Around the world, a few dozen cities collect ground rents – some of the money that people spend or are willing to spend on a location – rather than tax buildings and other economic goods. Besides raising public revenue more efficiently, these places also motivate efficient use of urban land. No longer taxed for improving their property, while prodded by a rent levy to make improvements, owners who had been speculating or procrastinating get busy and put their once under-utilized land to better use. Overall, better land use raises density in particular and livability in general – goals that other jurisdictions still long for.

Where jurisdictions did shift the property tax landward, owners built structures of higher quality, letting design express needs other than frugality. Their “re-filling” of the city shrinks distances, enabling more pedestrian transit while providing more riders for mass transit. Less driving of private cars cuts congestion, noise, and smog, improving everyone’s health.

Erecting new buildings includes new homes, lowering their cost. The “land dues” themselves lower the price of land, together improving housing affordability. Lower-priced land draws in more developers and buyers, shrinking the political leverage of any one player. Yet soon, making the city more livable draws in more people, driving up site values. By tapping these rising values, a locality can operate in the black and can afford to rebate a rent dividend to residents from the surplus. Yielding these benefits, recovering rents while not taxing goods is a tool that makes the job of planning easier.

Organic Density

Around the world, a few dozen cities and larger jurisdictions utilize an aspect of “geonomics”: they collect ground rents – some of the money that people spend or are willing to spend on a location – rather than tax buildings or other economic goods, a reform advocated by Frank Lloyd Wright. Besides raising public revenue more efficiently, these places also motivate efficient use of urban land. No longer taxed for improving their property, while prodded by a rent levy to make improvements, owners who had been speculating or procrastinating get busy and put their once under-utilized land to better use. Overall, better land use raises density in particular and livability in general – goals that other jurisdictions still long for. Thus recovering rents while not taxing goods can be a tool that makes attaining these goals by planning easier.

To recover ground rent, a public authority could levy a site-value tax, shift its property tax off buildings, onto locations, charge a land-use fee, or raise the deed fee to full-market value of the location then annualize it. By whatever method, government could raise enough revenue to forgo taxing buildings (and possibly sales and incomes). Both parts of geonomic revenue reform – (a) having owners pay their community a site rent while (b) exempting their improvements from taxation – spin off benefits, raising the quality of design, the livability of the city, and the health of the environment.

Design Quality by the Pacific Ocean

Where jurisdictions did shift the property tax landward, owners built structures of higher quality, letting design express needs other than frugality. In Hawaii, Honolulu raised its rate on land, not buildings, to spur construction along Waikiki Beach. Thanks to the tax shift, developers erected new hotels about 25% more valuable than they otherwise would have. (1) The resultant rise in land values proved too tempting to land speculators who persuaded Honolulu to abandon the land tax after it had done its work. Today, in a state where land is scarce (it’s an island, after all) and pricey, only the County of Hawaii still levies a land tax.

For decades in Australia and New Zealand, more towns taxed land alone, not buildings at all, and left an impressive legacy. While Sydney still taxes only land (albeit lowly), Canberra, the capital, which once existed entirely on public land, still leases commercial sites to building owners but is now selling residential ones to homeowners. Until the late 1990s around Melbourne in the state of Victoria, about half the towns taxed land, half taxed both land and buildings. In the former, owners built structures that totaled 50% more built value per acre than structures in towns wielding the conventional property tax. (2) During the last recession (mid ’70s), while the state overall suffered a bankruptcy rate of 20% among manufacturers, in the land-taxing towns, the number of factories actually increased by 10%. (3) Resiliency to recessions keeps the planning profession resilient, too.

Re-fill in Pennsylvania

While the density of towns taxing land has not been compared to that of towns taxing buildings, too, their building starts have been. Places that issue more building permits indicate more in-fill than their neighbors, and in-fill raises density. In Pennsylvania, about 20 jurisdictions levy a rate on land higher than their rate on improvements, and all issue more building permits than their neighbors. Their greater construction generates more economic activity, even in the midst of Appalachia; compared to their neighbors, the output of towns recovering more site rent is 16% greater each year (4). Better economic health grants planners more resources for renovating cities.

