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The Taxation of Land Value

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The Taxation of Land Value The Taxation of Land Value George E. Lent * T} CONOMIC DEVELOPMENT is frequently accompanied by the JC/ growth of population and its increased concentration in urban areas, which imposes greater demands on the government for the provision of essential services, sometimes at a considerable cost. A real problem arises in financing this cost and equitably apportioning it among the members of the community. Because population growth and higher standards of living inevitably enhance the value of land, many govern- ments have sought ways of allocating this cost among the landowners who benefit directly and indirectly from rising land values. The philosophy that landowners should bear this cost originated partly in the classical theory of land rent as an unearned increment, arising either from the location of land or from the differential bounties of nature as to fertility of soil and deposits of natural resources. Accord- ing to Ricardo, rent from land is essentially a private expropriation of its natural productivity or site value (location) which does not originate in human effort or skill.1 A tax on such unearned increases in land value therefore does not impair use of the land or deter production. This view was supported by J.S. Mill, who remarked: . Suppose that there is a kind of income which constantly tends to increase without any exertion or sacrifice on the part of the owners: those owners constituting a class in the community, whom the natural course of things progressively enriches, consistently with complete passiveness on their own part. In such a case it would be no violation of the principles on which private property is grounded, if the state should appropriate this increase of wealth, or part of it, as it arises. This would not properly be taking anything from anybody; it would merely be applying an accession of wealth, created by circumstances, to the benefit of society, instead of allowing it to become an unearned appendage to the riches of a particular class.2 This principle underlies the theory of the "single tax" on land, developed by Henry George,8 which has considerably influenced property tax policies, especially in English-speaking countries. * Mr. Lent, Chief of the Tax Policy Division, formerly served as assistant director of the tax analysis staff, U.S. Treasury Department; consultant, Organiza- tion of American States; and research associate, National Bureau of Economic Research, New York. He was on the faculty of the University of North Carolina and Dartmouth College. 1 David Ricardo, Principles of Political Economy and Taxation (first published 1817). 2 John Stuart Mill, Principles of Political Economy (Toronto, 1965), p. 819 (first published 1848). 8 Progress and Poverty, Book VIII, Ch. Ill (first published 1879). 89 ©International Monetary Fund. Not for Redistribution 90 INTERNATIONAL MONETARY FUND STAFF PAPERS Although few if any fiscal experts now believe that a single tax on rents would meet the requirements of modern government, persons still defend the taxation of increments in land value as a valid principle. These persons hold that the substantial increases in value accruing to holders of urban as well as suburban and agricultural land represent a reservoir of value which can properly be tapped to meet the social needs of developing communities without adverse effects on incentives. This paper describes the major applications of this principle in different countries; it also discusses the problems encountered and the necessary conditions of the successful application of this principle. The principal applications may be summarized as follows: (1) Recurrent (annual) tax on land values under a property-tax system based on capital values. (This tax may take the form of a property tax limited to urban and rural land values, as in Jamaica, New Zealand, and some Australian jurisdictions, or to agricultural land values, as in some Latin American countries; or it may take the form of a differentially higher rate on land, as in parts of Canada, East Africa, South Africa, and Denmark.) (2) Periodic tax on increments in land value. (This tax may be based on increases in land value between valuation dates even though not "realized" by sale, as in the United Kingdom and Germany early in this century, and more recently in Denmark and Italy; or it may be based on capital gains realized from the sale of land and other property, as a special tax limited to gains realized on the subdivision of urban land, or as a tax embraced by capital-gains taxes of more general applica- tion.) (3) Special assessment, or land betterment tax, which apportions the costs of publicly created improvements among the benefiting prop- erty owners. (Such special assessments, justified by the direct bene- fit theory, have a long history in the United States, Canada, the United Kingdom, and many other countries. ) Annual Taxes on Unimproved Land Values Annual taxes on the value of property—including land and improve- ments—are widely