$affect$this$ratio$but$housing$that$consumes$ a$greater$amount$of$land$for$equal$amount$of$living$space$will$pay$more$taxes. Y$For$ownerYoccupied$housing,$the$tax$burden$does$not$change. Y$For$tenantYoccupied$housing$the$tax$burden$falls$by$the$amount$of$the$"IFD" Y$For$housing$not$occupied$by$the$owner$(i.e.$landlords),$the$tax$burden$increases$by$the amount$of$the$IFD.$ N Yearly$Payment$for$a$Home$of$120m2$(Independent$of$FAR) $$$$$$$$$$$$$$$$$$$$2,184 CHF $$$$$$$$$$$$$$$$$$$$1,752 EUR $$$$$$$$$$$$$$$$$$$$2,321 USD

Impact)on)Landlords)as)a)Ratio)of)Rental)Income O Average$Monthly$Rent 1,293 CHF 1,037 EUR 1,374 EUR P Average$Rent$per$M2$Y$Monthly $$$$$$$$$$$$$$$$$$$$$$$$$ 13 CHF/m2 $$$$$$$$$$$$$$$$$$$$$$$$$ 11 EUR/m2 $$$$$$$$$$$$$$$$$$$$$$$$$ 14 USD/m2 Q Average$Rent$per$M2$Y$Yearly $$$$$$$$$$$$$$$$$$$$$$$158 CHF/m2 $$$$$$$$$$$$$$$$$$$$$$$127 EUR/m2 $$$$$$$$$$$$$$$$$$$$$$$168 USD/m2 R LVT$payment$per$rentable$M2$Y$Yearly $$$$$$$$$$$$$$$$$$$$$$$$$ 18 CHF/m2 $$$$$$$$$$$$$$$$$$$$$$$$$ 15 EUR/m2 $$$$$$$$$$$$$$$$$$$$$$$$$ 19 USD/m2 S Cost)to)Landlords)as)Ratio)of)Rent 11.5% 11.5% 11.5%

T Effective)LVT)Rate)for)Land)Zoned)"NonKProductive)Residential" 3.5% 3.5% 3.5% U Yearly$Payment$for$a$Home$of$100m2$(Independent$of$FAR) $$$$$$$$$$$$$$$$$$12,055 CHF $$$$$$$$$$$$$$$$$$$$9,669 EUR $$$$$$$$$$$$$$$$$$12,813 USD NonYproductive$Residential$is$land$that$is$not$used$for$housing$at$least$9$ monthsa$year$continuously.$An$alternative$definition$would$be$based$on$tax$ domicile$and$$dependents.$

Data$Sources$&$Explanations OFS:%Office%Fédéral%de%la%Statistique,%Bern,%Switzerland% www.bfs.admin.ch A OFS:%"Impôt%Fédéral%Direct%des%Personnes%Physiques"%("IFD"),%27_np10ch.xls% (nomal%cases%only) B OFS:%Sames%as%above C A%divided%by%B D OFS:%T9.2.2.1.2 E OFS:%T9.2.2.1.13 F This%number%not%%found%at%the%OFS.%Calculated%from%mulitplying%B%by%C G Wüest%&%Partners%AG%2010/Q4%report H " I K%multiplied%0.77%plus%H%multiplied%by%0.23.%These%are%the%ratios%of%single] family%%over%total%housing%units%and%are%extracted%from%OFS:%T9.2.1.1.% J Aproximation%from%homegate.ch%&,:%Hardest%number%to%establish.%See%also% sensitivity%analysis K E3%minus%F.%This%value%is%per%unit%of%floor%area%not%actual%land%area.%It%is% independent%of%FAR. L A%divided%by%D M L%divided%by%K N %M%multiplied%by%K%multiplied%by%120 O OFS:T%9.3.3.33 P O%divided%by%E Q P%multiplied%by%12 R M%multiplied%by%K S R%divided%by%Q T Proposition U T%multiplied%by%K%by%100 6 of 12

This analysis reveals that it is feasible to substitute the federal income tax by land value tax. The costs will remain very similar in either scenario for taxpayers who own and occupy their homes. The nominal rate for the LVT will be around half a percentage point, an absolute value that does not come across as prohibitive.