The biggest of the geonomic cities was Pittsburgh. For over 20 years, Pittsburgh levied a rate of 6:1 (land to improvement), which helped keep land prices low and enabled new construction. The city renewed its urban core without massive federal subsidy but by attracting private investment, and converted its most valuable location – where the three rivers meet – into a park without a grassroots effort to overcome developer resistance. Outside downtown, the new construction augmented the housing stock. Among major metro areas, Pittsburgh enjoyed the most affordable housing, which in turn yielded stable neighborhoods and low crime rates, also the best in the nation. Citing these factors, Rand-McNally named the Steel City “America’s Most Livable” for two years, 1985 and 1986. In 2000, the real estate lobby persuaded the city to revert to the conventional property tax. While construction starts have fallen across the state by about a percent, in Pittsburgh they’ve fallen almost 40%. (5)

Harrisburg still levies a higher rate on land. After its shift of the property tax, the state capital went from being the second most distressed city in America (199th out of 200) to being a geonomic success story; it attracted millions of new investment dollars, converted abandoned buildings from being the targets of arsonists to being renovated homes, and generated thousands of new jobs filled by residents. The mayor, Steve Reed, gives credit to the city recovering rent; Harrisburg has since been named an “All-American City” twice. (6) Allentown, whose plight crooner Billy Joel made famous in a pop hit song, in the mid 90s voted in a higher rate on land twice (after the first vote, the real estate lobby tried to rescind it) and also generated much new construction. For making itself more attractive to young entrepreneurs, Allentown earned a citation in the book, The Rise of the Creative Class, by Dr. Richard Florida.

Transit in Hong Kong, Environment everywhere

The “re-filling” (in-fill and redevelopment) of a city places buildings side-by-side, cutting heat loss and energy bills, mitigating one set of environmental problems. Meeting the demand for new shelter (while liberalizing zoning constraints if need be) lets neighborhoods integrate all urban functions – business and pleasure, shopping and learning – shrinking distances, enabling more pedestrian transit while providing more riders for mass transit, mitigating another assault on the environment; less driving of private cars cuts congestion, noise, smog, and oily runoff, improving everyone’s health. To date, none of these factors – nor the number of cars entering the town daily, cars per residents, parking spaces per resident, etc – for towns taxing land have been compared to those of towns taxing buildings, too.

One of the few mass transit systems to operate without a penny of subsidy is Hong Kong’s. Once the best example of geonomics, Hong Kong, existing on public land, leases plots to building owners and collects an immense amount of rent, enough to keep taxes on merchandise and incomes quite low. Before it reverted to mainland communist control, Fortune Magazine routinely named Hong Kong “the world’s best city for business” while Libertarians named it the freest jurisdiction on the planet (both neglected to mention the high site-rent payments). Altho’ a very populous city, Hong Kong is so dense that it raises most of its own food in its suburbs.

As cities densify, they leave less demand unmet to become sprawling development. A computer model of Boston showed the city’s periphery rolling back toward the center following a shift of the property tax from buildings to land. (7) Another way to show densification from shifting the property tax landward may be to compare building starts or farmland conversion around cities taxing land vs around cities taxing both site and improvement.

Lower Entry Fees

While developers may long to build on central urban land – an action that would densify the city – the cost of those prime locations is perhaps the biggest obstacle to their building. A sure way to lower land price is to raise “land dues”; as the community collects more site rent, that leaves less for the owner to try to capitalize into price. Lower-priced land in high-demand cities could quickly sprout new construction. Johannesburg, South Africa, when it taxed land more than buildings, had the fastest site-recycling rate in the world; almost every site was put to a more intensive use about every 22 years. (8)

Making urban land more affordable lowers the “entry fee”, drawing in more developers and buyers. With more players on the stage, any major owner of local real estate or a small cadre of investors (often outsiders not even living in the area) who had enjoyed a special relationship with local government would face more competition in both the political and economic arenas. If that major player or cadre had been opposed to density or car-free, carefree pedestrian malls, or pocket parks on corners, or day-lighting streams, having those parties wield less clout permits more progress. Since such urban amenities benefit most residents, democratizing urban land use decisions – by empowering a greater number of smaller builders, re-modelers, and owners – may help improve the urban environment.

