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Home , Land value tax, Nicholas Shaxson, Tax Justice Network

TAXING NATURAL RENTS VOLUME 6, NUMBER 1

TAX JUSTICE FOCUS A Tool for Econopmic Development 1 Nicolaus Tideman The newsletter of the justice network EDITORIAL Natural Rents 3 Carol Wilcox

FEATURES A Tax That is Not a Tax 5 Henry Law Harnessing Value as a Green Tax 7 Molly Scott Cato A Tale of Two Cities 9 A TOOL FOR ECONOMIC Josh Vincent

REVIEW DEVELOPMENT Debt and 12

A is a periodic tax (monthly or yearly) on those who have title to land, NEWS levied in proportion to the value that the land would have if it were not improved. A African Voices Call for Tax Justice 13 John Christensen land value tax reflects the value that is added to land by public improvements such as streets, water service, sewers, parks, etc., but not the value of structures, fences, CONFERENCE 15 of Taxation grading, draining or other improvements to an individual parcel of land.

and value taxation promotes economic by transferring the land to someone else. development in at least six different By putting land in the hands of people who will Lways. First, land value taxation serves use it, such transfers of land promote economic as a regular reminder to those who have title development. to land that they are not using, that they have Second, land value taxation provides revenue something of value that could be put to use. Guest Editor: Carol Wilcox Land is often in the hands of people who have for governments, permitting them to reduce Contributing Editor: John Christensen other concerns and prefer not to think about taxes that have harmful effects on economic Design and layout: www.tabd.co.uk Email: info(at)taxjustice.net what might be done with their land. A regularly development. Taxes on wages discourage Published by the International recurring tax bill reminds people that they have people from working. Taxes on saving or Secretariat Limited something of this and if they have no use for investments discourage people from saving A key to funding transport infrastructure like Delhi’s new © Tax Justice Network 2010 For free circulation, ISSN 1746-7691 their land themselves, they could save on their and investing. Sales taxes and value added taxes underground? (photo: John Christensen) SECOND QUARTER 2010 VOLUME 6 ISSUE 1 TAX JUSTICE FOCUS discourage productive activity generally. But value tax. Those who have high discount “Any substitution of a tax on land value for a tax on a tax on land values does not discourage any will have lower present discounted values for productive activity. Thus any substitution of a future taxes, and will therefore have smaller wages, incomes, savings, sales or value added will increase tax on land value for a tax on wages, incomes, reductions in the prices that they will offer the efficiency of an economy and promote economic savings, sales or value added will increase for land, compared to those who face low development” the efficiency of an economy and promote interest rates and therefore have high present economic development. discounted values for future taxes. Thus a tax on land value will tend to move land from 1 When infrastructure is financed by taxes generating confidence in governments. Third, land value taxation reduces the profit those who have low discount rates to those on land there is no dead-weight loss from Economic development is often financed by from land . Land speculators leave who have high discount rates. And those who the taxes as there would be with most foreign investment, and foreign investors ask land unused because they think its value will have high discount rates (those with limited other sources of financing. themselves, before investing, how confident rise rapidly, so it should not be improved now. access to capital) tend to get returns on they can be that they will not lose their These expectations of speculators are often their assets that reflect those discount rates. 2 When infrastructure is financed by a tax investments as a result of confiscatory taxes disappointed. Valuable land in the centres of Thus land value taxation puts land in the on land in the vicinity of the infrastructure, or regulations. Potential domestic investors cities is often left unused or very poorly used hands of those who do more with it, thereby assessed so as to reflect the increase in will also ask themselves whether, considering for generations. The inefficient decisions of promoting economic development. the value of the land that is caused by the the risk of confiscatory government action, land speculators to not develop land mean infrastructure, no one is harmed by the they would achieve higher expected returns that economies must contend with artificial “When a tax on land value decision to produce the infrastructure. with investments abroad than with domestic of land. When a tax on land value Everyone is a net beneficiary. Even if the investments. is implemented or increased, the potential is implemented or increased, tax cannot be assessed so perfectly that profit from land speculation falls. Regular the potential profit from land no one is harmed, the effort to assess the There may be no way that a government can tax bills limit the capacity of speculators to costs according to the benefits to owners provide an absolute assurance that no future speculate. As a result, less land remains in the speculation falls” of land greatly reduces the extent to government will confiscate investments, hand of speculators and more land goes into which net harm to individuals is caused but a government can provide evidence of the hands of those who wish to use it. With by the taxes that finance infrastructure. responsible planning for a future that does more land in the hands of those who wish to Fifth, land value taxation has a particular not require confiscating investments. By use it, economic development improves. capacity to finance infrastructure 3 By financing infrastructure through collecting the rent of land and using it for improvements such as road paving, bridges, taxes on those who will benefit from public purposes, a government can provide a Fourth, land value taxation provides a special water lines, and sewers. An infrastructure the infrastructure, land taxes avoid signal that it plans to provide for its future benefit to those who have limited access improvement is worthwhile if its benefits are the problem of efforts by beneficiaries revenue needs without having to confiscate to capital, and in the process it promotes greater than its costs. Because of the mobility to persuade governments to provide the capital that investors bring to the country. economic development. Other things being of labour and capital and the fact that benefits infrastructure that is not actually Thus in this way too, a tax on land value equal, when the applied to land value of infrastructure tend to be limited to the worthwhile. When the beneficiaries are promotes economic development. is increased, people who might want to buy vicinity of the infrastructure, the benefits the ones who will pay for infrastructure, land will reduce their offers according to the of infrastructure tend to be reflected in they have an incentive to push the Nicolaus Tideman is Professor of Economics present discounted value of the increase in increases in the of the land in the government to provide the infrastructure at Virginia Polytechnic Institute and State taxes. But every potential investor will use his vicinity of the infrastructure. This means that only when it actually is worthwhile. University own interest rate in determining the amount financing infrastructure by a tax on the land by which to lower his or her offering price in in the vicinity of the infrastructure has three The sixth way that land value taxation response to an increase in the rate of a land important benefits. promotes economic development is by