The major difference will be for tenants and for commercial landlords in the residential market. Tenants will see a fall in their tax liability and an increase in their disposable income. Commercial landlords will see a significant increase in their costs of approximately 10% of gross rental proceeds.

Understanding how wealth is created from land rents, this redistribution of wealth should be considered fair and desirable. What is unfair and undesirable is that it remain in private hands and that society be forced to find revenues in a more regressive and inefficient manner.

3.4 The Choice of Tax Rates

The goal of this analysis is not to establish what should be the just tax rate to redistribute the wealth arising from rents. Such a proposition is too complex for this paper. The objective of here is to promote the principle of a land value tax and propose a simple application. This is why it compares only personal taxes and residential land with a rate derived from the principle of substitution. Looking at what rate is obtained in this calculation and whether it is a value that can be accepted by the public tests the validity of the proposal.

Subsequently as the system is introduced and gains acceptance, it can be adapted and further refined to include other land uses and other types of substitutions. The bulk of the work in implementing this approach is in creating the assessment database which will have to include all pertinent land and property information. Once this has been completed the system can easily be expanded to other land uses and property types.

3.5 Sensitivity to Construction Costs

In this analysis average unit values for construction costs per m2 is the hardest quantity to ascertain. The figure used here, 2471, is an average between the 3 data points found. To test if the outcome is still acceptable with diverging unit costs for construction, the analysis has also been tested with CHF 1500 per m2 and CHF 3500 per m2. For the first value the LVT rate would be 0.41%, for the second one it would be 0.75%.

3.6 Assessment of Land Values and Collection of Information

One of the major objections to a LVT is the difficulty of properly assessing land value. Appraising real estate does not have to be an imprecise process. Assessors have well-proven techniques and financial models to perform valuations. Unfortunately they also need solid market data to fill-in gaps and develop reliable assumptions for certain calculations. Such information is hard to gather and is often kept confidential by some market participants because it confers competitive advantages to those hold it.

Using modern information technologies and geographical information systems and with a legal and fiscal system that makes land assessment a public necessity, these challenges will be eliminated. The authorities will be in a position to collect, compile and analyze, on an ongoing basis, vast amounts of data to deliver reliable information. Some individuals will be concerned with such a collection of information by the government. They should not worry if this is properly managed. First the data need not be personalized.

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Second the government will have to keep the process open and transparent. If individuals can continuously scrutinize and review information, they will understand how it is being used. Openness will also allow for ongoing calibration of outcomes.

Over time, as data accumulates, the pool of information will become more and more reliable. As it remains open, it can be used by others for different purposes and will, in particular, ensure greater efficiency and less waste in the construction and real estate sectors.

3.7 Implementation Over Time

In the beginning a LVT will be substituted gradually with the taxes it is meant to replace to smoothen the impact of its introduction. Each year the share of the LVT will increase by a set amount and the share of the levies to be eliminated will decrease correspondingly until the LVT becomes 100% of the tax to be eliminated. This can happen over a period of, for example, 10 years.

Once the basic assessment system is in place (see 3.6) it can be expanded to substitute and/or eliminate other taxes. The appeal of this proposition to the taxpayer can be strong once he/she can internalize the intrinsic ease and fairness of a LTV.

4 Social and Economic Benefits

A Land Value Tax has many intrinsic advantages that the taxpayer, if he/she understands them, should find attractive. In general as well as in the details of the proposal described in this paper, one can highlight the points below.

4.1 Fairness, Transparency and Compliance

The LVT makes fiscal burdens bearable and justifiable and in a manner that taxes on income do not. • Progressive Aspects: A LVT is not a tax on economic activity but on the appropriation of a finite existing resource. Insofar as the wealthy always pursue larger and more desirable pieces of land, they will end up paying a much larger share of the overall collection as a result of higher underlying land values and of larger amounts of land utilized. A LVT is intrinsically and voluntarily progressive. It does not force this on the taxpayer. It is a personal choice.