Erecting new buildings includes new homes; adding to the housing stock lowers the cost of housing. Meanwhile, raising the tax rate on land lowers the price of land. Together, less costly land and less costly buildings greatly improve housing affordability. When New York City used this tax reform in the 1920s, it more than tripled new construction while in other major cities it barely doubled. Not only did the increase in supply make housing more affordable, but also the new construction provided workers with more income for affording it (as working in Ford’s factory enabled a worker to buy a Ford). The expiration of that property tax reform was why the city economy imploded even before the impact of the stock market crash could be felt. (9)

Rent Dividends

Since density correlates closely with land values, raising density – whether by planning or by shifting the property tax – raises urban site values, making urban living less affordable for many residents. So that they can stay residents in their hometowns, it’d help to augment their incomes. Shifting taxes off wages and businesses, onto locations, increases workers’ income.

Plus, with rent-recovery in place, localities could afford to rebate a rent dividend to residents, the key feature of geonomics. As civic improvements draw in more people, driving up site values, city governments could collect these site rental values, including from the steeply upwardly inclined downtowns. Enjoying a surplus, localities could pay residents dividends, similar to how Alaska pays residents a dividend from oil rents.

Whenever land values rise, so would one’s rent dividend, so residents would be secure in their homes. This positive feedback loop of rent-recovery, re-fill, higher density, and magnified land values, makes cities, their economies, and their polities sustainable indefinitely. Even after population growth levels off, efficient land use coupled with untaxed income will keep up site values, land dues, and rent dividends.

Geonomics spreads

With rent recovery in lieu of taxes on efforts, the urban economy automatically generates higher quality design, affordable housing, stable and safe neighborhoods, density, compact settlement, riders for mass transit, and low entry costs for would-be builders. To capture these benefits and others, more jurisdictions turn to the property tax shift. Philadelphia debates the shift while both Mexicali and Estonia recently made the shift (10). Winning these benefits also make the job of planners easier.

References:

1) Pollack, Richard & Donald C. Shoup. Land Economics 53, no 1 (1977), p 67-77.
2) Lusht, Kenneth M. Site Value Tax & Residential Development. Cambridge, MA, USA: Lincoln Institute Monograph Series, 1992.
3) Bennett, John. The Effect of Rating; a Compendium. Melbourne, Australia: SRD Group, 1996.
4) Tideman, Nicolaus; & Plassmann, Florenz, in The Losses of Nations. Harrison, Fred, ed. London: Othila Press, 1998.
5) Cord, Steven, ed. Incentive Taxation, 2002 May. Philadelphia, PA, USA.
6) Andelson, Robert V., ed. Land-Value Taxation Around the World, 3rd Edition. New York: Robert Schalkenbach Fdn, 2000.
7) DiMasi, Joseph. The National Tax Journal, 1987 Dec.
Dunkley, Godfrey. That All May Live. Roosevelt Park, RSA: A. Whyte, 1990.
9) Post, Charles Johnson. “How New York Solved Its Housing Crisis”, 1931?, Schalkenbach Fdn.
10) The Economist, 1998 Feb 28, “Estonia adopts Henry George’s tax proposal”.

Mark Braund, Saturday December 3, 2005 The Guardian

Despite the prime minister’s resolve, the year in which Britain was to lead the world in making poverty history has achieved little. This month there is one last opportunity as the World Trade Organisation gathers in Hong Kong. But even if this meeting throws up some surprises, we will end the year little closer to ending poverty. Increased aid, debt cancellation and fairer trade would certainly have some impact, but they would not address the underlying causes of poverty.

To their credit, Tony Blair and Gordon Brown seem genuinely committed to reducing poverty in the developing world. But commitment is not enough. Their ambitious plans were doomed from the start for political and economic reasons.

Any strategy to reduce poverty in poor countries based on aid, debt relief and trade justice has to be paid for by rich countries, and this has consequences for their economies. Britain may be able to absorb the costs, but other countries cannot. Try telling France’s disaffected youth that more taxpayers’ money must go to Africa, or their struggling farmers that more food must be imported from the developing world. But even without this considerable political constraint, the strategy is unlikely to succeed because it does not take proper account of the economics of poverty. All the governments of rich countries remain committed to current global economic arrangements and believe a solution to poverty is available within that framework. They see poverty as a side-effect of economic advance, a problem to be addressed through policy adjustments, and refuse to accept it is part of the system.

One can see that the neo-classical economics that currently dictates policy, and that has driven globalisation, has little to offer when it comes to tackling poverty. It is reasonably effective at promoting economic growth. But growth does not assure the equitable distriution of wealth, and often appears to have the opposite effect, especially in the developing world.