2 SECOND QUARTER 2010 VOLUME 6 ISSUE 1 TAX JUSTICE FOCUS

editorial NATURAL RENTS Carol Wilcox

The argument for land rent as a primary source of revenue has become marginalised -- though no coherent argument against land value taxation exists. Land rent is the natural source of public revenue.

here there is concentrated it is a scarce resource with alternative uses, landownership, the surplus it can be used continuously without requiring Wfrom is scooped by maintenance or, ultimately, being consumed, the landowner, with the bare minimum paid unlike its embedded natural resources. So idle to labour. Since political power universally land for which there is a demand represents a resides in landownership, it is hardly permanent loss to production, similar to the surprising that as wages have increased due waste of labour when there is involuntary to economic development, landowners have unemployment. The £16 billion Crossrail project in London will provide massive windfall gains to the City, through higher been able to ensure that the main tax burden prices. With an LVT, the beneficiaries would pay for it, letting other British taxpayers off the hook. British land is shifts not onto them, but onto labour. Wherever you look around the globe, distributed more unequally than in Brazil, where 1 per cent of the population owns 49 per cent of the land. In the under whatever political system, land is not UK, 0.3 per cent owns 69 per cent. In , land is defined as one allocated to its best use: just look at urban of the three factors of production, along housing problems, for example. A well Well known criteria for a good tax system consumption taxes, which bear more heavily with labour and capital. Economics text functioning land market should therefore include fairness, affordability, minimal cost on the poor. books tend to play down the subject. You be an important objective of any economic and ease of collection, certainty, transparency, will read that land consists of location -- system. and flexibility. It is strange that treasuries have tended not the ground you walk on, and the permanent to recognise the return to land -- rent -- physical space and airwaves below and above The Public Revenue Problem Direct taxes, which are taxes on the as a source, when land is totally it – and natural resources. also The main purpose of tax has always been to returns to the factors of production, usually immobile. Direct taxes on land, where they recognise land’s unique characteristics: that raise revenue for public goods and services provide the main tax base, even though it exist at all, tend to be lightly applied and do it has no cost of production, and it is in fixed (or, sadly, wars). Governments are hungry could be said that taxing labour and capital not raise significant revenues. supply. As Will Rogers, American humorist, for revenues, and they generally slap on a discourages wealth creation. But as the global put it, “Buy land. They ain’t making any more tax wherever practical. Some taxes have economy has expanded, capital has become Indirect taxes on land are more popular of it.” Land is different. overt secondary purposes: to reprice goods increasingly mobile and thus harder to with governments, in the form of property and services where there are significant tax. This has provoked a shift towards taxes, which are hard to avoid. An ad What is omitted, however, is a special externalities, or to redistribute wealth and taxes on labour and indirect taxes, such as valorem tax on residential property paid by attribute of land’s location aspect. Although income.

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“as wages have increased due to economic development, A land value tax, by contrast, would have land value assessment is becoming a simpler tempered the boom and redirected savings task with the development of improved landowners have been able to ensure that the main tax towards productive, rather than speculative, software and other tools. burden shifts not onto them, but onto labour” activities. Molly Scott Cato then presents LVT Conclusion as a green tax. Ever since value slipped its owners is in effect a – probably indifference to freedom, recognized that a attachment to the natural world—around the only effective one of its kind. However, hungry vassal was not a productive worker. Global economic problems do not have when fractional reserve banking was invented it is nonsensical for businesses to pay a But gradually individual greed for land as a simple causes or remedies, and land value tax on , which require constant sign of power, as a way to become richer taxation is not a panacea. Our movement in the 17th century—money has become maintenance, and then receive tax reliefs on through speculation, and even as pastures does claim, however, that LVT meets all increasingly important, and the planet and those maintenance costs. for animals instead of residences for people the criteria for a good tax: it will correct its resources less so. To find solutions to the (as in the case of British over Irish land market failures; raise large revenues; financial crisis and the environmental crisis, Where there are tenant farmers on peasants, or other examples of colonialism) redistribute wealth; and stop the creation of she argues, we must get our feet back on the agricultural land, the landowner collects led to privatization – usurpation – of the property price bubbles. Land value taxation ground. the surplus for doing nothing. Consider commons, the land originally provided by should be part of every good tax system. Finally, Joshua Vincent describes the LVT European Union subsidies paid per hectare communities for their people, including the under the Common Agricultural Policy. poor, for subsistence farming and wood In this edition, members of the international experience in and presents Although the subsidies are paid directly to gathering.” land value tax movement present their some interesting data. The split-rate taxes the tenant farmer, the result is that the value arguments for the annual collection of land levied in Pennsylvania are probably the best of the land rises commensurately; and the The Boom/Bust Problem rent for public benefit, as prescribed by documented applications of LVT in practice. landowner effectively captures the subsidy The 2008 credit crunch had its origins in triple- the 19th century social philosopher, Henry In fact only a small portion of rent is collected by using the greater land value to extract A-rated mortgage-backed collateralised debt George. in this way, which some say is insufficient to higher rents from the tenant farmer. Tax the obligations which turned out to be junk. The show the effects. farmland, and you tax the landowner. trigger was, as always, an explosion of credit In our lead article Nic Tideman presents availability, but loose money makes its way LVT as a tool for development. Poor This edition also covers news of the recently The Inequality Problem inevitably towards landed property. countries have generally low land values so issued Nairobi Declaration on Tax and Inequality of both income and wealth within LVT is not commonly considered as a useful Development, plus details of a forthcoming and between countries is a major concern. As land values soared, professional property instrument for raising government revenues. conference on the Political Economy of As the International Union for Land Value speculators pocketed their windfall gains, Nic describes the mechanism whereby LVT Taxation at Loughborough University, UK, in Taxation notes: and banks filled their coffers with ever can trigger a virtuous circle of increasing September 2010, a review of an IMF paper increasing mortgage receipts - they were, in land values and revenues. looking at the role of tax distortions and tax “, philosophy, and other aspects fact, collecting the rent. havens in the build-up of debt in financial of the major civilizations have always Henry Law discusses how LVT might be systems around the world, and finally an recognized that land is every human being’s Some pundits said that the property price introduced. One of the main objections to invitation to support a documentary drama birthright. Society used to ensure that bubble could have been pricked by raising LVT seems to be that it is impracticable, film. people had enough land for shelter and interest rates. This may indeed have curbed particularly that the process is subsistence. Even slave owners and so-called the boom but it would also have halted problematic. As can be seen below LVT has Carol Wilcox is Secretary of the Labour noblemen who ruled over serfs, for all their general growth and precipitated the bust. already been successfully implemented and Land Campaign