• Clarity and Trust: The tax is based on physical property that is finite and immovable and is tracked thru a public assessment process. There is no possible manipulation or concealment. Such transparency is very beneficial to the fabric of society. The burden is clear and consistent for all. Individuals are fully aware that the treatment is the same for all. There will be no cheaters or “free-loaders.”

• Reporting: A LVT simplifies tax filing to the point that an individual needs only minimal and infrequent involvement. The nature of the assets and the assessment process means that the whole procedure can be handled by the authorities who simply send an invoice on a monthly basis.

As these advantages become clearer, the taxpayer should welcome greater and greater substi- tution of existing taxes by an expanded LVT.

4.2 Applications for Land Management Impact on the Swiss “Lex Weber”, Secondary Homes and Resort Areas

A land value tax can be used as an effective tool of land management. Different rates can be

8 of 12 applied to various uses promoting their expansion and taking into account the cost of externalities to the development. These rates can follow existing categories or can supersede them. Examples would be “agricultural, residential, etc.”

A major impetus for the proposal in this paper is to assist in the control of sprawl and mitigate the unintended negative effects of other regulatory approaches to development. This is an important problem for the Swiss. They are currently try to bring under control with a new law, the “Lex Weber.” The Lex Weber mandates that in no municipality should more than 20% of the housing stock be used as secondary homes (i.e. not primary domiciles). The aim is to stop unbridled development in resort areas and bring it under control. The law assumes that precious land resources should not be wasted on what are, ultimately, unproductive or marginally productive uses. This goal is laudable but the law has unintended consequences on prices, affordability and compliance. One can highlight the following: • Secondary homes in resort areas, where the limit of 20% has already been far exceeded, have jumped in value as no new construction is allowed. This is a classic example of the effect described by Ricardo in “On Rent.” Suddenly these homeowners see their assets increase in price thru no willful effort of their own. No one can reasonably argue that they made their investments aware and/or anticipating such a development. (If they did, it would have already priced into the acquisition price.)

• Local residents of resort areas, who typically don’t have as high incomes as out-of- towners and already face very high acquisition costs or rents, are further priced out of their own communities.

• The law raises all sorts of problems with compliance. The value of the property no longer depends on the nature of the object itself. It is now contingent a legal definition of which is hard to enforce and can be prone to outright misrepresentation and manipulation.

The obvious solution is to customize the land value tax to this specific situation. A higher LVT in this context would first return to the community the wealth created by the passage of this law. Next it would impose a cost on undesirable uses bringing down their attractiveness. It would then increase or re-stabilize supply and affordability for local buyers seeking primary homes.

This paper proposes that a new zoning category be immediately created labeled “non productive residential” with a higher LVT rate than normal residential. Non-productive here refers to secondary homes which are labeled as such because they are not occupied by their owners for an extended period of time. Other interpretations can be used. For example the tax domicile of an owner can be used as the definition of primary residence with all other residences treated as de facto secondary homes. This can be correlated with a list of dependents in the primary household. One could not be both listed as a dependent on someone else’s tax return and a primary home user.

As a portion of the housing units shown in the main analysis includes secondary homes, applying a higher rate for these properties would lead to higher revenues than the proposed substitution model shown earlier. This proposal would then no longer be revenue neutral. In so far as this is a second step in the original analysis and one that seeks a specific and separate objective, it is not a departure from the original intention. It is a possible and attractive enhancement to the core proposal.

4.3 Smart Land Use - Density

A land value tax imposes a quantifiable and ongoing cost to the incremental utilization of space. To minimize costs, individuals must use their existing space as efficiently as possible.

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The burden of waste is now on the owner not on the community.

A LVT does not impose higher densities.6 This is a function of zoning. A LVT simply de- mands that the owner exploit its full allotment for buildable floor area. Authorities, of course, could apply different rates to various types of zoning and would then favor certain densities and uses over others.

4.4 Environmental Tax

A land value tax is also a proxy for an environmental tax and arguably a very good one. There is a close correlation between wealth, the size and worth of housing, and the consump- tion of natural resources. Tax the land value of housing and one incorporates a lot of other activities. Unlike other forms of environmental taxes (BTU tax, etc.) this levy would be a lot more acceptable. It would be a matter of personal choice (see 4.1) and not imposed on certain patterns of consumption.