If the objective is reducing poverty, then economic progress should be judged by measuring not growth, but poverty and economic exclusion. This reveals that after several decades of steady improvement, the situation in sub-Saharan Africa has deteriorated every year since 1984. Despite this, it seems never to cross the minds of the world’s finance ministers that the theoretical basis for the global economic revolution of the past three decades might be fatally flawed.

The forces that cause deepening poverty in poor countries are also at work in the rich. This is why Labour’s commendable targets for reducing child poverty have been so difficult to achieve. Poverty in the developing world can be successfully tackled only by removing its root causes. This requires us to return to economic first principles and to look to the founding fathers of worldly philosophy. It was clear to Adam Smith that any philosophy for a fair society needed to acknowledge the economic forces that determine the distribution of economic opportunities and therefore wealth. It was Smith’s near contemporary David Ricardo who made explicit what was becoming obvious: if the ownership of land and natural resources is grossly unequal, then wealth and wellbeing will be the privilege of the minority. And as the economy develops and more wealth is created, the gap between rich and poor will widen. This is an inescapable conclusion of classical economic theory, and although the world has moved on since Ricardo’s day, the fundamentals remain the same.

Consider Mozambique, an African success story where the economy is growing at 10% annually. The capital, Maputo, boasts one of the finest colonial hotels on the continent. But as the new indigenous elite enjoys London-priced cocktails in its sumptuous bar, only a few miles away their fellow citizens are still living in the iron age. Fairer trade would increase the wealth-generating capacity of countries such as Mozambique, but without measures to address the root cause of poverty, the poor majority would feel little of the benefit.

Neo-classical economics is considered to be a minor updating of its Enlightenment predecessor. But in the process of that updating, key aspects of the earlier version have been discarded. Only those elements likely to serve the interests of minority privilege have been preserved. If a small group of wealthy citizens set out to devise an economic system that would enable it to expand its wealth and entrench its advantage, it is hard to imagine a better system than the one we have today.

It is reasonably easy to make a moral case against the obscene wealth of the super-rich, and for a more inclusive and just global economic order. But that moral argument must be presented alongside a sound economic strategy. If our present minority-favouring economy is based on a false understanding of economics, then a revised understanding is needed in order to create an economy which serves the interests of the majority.

The early economists set out to find a means by which individual freedom and social justice could be reconciled. The evidence of the intervening two centuries suggests that not only were they ahead of their time, but also ahead of ours. Far from trying to emulate their attempts to reconcile freedom and justice, we assume them to be irreconcilable. As a result, politicians and activists divide into two camps: those who prioritise individual freedom, but fail to acknowledge that freedom is worth little without economic security; and those who prioritise social justice, but struggle to come up with a sound economic strategy for promoting a more equitable distribution of wealth.

Arguments about freedom and justice often centre on taxation. Those on the right argue that taxing personal income is a disincentive to individual enterprise, while taxing corporate profit undermines the ability of firms to invest for the future. The left counters that as private enterprise and free markets are unable to provide economic security for all, the redistribution of wealth through taxation is imperative if a sizeable part of the population is to avoid destitution. Both sides have a case. Taxation does limit wealth creation. But, without some redistribution, millions more would fall into extreme poverty. Taxation of personal income is an infringement of people’s right to keep what they earn. But that infringement is as nothing compared to the experience of those denied viable economic opportunities.

Instead of arguing over how much we should tax, we should be asking why an economy based on free markets and private enterprise is so incapable of delivering opportunities and security for all. This brings us back to classical economics. If access to the land and natural resources upon which economic activity depends is concentrated in the hands of the few, the many will struggle to find adequate life-sustaining opportunities. This conclusion drove Ricardo to despair. Two centuries ago there was no possibility of persuading the aristocracy that wholesale changes in land ownership were needed to reduce poverty. After staggering economic and technological advance but still no end to poverty, we may be more receptive. But we still need a mechanism to widen access to economic resources without threatening individual freedom.

A neat solution was proposed more than a century ago by an American economist named Henry George. Today, his followers are subjected to unfair accusations of intellectual naivety by the economics mainstream. But his ideas deserve a hearing because they adhere to the essential truths of classical economics, and because they promise an economy in which individual freedom and social justice become co-dependent rather than mutually exclusive. For George, the key to transforming the economy lay in the tax system. He argued that instead of taxing effort and enterprise through taxes on incomes and profit, we should tax ownership and the exploitation of natural resources.