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feature A TAX THAT IS NOT A TAX Henry Law

Land Value Tax (LVT) is not a tax, but a payment for actual benefits received, just as the charge for a parking space is a payment for a benefit. It is the collection of part of the annual rental value of land. It is not a charge on the selling price of land, or the sale of land.

treet traders and buskers understand from economic theory. Perhaps economics rental value. In most cities a busker will students should be sent busking or should Searn more in a busy railway station in the operate a market stall for their first course city centre, than at the end of the line, where assignment! Ricardo’s Law means that LVT – nobody would bother to set up their pitch. the collection and use of the Somewhere in between, the reward makes it of rent as public revenue – is not a tax but a just worth while. These latter locations are payment for benefits received. the “marginal sites”. The additional earnings on the better sites, over and above the margin, The benefit principle owe nothing to the skill of the musician. This What are these benefits? The legal recognition, is rental value, due to the benefits of location, protection and defence of the owner’s right Perfect pitch: busker at Oxford Circus, Central London economic rent. The more people that pass of occupation, and the advantages enjoyed by, the higher the takings. The differences are by the owner due to the presence and due to the shape of the transport system and activities of the community, that give rise to Parasitic speculation in the price of land titles trading of land titles, usually concealed inside other local features – in other words, to the the rental value. This rent will inevitably end becomes pointless, since land holding carries “assets” such as shares or property, or of presence and activities of the community. up in someone’s pocket. If it is not collected a liability to pay a charge proportionate to land rent extracted by the financial system as as public revenue or by a , it will be its actual present value. It inhibits corruption interest charges on loans for the purchase of Buskers instinctively understand the farmed by extortionists or fought over. of the banking system through the trading of land titles: economic rent capitalised. phenomenon of economic rent, which was land titles, with consequential damage to the analysed by the Land rent as public revenue economy through boom-bust cycles. Under an LVT regime it is no longer possible to tap into this revenue stream. Income can when he formulated his . It Using land rent as public revenue has many Most of the so-called “obscene earnings” only arise from wealth creation. The incomes applies universally but is largely absent advantages. It cannot be evaded or avoided. received by financial entrepreneurs are not that are diverted to tax havens are collected earnings at all, since no labour has been at source. Tax havens no longer have a “Buskers instinctively understand the phenomenon of applied and no wealth has been created. purpose. economic rent” They consist either of profits made from the

5 SECOND QUARTER 2010 VOLUME 6 ISSUE 1 TAX JUSTICE FOCUS “In most countries, the lion’s share of the most valuable areas of city good behaviour rather than bad and reduce opportunities for fraud. LVT is a centres is concentrated in the hands of a tiny elite of landowners. This that achieves all of these. Henry Law is a member of the Land Value gives rise to great political influence, working quietly in the background.” Taxation Campaign

How much? In Year One of LVT, the LVT charge is levied on can services provided by local government How much can be raised? In many countries, occupiers, based on the land value assessment be paid for? One possibility is a capitation both in the developed and the developing instead of the present . Nothing payment distributed from the national LVT world, land rent is being collected as public else changes. The total amounts raised can be fund, with the local body receiving a pot of revenue today through property taxes in set so that, perhaps, just over half of all bills money to spend as they wish. some shape or form. Their usual defect is the are the same or less than in the final year The real difficulties are political. Vested method of assessment: improvements are of the old property tax. That will raise more interests are powerful. In most countries, penalised, under-used land is not assessed at revenue and minimise protests. In the case the lion’s share of the most valuable areas of its potential value, and vacant and agricultural of business and agricultural premises, where city centres is concentrated in the hands of land is exempt. In Greece, for instance, are often subject to an upwards-only a tiny elite of landowners. This gives rise to buildings are left unfinished so as to avoid rent revision clause, introduction of the tax must be accompanied by a regulation great political influence, working quietly in the tax. Even a simple switch from existing setting aside this clause, which is in any case the background. property taxes to LVT would therefore raise fundamentally unjust, so that tenants can if more revenue. And since the reduction of necessary renegotiate their rents downwards Objections also come from those who ought existing taxes would tend to drive up land as well as upwards. to be supportive. It seems to have arisen out rental values, a benign cycle would be set up of the concept of ‘Rent of Talent’, a notion in which the LVT tax base grew as existing In some countries, the property tax is local that emerged around the start of the last taxes were phased out. rather than national. But LVT cannot be century. It cast a fog of confusion over the a local tax except for the first few years, term ‘Rent’. The talents in question were How might LVT be introduced when the rate is low and before significant those of opera singers or today’s football So long as some form of property tax is in cuts have been made in other taxes. Some stars. The argument goes that if land rent place, a smooth and uncontentious transition administrative areas have, in aggregate, high should be taxed, so should natural talent, to LVT is possible. There is no practical land values and a solid land value tax base. thereby opening up the case for progressive difficulty in carrying out a valuation of land Others have little. This is true of all taxes at income taxes. This helped the landowning and producing a set of rental values for all a local level: the amount that can be raised interest by diverting attention from their land. The land has to be registered, but there depends on the area. The land value charge privileged status. But ‘rent’ is the wrong term are many ways of getting this done. Owners should therefore, over a few years, move to a for the high earnings of opera singers. These could simply be required to register their uniform national levy. are the rewards for labour: wages. property. There is no practical difficulty in collecting the revenue using the existing If local authorities do not have access to the Always, the aim should be, above all, justice, administrative apparatus. land value in their area as a tax base, how and to promote the efficient use of resources,