4.5 Construction Activity Because a LVT does not tax land improvements, it is believed that it will lead to recurrent construction activity. It does not discourage investment in properties.7 There is no penalty to capital improvements as these are not taxed but are depreciated. If owners do not maintain them and/or renovate them the residual land value will increase as a ratio of the total asset cost. Owners will be incentivized to continuously maximize or enhance their facilities.

4.6 Redistribution and Compliance: Capital Gains vs. LVT A capital gains tax on also allows for the redistribution of profits to the community. Progressive rates can be used based on the ratio of the gain and/or the duration of the holding period (to discourage “flippers” for example). The implementation of such a system is easier as the transaction gives a de facto assessment and capital gain taxes are more commonly accepted.

Nevertheless the LVT is, arguably, a preferable solution. First, as it is paid regularly, it redistributes this wealth on an ongoing basis as it is created. It is not returned on the basis of a long-term unpredictable interval. Second it will be more acceptable to individuals and less prone to evasion. One can accept paying a small amount regularly and internalize this obligation as an ongoing cost. It is more unpleasant to face a large payment on a single one- off gain of important magnitude.

6 Dye, Richard F. and England, Richard W., Assessing the Theory and Practice of Land Value Taxation, Lincoln Institute of Land Policy, 2010, page 11 7 Ibid, page 8

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5 Conclusion

The benefits of a land value tax have been well documented by many experts. This paper hopes to have shown that a simple and gradual implementation is feasible and can be made politically attractive. Unfortunately the LVT also demands a complete paradigm shift for all participants in the economy. We must begin to recognize that the role of the individual in wealth creation is much smaller than it appears and the role of the public collective much larger. This observation has far reaching consequences for resource management, wealth dis- tribution and taxation. It also does not corroborate with existing legal structures. It is not an easy proposition to understand or accept.

Nevertheless the political environment today could be far more receptive to a LVT for it has advantages that are relevant to society’s problems in ways that were not apparent in the past. Our environment is changing very fast. We are running out of untouched space. “Tiny” Swit- zerland is not a singular case but a harbinger of things to come. The world will also soon be tiny. How well we collaborate and manage the soil and the seas will become the essential is- sue of the future. In this context the land value tax is an essential idea that must be brought back to the fore- front of available solutions and actively promoted. It is the only effective way, short of ration- ing (and who decides that), to manage limited assets for everyone’s greatest benefit. If we fail in doing so, scarcity of resources will do nothing but exacerbate and reinforce inequality and social conflict. If we succeed, we might very well bring in a golden age. In the meantime Switzerland has the means and the know-how to intelligently face such prob- lems. It should appreciate this role and explore the land value tax as a solution to its existing development challenges.

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6 Selected References

- , The Appraisal of Real Estate, Appraisal Institute, 2001 - Conférence Suisse des Impôts, Le Système Fiscal Suisse, Conférence Suisse des Impôts, 2013 - Dye, Richard F. and England, Richard W., Assessing the Theory and Practice of Land Value Taxation, Lincoln Institute of Land Policy, 2010 - Geltner M. David, and Miller G., Norman, Commercial Real Estate Analysis and In- vestments, South-Western, 2001 - Micheli, François et Pedrazzini, Lorenzo, Le Prix des Immeubles, Georg, 2000 - Ricardo, David, Principles of Political Economy and taxation, Chapter 11, “On Rent,” 1817

On the Web: - http://www.econlib.org/library/Enc/bios/George.html - http://en.wikipedia.org/wiki/Henry_George - http://en.wikipedia.org/wiki/Land_value_tax - http://www.landvaluetax.org/what-is-lvt/ - http://www.lincolninst.edu - http://markwadsworth.blogspot.co.uk/2014/01/your-handy-cut-out-and-keep-guide- poll.html - http://nextcity.org/equityfactor/entry/cities-split-rate-property-taxes-value-capture- land-value-Innovation-lab - http://www.workandwealth.com/lvt/land-taxation/

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