employed. When assessed values are kept current with changing values, they provide an appropriate method for allocating the cost of government to property owners who enjoy rising real estate values. If the tax is limited to the site value of land or if land is taxed more heavily than improvements, the property tax can be made an even more effective instrument for taxing increments in value and encourag- ©International Monetary Fund. Not for Redistribution THE TAXATION OF LAND VALUE 91 ing more productive use of land. This view is supported by many prominent fiscal experts.4 Professor Shoup and his associates in their re- port on Venezuela declared: "We believe that the theoretical case for a differentiated tax, in a country with rapidly increasing urbanization, is so strong that it merits careful consideration." 5 A tax on site value, resting on an economic surplus, does not impair economic incentives to make more productive use of the land. Indeed, if land is assessed to reflect its most productive use, such taxation can be employed to encourage the use of idle land and to put underutilized land to more effective use. It is argued that if the tax is assessed on the potential output of agricultural land—that is, the output which the land would yield if it were managed with average efficiency—it would give the maximum incentive to improve land and increase its output.6 The justice of such a policy is strongly defended in countries where ownership of land is sought as a refuge from inflation. The diversion of capital to investment in land tends to accentuate the rise in land prices and provides a hedge against erosion of capital values. By effectively taxing such appreciated values under a property tax, a gov- ernment can better apportion its rising costs among those realizing the greatest benefits. APPLICATIONS Taxes on unimproved land value have historically been applied in Australia, New Zealand, Canada, South Africa, and East Africa, and more recently in Jamaica, Trinidad and Tobago, and Barbados. Most Latin American countries limit the tax on agricultural properties to unimproved land values. Similar practices are followed elsewhere, especially in Denmark. 4 For an excellent summary of the principles involved and their application, see Haskell P. Wald, Taxation of Agricultural Land in Underdeveloped Countries (Cambridge, Massachusetts, 1959), pp. 71-126. 5 Commission to Study the Fiscal System of Venezuela, The Fiscal System of Venezuela: A Report (Baltimore, 1959), p. 340, hereafter cited as the Shoup Commission Report. (The Commission consisted of Carl S. Shoup, Director; John F. Due; Lyle C. Fitch; Sir Donald MacDougall; Oliver S. Oldman; and Stanleys. Surrey.) 6 N. Kaldor, "The Role of Taxation in Economic Development," in Problems in Economic Development, E.A.G. Robinson, ed., International Economic Asso- ciation (London, 1965), p. 179, and Haskell P. Wald, "Reform of Agricultural Taxation to Promote Economic Development in Latin America," in Fiscal Policy for Economic Growth in Latin America, papers and proceedings of a conference held in Santiago, Chile, December 1962, and issued by the Joint Tax Program of the Organization of American States, Inter-American Development Bank, and Economic Commission for Latin America (Baltimore, 1965), p. 326. ©International Monetary Fund. Not for Redistribution 92 INTERNATIONAL MONETARY FUND STAFF PAPERS Australia and New Zealand The original Australian federal land tax was levied at steeply graduated rates on "unimproved land value." 7 Federal rates are applied to the total value of land held by one individual anywhere in the Com- monwealth. There is considerable evidence that the tax operated in accordance with the classical theory, by contributing to the breakup of large estates into smaller and more productive units, although the influ- ence of the tax cannot be clearly distinguished from that of government settlement policies, which greatly stimulated this movement. The land tax, never a large revenue producer, gradually deteriorated as large estates were broken up. Finally, in 1952, the Commonwealth relin- quished the land tax to the states. Unimproved land value taxes continue to be employed by the Australian states and by New Zealand, together with taxes on improvements and rental value; but because of exemptions and low rates, they no longer are fiscally important. At present the land tax is a significant factor only in business decisions involving land with a high value—almost exclusively urban land. For this land, however, the tax can be important since industrial and commercial property reaches the maximum rate—about 3 per cent in Queensland and New South Wales—fairly quickly.8 Canada Henry George's philosophy had considerable appeal in western Canada: British Columbia adopted site-value taxation before the turn of the century and the Prairie Provinces during the first decade of this century.9 By 1914, two thirds of the municipalities in British Columbia (including Victoria and Vancouver), all in Alberta, and a quarter in Saskatchewan had fully exempted improvements from property tax.
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