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HARNESSING LAND VALUE feature AS A GREEN TAX Molly Scott Cato

The sense of vertigo you experience when trying to understand how financial alchemists have created so much meaningless monetary value out of thin air is an indication of the dislocation that financialisation has brought to the world economy. One reason why the regulators did not do their job was that the process of debt creation was alienating: it was technical and abstract and human minds are repelled by such stuff.

ver since value slipped its attachment Whose Land is it Anyway? to the natural world—around the time From the perspective of a green economist, the technique of fractional reserve land is the primary source of all value; the E th banking was invented in the 17 century— nature of its allocation is therefore an issue money has become increasingly important and of great political salience. This raises critical The growth logic is driving the planet to destruction (photo: John Christensen) the planet and its resources less so. The early questions concerning the legal origin of a economic theorists - who called themselves right to own land. In indigenous societies common resource—how could something so to the population explosion that caused such Physiocrats - stated in their name their view it would be considered blasphemous to fundamental to survival pass in perpetuity into distress to Malthus and the economists who that the land was the source of all value. But make such a claim and even the notoriously the hands of a minority? The history of the followed his path. they were defeated by the mercantilists and legalistic Roman Empire had a law of usufruct alienation of peasants from their land during then by classical economists, who argued that that established the right of local people to the Enclosures in England is well known It is interesting that this year’s Swedish Bank was what really mattered: it was trade make use of land if the landowner was not although, unlike the Highland Clearances, it Prize (in spite of attempts by the economics that enabled the accumulation of money. doing so. How many farmers who live from is not burnished with the same continuing profession to delude us to the contrary it is Since that time economists have not been grants and subsidies would be able to justify sense of injustice. It should be. Because the not a ) was given to a woman who able to distinguish between money, wealth their right to continued use of their land lowland clearances that removed subsistence is not an economist and has spent her life and value. under such a legal stricture? farmers from their livelihood opened the studying systems of allocation by commons. Elinor Ostrom’s citation—‘for her analysis To find solutions to the financial crisis, as well Behind these laws and lies the way for over-exploitation and species of economic governance, especially the as the environmental crisis, we need to get fundamental understanding within human holocaust. Neeson (1989) even argues that commons’—might be a hint that even in our feet back on the ground. communities of the inevitability of land as a the disruption of this ancient way of life led

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“The early economic theorists – who called themselves as ‘a common treasury’. Far from Hardin’s immediate introduction of the taxation of empirically ungrounded critique of commons land value as the central source of national Physiocrats – stated in their name their view that the land was (1968), Neeson’s account demonstrates how revenue. the source of all value” the best means of protecting a resource is to reconnect use-rights with shared ownership Molly Scott Cato is a Reader in Green Economics at Cardiff School of Management the higher realms of what Hazel Henderson harvests and rising food prices; it limits the rights, backed up by a system of local social and Economics and Speaker for the Green Party called the snake-oil priesthood there are amount of carbon we can waste in pointless control. Being dependent on a resource in the UK uneasy feelings that the private-property food swaps; and it undermines the security of emerges as a better protection than legalistic free-for-all may have gone a little too far. the infrastructure that a global food market property rights. relies on. No wonder that food security is the It is money that has got us into this mess. The The horrifying levels of inequality that have political issue of the moment. References resulted from 30 years of neoliberalism abstract nature of money has facilitated our Hardin, G. (1968), ‘The Tragedy of the have pushed the issue of redistribution up As food becomes scarcer and more expensive dislocation and disembedding from the planet Commons’, Science, 162:1243-1248. the political agenda. But the failure of the the exclusive ownership of land becomes an so that we can get more excited about an redistributive measures, despite their vast increasingly indefensible privilege. Unless we iPad than a squirrel or our own best friend. Mellor, M. (2010), The Future of Money: From expense, to solve the problem of persistent find a way of treating the world’s productive And it is the growth logic that is inherent in Financial Crisis to Public Resource (London: poverty makes clear the inefficiency land as a common good the 21st century the way money is created under capitalism Pluto). of solutions that rely on redistribution is going to degenerate into an era of food that is driving the planet to destruction. rather than the predistribution that green and other resource wars. This is why the Neeson, J. M. (1989), Commoners: Common economists have long been arguing for. virtual money that was created in the casino “The buying up of huge Right, Enclosure and Social Change in England, Land redistribution is one such means of economy during the bubble was invested in 1700-1820 (Cambridge: University Press). predistribution, but introducing a tax on land before it burst. The buying up of huge tracts of land in the poorer those who currently own land so that the tracts of land in the poorer countries of the countries of the world that value they derive from it could be fairly world that has become known as ‘the great has become known as ‘the shared is another. From a radical perspective, land grab’ illustrates how, although the money land is a common source of wealth for the was created by a computer, its power in the great land grab’ illustrates inhabitants of a nation, and should therefore world is real. how, although the money be shared fairly between them. Taxing owners was created by a computer, of land and distributing the receipts to those Green economists argue for an economy that who do not own would be a crucial aspect of is just and sustainable, but such a world is not its power in the world is predistribution. attainable without a reallocation, occupation real” or requisitioning of land. At the policy level Land in a Sustainable Economy we might suggest the immediate introduction So three steps to Green heaven? First, replace These are not new arguments but what gives of a Land Value Tax, which would require money with land as the source of true value. them added salience is the limit and pressure those currently in ownership of land to pay Second, challenge the right of those currently for change exerted by climate change. No for this privilege. The value of land ownership in ownership to enjoy that privilege when it longer can we rely on the production of food could then be shared between the people is so socially and environmentally destructive. and its transport across the globe to feed of each nation or region—a policy response And third, argue with renewed vigour for the our families. Climate change brings irregular to Gerard Winstanley’s definition of land

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feature A TALE OF TWO CITIES Josh Vincent

LVT is used most extensively in the state of Pennsylvania. Indeed, the first tax in Pennsylvania in 1693 was a land tax.