Currently, people who own land are entitled to keep the full amount of any increase in its value. As land generally rises in value, their wealth increases regardless of how much work they do. If this income were taxed, there would be no incentive for anyone to amass large landholdings, and land ownership would be spread more widely. Supporters of such land-value taxation suggest it could ultimately replace traditional taxes as the source of public revenue, thus increasing the capacity of the economy to generate wealth, as well as ensuring its more equitable distribution.

By reforming the tax system to reward effort rather than ownership, many more people would gain access to economic opportunities. Admittedly, the super-rich would have less freedom to amass huge personal fortunes, but if our democracy is working as it should, they would eventually have to accept that their privilege comes at too great a cost to wider society.

Look at the argument for such change: the promise of an economy that encourages private enterprise; that is dependent on the free play of market forces; that reduces the role of government to that of provider only of those services not suited to private provision; and that provides opportunities for everyone prepared to take responsibility for their economic welfare. It is a no-brainer.

Such revisions to the tax system would have to be accompanied by other similarly motivated policies if the economy were to be transformed from a servant of minority privilege into a provider of majority justice. These would have to include reform of the global monetary system which allows banks to create unlimited credit for large corporations while denying small loans to those who need them to help themselves out of poverty. It would also require an end to the kind of casino capitalism that allows the rich to speculate on financial markets, sometimes causing whole economies to collapse, forcing millions into poverty. What these reforms (of the tax system, the monetary system and financial markets) have in common is they all target unearned income.

In poorer countries the pace of economic liberalisation makes matters worse. Russia is a perfect example of how rapid deregulation causes land and natural resources to fall into the laps of a fortunate few. It now rivals Mexico as the country with the largest gap between the rich elite and the poor majority. And it does not require corrupt government for assets to be scooped up by the likes of Roman Abramovich. It happens anyway, as those who are wealthy borrow money to acquire more land and the rights to exploit mineral resources.

In the developing world the situation is more serious. In these mainly agricultural economies, the only way for most people to make a living is by growing their own food. If, as in Africa, the most productive land is taken over by cash crops for sale to rich countries, then the life-blood of ordinary people dries up. This may be happening because of the need to repay crippling international debt, but even if that debt were written off these businesses would continue to flourish. As they became more successful they would use more technology and employ fewer people. No jobs, no land to farm and no social security system. More than anyone, the people of the poorest countries need a mechanism to ensure they have access to land.

The long-term redistribution of economic resources through a reformed tax system that targets unearned income promises an end to poverty in rich and poor countries alike, because it strikes at the root cause. We have a choice. We can arrange the global economy so that only a minority have access to it, and then tax their earnings to mitigate the poverty of the rest. Or, we can arrange it so all have access to economic opportunities. The first will relieve the worst of today’s poverty but do nothing for tomorrow; the second could eradicate poverty once and for all.

For too long we have accepted the argument that there is no alternative to current arrangements. If growing numbers can be persuaded that there is an alternative, one that is morally desirable, likely to promote individual freedom and social justice, and that is backed by sound economics, then we might succeed in making poverty history.

Mark Braund’s book, The Possibility of Progress, is published by Shepheard-Walwyn.

Derived from the presentation at the Hume Global Learning Centre, June 28, 2006

Introduction

Tonight I am representing Prosper Australia, an organisation which has, in various guises, been a part of Victoria for over one hundred years. One key objective of the organisation is the reduction, as much as possible of taxes on labour and capital, and for public finances to be derived instead from site rental. Because when it comes down to it, there are only two sources for public revenue; the goods and services which are produced or the resources that are used.

The idea of public financing through site rental was extremely popular in the early days of Australia, supported by both the Liberal Party of Alfred Deakin and his Labor opponent Andrew Fisher. Indeed Alfred Deakin illustrated the case quite succinctly when he said;

“The whole of the people have the right to the ownership of land and the right to share in the value of land itself, though not to share in the fruits of land which properly belong to the individuals by whose labour they are produced.”

In this period many local councils adopted site rental as the main source of income and for a period the Commonwealth derived much of its income from site rental. The idea was not subject to the partisanship of Party politics; famous supporters of site rental include Labor’s Arthur Calwell and Clyde Cameron and the Liberal Minister in the Menzies, Holt and Gorton governments, Sir Allen Fairhall.