Harrisburg investment, in contrast to a flat rating tax Harrisburg first employed LVT in 1975 to rate system that penalises both. battle the twin disasters of nature (Hurricane Once considered the second most distressed Agnes) and humanity (land speculators). cities in the nation, Harrisburg, since 1982, After the storm had wiped out much of the has sustained economic resurgence that has downtown and industrial sector, speculators quickly snatched up land and held it for future garnered national acclaim. Mayor Reed was gain. At the time Mayor Arthur Swenson voted “US Mayor of the Year” in 2006. reasoned that LVT would both promote In 2002 the City issued 1,567 permits. construction through the tax relief afforded They represent a total of $269.7 million in buildings and provide an incentive to use new investment, the highest total for any year vacant land. in the City’s history. Even in the face of the Recent long-time Mayor Stephen R. Reed and , in 2008, 1,623 building permits other City administrators credit Harrisburg’s were issued with a value of $90.2 Million. use of LVT as a key initiative in promoting the revitalisation of their City. LVT encourages Since 1982 Harrisburg has issued a total of the of land and rewards about 30,000 building permits reflective of Harrisburg, PA – LVT has contributed to sustained economic resurgence those who properly maintain or invest in $3.2 billion in new investment. In 1982 the buildings. total assessed value of taxable in Harrisburg was $212 million. In 2007, it the highest number ever recorded. This is in “Distinguished Budget Presentation Award” One of the effects of LVT is to benefit was over $1.8 billion, which is reflective sharp contrast to the number that existed in from the Government Finance Officers’ the lower-income homeowner and small of the additions to the tax rolls from new 1985: 1,908. Association, and was awarded the “Certificate business owner to keep and maintain their investment. of Achievement for Excellence in Financial homes and businesses. It also has the residual Harrisburg is the only municipality in Reporting” by GFOA. effect of keeping rents lower than they would By the end of 2007, the number of businesses Central Pennsylvania to subsidise the area’s otherwise be. It rewards productivity and on the City’s tax rolls had risen to 5,278 -- transit system. Harrisburg received the

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“Once considered the second most distressed cities Building Permit Change in Pittsburgh compared to analog cities in the nation, Harrisburg, since 1982, has sustained economic resurgence that has garnered national Building Permit Change in Pittsburgh compared to analog cities acclaim.”

These results are impressive when one Research in the mid-1990s concluded: considers the fact that 45 percent of the land in Harrisburg cannot be taxed because it is “The basic data are clear on certain things. state, county, or non-profit real estate. Following the change in regimes at the end of the 1970s, Pittsburgh experienced a striking -43.20% -11.54% -30.59% Administrative costs to implement the building boom, far in excess of anything that -24.70% two-tiered tax system were minimal. The took place in the other major cities in the appearance of the bills and an explanation of region. The building boom was basically a city -52.93% the change to a two-tiered tax system were phenomenon; it did not extend to the rest -32.44% -31.84% the only administrative changes that took of the metropolitan area. It was, moreover, -66.99% -34.41% place. The current ratio of land to buildings a boom primarily in commercial building is 6:1. activity. -39.73% -40.15% 70.43%

A current city fiscal crisis brought on by The residential sector experienced only 15.43% -14.42% the failure of an independent authority has a modest increase in new construction brought Harrisburg back into the news (although even this is noteworthy in the recently. Current Mayor Linda Thompson will context of the nationally depressed housing -27.24% resort to land value taxation to close a huge markets of the early 1980s). The central thrust hole caused by the default of this authority’s took the form of several major new office debt, which can’t be paid; legally the city and buildings in the Central Business District county then must step in to pay off the bonds. in response to a marked shortage in office LVT may again be called upon to provide space that characterised the transformation revenue stability and a modicum of local of the Pittsburgh economic base from its control over its economic destiny. earlier heavy manufacturing orientation to a Color shows sum of Building Permit Percent Change From 1960-1979, and then 1980-1989 more diversified, service-oriented economy.” Size shows Percent Change . Details are shown for City and State. BP Percent Change BP Percent Change Pittsburgh (Oates,Schwab 1997) -66.99% -40.00% -66.99% 70.43% The story of Pittsburgh and LVT goes back a -20.00% long way. Implemented in 1911 by an act of How to measure the success of LVT in 0.00% Pittsburgh? It is accepted by most urban 20.00% the state legislature, the growth and low tax 40.00% atmosphere of Pittsburgh during those early development experts that tracking the 60.00% 70.43% years and especially during the expansion of dollar value of building permits is the place LVT in the late 1970s was remarkable. to start. The Oates and Schwab numbers are

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businesses. “Economic development” is Most often, property tax falls reserved for deep-pocket speculators who equally on land and the attachments. refuse to do anything without tax abatements For example, if there were no land and givebacks shouldered by the poor and middle class homeowners. value tax (LVT) Harrisburg would have a tax rate of 8.64 mills (or What happened to Pittsburgh after it .864%). Currently the rate on land is lost LVT? six times the rate of buildings: 28.67 The Center for the Study of Economics and Dr. Steven Cord looked at building permit (2.867%) mills on land values and TJN is working with Speak-it Films Cashback is intended for a issuance after rescission. Pittsburgh’s private the production company behind mainstream cinema release in 2012 4.78 mills (.0478%) on buildings. new construction (now more taxed) declined the award-winning fi lm ‘Black Gold’, and will act as urgent wake up call 19.57% (infl ation-adjusted) in the three years which changed the way millions to the public and will also become after rescission as compared to the three impressive: Splitting 15 “Rust Belt” cities of people think about their coffee a powerful tool for organisations years before, while the value of construction into two time frames (1960-1979 and 1980- and became a clarion call for trade to use for lobbying and public nationwide increased 7.7% (also infl ation- 1989), the rapid decline in construction was justice across the world. mobilisation. adjusted). notable in its severity. These time frames Speak-it Films’ new The release of the fi lm will be are important since they mirror the period An analysis of the Pittsburgh assessment project, “Cashback” (working supported by a 5 year global outreach from relative industrial health to a near data found that rescission caused 54% of all title), will be a cinematic feature- campaign co-ordinated by TJN and our total collapse of traditional heavy industry in homeowners to pay more property tax and documentary thriller about illicit colleagues across the world. the region. Yet, Pittsburgh surged against its 70% of poorer homeowners. As for non- fi nancial fl ows. It will tell the story analogs: landowning tenants (offi ce tenants also), of how money is drained out of We are now inviting the TJN eventually they all paid more space-rent developing countries by a network community, who are committed Only Columbus, Ohio registered a gain, and because more building tax was passed on to of bankers, accountants, and lawyers to changing the status-quo, to that was due to annexation of land outside them but the land value tax never can be. into secret, offshore Western bank be part of this groundbreaking the city. accounts, undermining the lives of project. If you are an individual, Since that time, vacancy rates in Pittsburgh NGO, business or funding Pittsburgh rescinded LVT in 2001. Why? In millions of people. It is estimated have been higher than the suburbs and the organisation and would like the midst of a botched property valuation, that for every dollar of aid that city has fl irted with insolvency with no end to become a funding partner there was a bitter mayoral primary campaign. goes in to developing countries ten in sight. dollars comes out under the table. please get in touch and join us Wealthy areas were struck by inaccurate on the CASHBACK journey. assessments. Rather than strike at the root Joshua Vincent is Executive Director of the How does this happen? Why is no- problem, the challenger called LVT the enemy, Foundation USA/Center for the one paying attention? This landmark Please contact not acknowledging that largely working-class Study of Economics, Philadelphia fi lm will peel away the secrecy to [email protected] communities would pay higher tax if LVT were reveal one of the 21st century’s Or visit http://www. lost. He claimed that the downtown buildings Oates, Wallace and Schwab, Robert biggest scandals. crowded into Pittsburgh in the last 30 years tippingpointfi lmfund.com/ (1997) ‘The Impact of Urban Land Taxes: projects/cashback/ would pay more without LVT (true), although The Pittsburgh Experience’, National Tax Pittsburgh’s traditionally business-friendly Journal L1 LVT kept rents low for tenants and productive

11 SECOND QUARTER 2010 VOLUME 6 ISSUE 1 TAX JUSTICE FOCUS reviews

Paper review: Leveraged buy-outs are a case in whether the SPV itself is taxable; institutions, because they have been Debt and equity point. Private equity firms and others third, whether and how payments so unusually profitable – making routinely borrow to buy profitable to holders of SPV assets are taxed. the returns on this debt-related tax companies, then deduct the interest One focus of financial innovation, engineering all the greater. costs in the high-tax country, and the IMF notes, has been to realise the interest -free, construct hybrid instruments with The paper also notes that the In June 2009 the IMF Fiscal it can generally deduct the interest offshore. At a corporation tax rate many features of equity but enough OECD’s recent (feeble) efforts to of 30 percent, the taxpayer gives a features of debt to attract interest address problems caused by tax Affairs Department issued an payments against tax. In addition, if the subsidiary or financing partner 30 cent subsidy to the private equity deductibility. This comes at a cost: havens entirely ignores these issues, important paper, Debt Bias and by focusing merely on criminal tax records those interest payments company for every $1 of interest not only loss of corporate income evasion, while ignoring these issues Other Distortions: Crisis-Related in a zero-, it cuts its tax paid. This engineering does nothing , but also “increased 1 to promote higher productivity complexity and opacity of financial of legal . Issues in , which looks bill that way. The distortion is that or real value creation – it merely arrangements” which “may hamper at how tax distortions have if the corporation, by contrast, transfers wealth directly from financial supervision.” As TJN The IMF is quite right to identify contributed to the build-up funds itself through equity finance, taxpayers to private equity firms, has noted, certain jurisdictions – these major and harmful distortions it gets no comparable deduction. of debt in our societies. Nick and indirectly transfers wealth by notably and the Cayman in international tax. Capitalists The distortion gives corporations Shaxson explores. boosting leverage in the financial Islands for the U.S., and in Ireland, are supposed to take risks with powerful incentives to load up with system, which has led to taxpayer , , and the United their money – and reap the profits debt, rather than to seek financing This IMF paper has a central premise: bailouts. Kingdom, for Europe – specialise or losses that flow from them. through equity markets. that tax distortions and tax havens in creating exactly the right legal Instead, these tax subsidies (and have played a major role in the build- A second problem with the tax environment for such engineering. the IMF explicitly agrees that they The effect is very large: up of debt and complexity in the distortions, the IMF concludes, is All are major secrecy jurisdictions. are subsidies) help capitalists take, “These distortions create advantages financial system, contributing to the that they encouraged the use of and even magnify, their profits – latest financial and economic crisis. to the use of debt measurable in complex financial instruments and These distortions are especially then shift the risks and losses onto It supports previous TJN analyses hundreds of basis points,” the IMF arrangements, creating new risks important with respect to financial others; in the process, capitalism has from 2007 onwards pointing out says. With a corporation tax rate and damage to the real economy. services corporations, and go a long been thoroughly corrupted. Reform exactly these problems. of 20 percent, it estimates that a “Financial innovation has been way towards explaining the rapid these distortions, and capitalists will debt-equity ratio that would be 40 driven primarily by the search growth in size and riskiness of the do what they do best – take on both Two main issues stand out. percent under a neutral system, for new ways to allocate risk, but financial services industry. As the the risks, and the rewards. would increase to roughly 45–60 also by tax avoidance,” it said. IMF notes, the tax bias towards debt First, when a corporation borrows percent. In almost all cases, this Securitisation creates three main for financial firms conflicts directly Having made these extremely useful money then pays interest on the loan, makes debt finance cheaper even tax issues: first, whether capital gains with financial regulation, which and important points, however, the

1 http://www.imf.org/external/np/pp/ than the use of retained earnings in on assets placed in a Special Purpose tries to lean against debt. And debt IMF then loses its nerve, and veers off eng/2009/061209.pdf most countries. Vehicle (SPV) are taxable; second, is especially important for financial in completely the wrong direction.

12 SECOND QUARTER 2010 VOLUME 6 ISSUE 1 TAX JUSTICE FOCUS reviews news (cont’d)

The answer, it says, is artificially to create a hypothetical return on African Voices Call for Tax Justice shareholders’ equity, which it calls by John Christensen, TJN Allowance for Corporate Equity (ACE,) and then make that tax- deductible! In other words, leave The Nairobi Declaration on Taxation and interest payments tax-deductible – Development but give these subsidies to equity capitalists too: cut the tax burden 1) We, the undersigned organisations and networks, having shared extensive on the wealthy. Perhaps by way of an research on the problems facing sub-Saharan African countries at the inaugural excuse, the authors add that “little is Pan-African Conference on Taxation and Development held in Nairobi, 25-26 known of the welfare costs of these March 2010 distortions.” (Later, while discussing a) recognise the common threat to political progress, sustainable economic the issue of interest deductibility in development and to poverty eradication that results from the unacceptable the mortgage markets, for which domestic and international obstacles to effective taxation for development. these problems are also a major b) affirm that effective and equitable taxation and is critical to the issue, they admit that “deductibility independence of African countries; and to the strengthening of channels of likely favors the better off.”) political representation and government accountability. c) commit to work together for reform in the areas of domestic taxation, The IMF mentions, but fails to Tax justice is on the agenda (photo: John Christensen) revenues from natural resource extraction and . endorse, the obvious and much 1) Domestic taxation better alternative: stop allowing Since its launch in 2007 TJN for At the end of the conference the a) Having regard for the importance on tax compliance and accountability for Africa has given priority to mobilising delegates issued the following corporations to cut their tax bills tax revenues and expenditure we: by deducting interest payments. This African around the Declaration, which calls on b) call on African governments to commit to full transparency on tax revenues would level the playing field towards issues of tax and domestic resource African governments, African and tax expenditures. equity finance just as effectively mobilisation. In March 2010 regional bodies, the international – and help stem the tidal wave of delegates from 17 countries and 3 financial institutions, the UN, the c) call on African governments to remove tax exemptions for multinational corporations and wealthy individuals and elites. wealth redistribution, from poor continents met in Nairobi, Kenya OECD, aid donors and civil society to rich. And it would give the tax for a Pan-African Conference to take steps to strengthen the d) call on revenue authorities to simplify the tax code and reduce the havens a kick in the teeth, to boot. on Tax and Development. The transparency, accountability and compliance burden, particularly for small businesses. conference had three key themes: overall integrity of tax systems and e) call on fiscal research institutes to investigate the feasibility of land Value taxes By Nicholas Shaxson harnessing domestic tax policies for to recognise the crucial role played in urban areas to funding of local infrastructure provisions, and to conduct development; taxation of extractive by tax in development processes. analysis into the benefits of Processing Zones to African countries. sectors; and the floodgates f) agree to work within civil society to promote taxpayer education and on . compliance and call on other civil society organisations to do so.

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African Voices Call for Tax Justice 3) International taxation Signed (cont’d) a) Having regard for the leakages which undermine the tax Alvin Mosioma Kenya Tax Justice Network-Africa bases of African countries we: Sandra Kidwingira Kenya Tax Justice Network -Africa b) note that developing countries lose more as a result of John Christensen Tax Justice Network /IS g) commit to ongoing research and advocacy with regard to the international and avoidance than they receive in Dereje Alemayehu Kenya Christian Aid- East Africa impacts of tax policy on men, women and vulnerable groups. foreign aid. Jack Ranguma Kenya Tax Justice Network-Africa Attiya Waris Kenya University of Nairobi 2) Revenues from natural resource extraction c) note the need for policy coherence among aid donors to Wakaguyu Wakiburi Kenya Tax Justice Reference Group take steps at the national and international level to challenge a) Having regard for the importance of strong governance to Semkae Kilonzo Tanzania Policy Forum international tax dodging. ensure African governments benefit from natural resource Jane Nalunga Uganda SEATINI extraction we: d) affirm the need for international and regional tax Alex Cobham United Kingdom Christian Aid cooperation to challenge harmful and stop David McNair United Kingdom Christian Aid b) note the power and information asymmetry between tax leakages. Katrin Mc Gauran Netherlands SOMO African governments and multinational companies in Aldo Calieri USA Rethinking Bretton Woods Project/Centre of negotiating fair contracts and the lack of capacity to e) challenge the widely held assumption that low tax rates encourage economic growth and development. Concern determine appropriate prices. Soren Ambrose Kenya Action Aid c) question the lack of transparency in mining contracts across f) call on the UN, IMF, World Bank and OECD to include civil Charles Chivweta Zambia Norwegian Church Aid the continent which increase potential for bribery and society in international processes to challenge tax leakages. Samuel Fakile Nigeria Covenant University of Ota corruption and undermine accountability. g) call on the G20 to involve African countries in international Nara Monkam South Africa Africa Tax Institute processes with regard to tax cooperation. Chilufya Chileshe Zambia Jesuit Centre for Theological Reflection d) call on African governments to audit natural resource bases Abdoulaye Doudou Sarr Mauritania Publish What You Pay before signing mining contracts. h) having regard for the need for greater transparency among Silvana Toska USA Cornell University multinational companies, we call on the International e) call on African governments to strengthen legal provisions Jean Marie Bolika DR Congo ILDI Accounting Standards Board (IASB) to adopt a country- by Michael Otieno Kenya NTA relating to contracts, possibly including measures to over- - country reporting of key financial information for all listed Jean Mballa Mballa Cameroon CRADEC ride stability agreements that prevent future governments companies from re-negotiating contract provisions, possibly including Steve Manteaw Ghana ISODEC limits to length of the contracts. i) having regard for the corrosive impact of financial secrecy Alradjé dono dédengart Chad N’Djamena University in offshore financial centres we call on the G20 and the UN Kennedy Masime Kenya Centre for Governance & Development f) call on African regional bodies to explore regional to move towards a multilateral agreement for the automatic Joanne Carpenter United Kingdom PANOS coordination and harmonisation of fiscal regimes, and exchange of tax information between jurisdictions, Fiona Chipunza AFRODAD information exchange to challenge harmful tax competition particularly developing countries. Vitus Azeem Ghana Integrity Initiative in the mining sector. j) call on African regional and pan African bodies to initiate Jean Luc Muke DR Congo Avocats Verts g) call on African regional bodies to commit to South-South effective multilateral programmes for exchanging tax Julien Tingain Côte d’Ivoire Publish What You Pay learning of successful tax practices in relation to mining. information to combat tax evasion. Manyewu Mutamba South Africa IDASA Rebecca Tanui Kenya BEACON h) call on African governments to sign on to the Extractive k) call on African governments to introduce legislation to make Vera Mshana South Africa Africa Tax Institute Industry Transparency Initiative (EITI), and to ratify the tax evasion a predicate offense under existing anti-money Kiama Kaara Kenya KENDREN laundering provisions. United Nations Convention Against Corruption. Isaack Otieno South Africa Institute for Security Studies i) call on aid donors to build the capacity of civil society in l) call on aid donors to invest in strengthening the capacity Marjolein Brouwer Netherlands Novib monitoring the activities of mining companies. for revenue authorities and to provide technical expertise Lina Sjaavik Tanzania Norwegian Church Aid in monitoring large taxpayers, in particular, Dennis EliashifieTanzania Norwegian Church Aid j) affirm that if it is not possible to arrive at a fair contract issues. Savior Mwambwa Zambia Centre for Trade Policy & Development that, resources should be left in the ground for exploitation Mathias Kafunde Centre for Social Concern by future generations. m) commit to research the impact of current tax regimes and campaign for reforms at the international level to Peter Kioko Kenya Institute of Certified Public Accountants-Kenya ensure that the taxing rights of African countries are not Saviour Mwambwa Zambia Centre for Trade Policy & Development undermined by abusive international tax practices Evariste Munyampunda Tanzania GTZ- East Africa

14 SECOND QUARTER 2010 VOLUME 6 ISSUE 1 TAX JUSTICE FOCUS

INTERNATIONAL CONFERENCE ON THE POLITICAL ECONOMY OF TAXATION

SEPTEMBER 29, 2010

P DiscussionsThe Politics have already of Tax begun Progression: with a publisher Taxation to and produce Redistribution; an edited volumeFlattening of conference the proceedings, Curve of Progression;using the best Flatof the Tax day’s Debates papers. and If youRegimes; wish to attendLaffer Controversy?the conference on September 29th 2010, you can request an application form from the Centre for the Study of International DiscussionsGovernance at have the above already address begun or via with email a at: publisher E-mail: [email protected] to produce an Taxedited Justice volume Network of conference plans to hold proceedings, a pre-conference using meetingthe best at of the the Centre day’s papers.for the Study of International Governance on September 28th 2010, starting at 18h00. The meeting will include discussion on recent research An interdisciplinary conference conference on on the the Political Political Economy Economy of Taxation of Taxation will Ifon you secrecy wish jurisdictions to attend the and conferenceproposals for on development September of 29 the 2010, Financial you Secrecy Index. willbe heldbe held at Loughborough at Loughborough University University under under the auspices the auspices of the Centreof the can request an application form from the Centre for the Study of for the Study of International Governance. The conference will include contributionsCentre for the on theStudy following of International core themes: Governance. The conference InternationalFurther enquiries Governance about the Conferenceat the above can address be obtained or via by email contacting. the will include contributions on the following core themes: Conference Organiser: Dr Jeremy Leaman ([email protected]; Core Themes Tax Justice Network plans to hold a pre-conference meeting at the TaxCore Competition Themes and Neoliberalism: The Politics of Tax Havens; Tax CentreSupported for by:the Study Centre of forInternational the Study Governance of International on September Governance, 28, Avoidance & Tax Evasion; Transfer-Pricing and Taxation; Paradigm Shift in Loughborough University (01509-222981) http://www.lboro.ac.uk/ departments/eu/CSIG/ContactUs.html2010, starting at 18:00hr. The meeting will include discussion on recent theP InternationalTax Competition Governance and Neoliberalism:of Taxation? The Politics of Tax Havens; research on secrecy jurisdictions and proposals for development of Tax Avoidance & Tax Evasion; Transfer-Pricing and Taxation; Taxation and Development: Taxation regimes in Emerging Economies; the . TaxationParadigm regimes Shift in less in developedthe International economies; Governance Taxation and of Taxation?mercantilism Further enquiries about the Conference can be obtained by contacting P TaxationTaxation in the and European Development: Union: Tax Taxation Harmonisation: regimes VAT in Emerging & Duties; Taxation and Enlargement; Taxation Policy in the Framework of the Conference Organiser: Dr Jeremy Leaman MacroeconomicEconomies; Regimes; Taxation Environmental regimes in taxes less developed economies; Taxation and mercantilism Supported by: Centre for the Study of International Governance, The Politics of Tax Progression: Taxation and Redistribution; Flattening the Curve of Progression; Debates and Regimes; Laffer Controversy? Loughborough University (01509-222981) P Taxation in the European Union: Tax Harmonisation: VAT & Excise Duties; Taxation and Enlargement; Taxation Policy in the http://www.lboro.ac.uk/departments/eu/CSIG/ContactUs.html Framework of Macroeconomic Regimes; Environmental taxes

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