Because we also have a candidate from the Liberal Party here tonight, I should also mention that I am a member of the Australian Labor Party. For several years I was the policy convenor of the Labor Left – Pledge Unions faction, the so-called “hard left” socialist group which strongly opposed the privatisation of public assets and had such disconcerting foreign affairs policies such as ending
apartheid in South Africa, self-determination of East Timor, democracy in Indonesia and a state for the Palestinians.

The point of laying these cards on the table is to illustrate that regardless of whether one believes that economies are best served by markets or by planning, or whether social equity has a greater priority over economic efficiency that one can find good and just reasons to be part of the site rental movement, whose claims include equity, efficiency, markets and planning! The fact that you would find stubborn socialists such as Clyde Cameron in agreement with amicable liberals like Allen Fairhall should give indication of the adaptability of the basic principle of site rental.

This leads to the purpose of tonight’s presentation. Some elements of the last State budget seemed quite contrary to the Labor Party’s stated objectives as put in their National Constitution. That constitution refers to matters such as the abolition of poverty, a
greater equality in the distribution of wealth, income and opportunity, and the abolition of exploitation. The assumption is that these decisions; decisions which will reduce opportunity and further impoverish those who are already poor, were made in ignorance rather than malice. Hence the title of tonight’s event: “Please Explain, Mr. Brumby”.

Something that should be said is that Prosper Australia made multiple attempts to contact Mr. Brumby and invite him to tonight’s function in his own electorate. However, he has chosen to attend a different engagement. Offers were also made to send a representative of his office or to have a written statement presented at the meeting. These opportunities also have not been taken up.

What Was In The Last State Budget?

The last State budget made (almost) everyone very happy. With a large surplus, the preparation to spend big in an election year and with the assistance of some rather optimistic economic projections, the mass media sang the praises of the State government and indeed, in most cases, this is deserved.

The last state budget witnessed a 10% reduction in Payroll Tax over three years costing some $533 million, and a $170 million reduction in WorkCover premiums. A $300 “School Starting Bonus” will be paid to families with children entering prep and year 7, along with a $500 Trades Bonus to those completing apprenticeships. A ten-year allocation of $10.5 billion has been made to improve mass transit facilities in Melbourne and regional Victoria. A budget surplus of $300 million per annum is planned and net financial liabilities remain below 7% of Gross Social Product.

There are flies in the ointment however; $100 million dollars was earmarked to the “Building Tomorrow’s Schools Today Fund” from the expected sale of Victoria’s share in the Snowy Mountains Hydroelectric Scheme. The budget also announced that schools in needy areas such as Broadmeadows, Altona, Western Heights and Dandenong would be modernised and upgraded. This announcement is now at risk because the Federal government pulled out of the sale of the Snowy leaving the State governments of New South Wales and Victoria with unfunded promises. Why the State government tied upgrades and maintenance of schools to the privatisation of a public asset is beyond reason.

One can also certainly argue that the cuts to payroll taxes are too modest and too slow. It is true that payroll taxes have a low compliance cost and it is also true that they effect a narrow band of employers (those whose payroll is greater than about $40 000 per month). But this does not change what the tax effectively is; a tax on employing too many people. This occurs when organisations like the Australian Industry Group claims that over 13,000 manufacturing jobs would be lost in Victoria this year.

But the biggest problem now facing Victoria is the issue of housing affordability. There is a real crisis in this issue and the actions in the State budget will make matter worse, contrary to the vested-interest claims of organisations such as the Real Estate Institute of Victoria and the Property Council of Australia. In particular the big cuts in land tax to those who have what is mis-named “investment properties” valued at over $2.7 million of unimproved site rental. This change, costing the public coffers some $167 million dollars, is on top of last years’ massive cuts which announced $823 million over five years.

Although this seems politically expedient, a very strong case can be made that this is not in the best interests of Victoria. Land is not like any other economic good. It is obviously in fixed supply and “investments” in buying land are demonstrably different to capital investments in buildings, manufacturing, or service-provision. If you spend money in any of these other areas goods are produced; people are employed. But putting money into land neither employs nor creates any additional goods or services. Indeed, what it does do is increase the cost of land as the available supply is reduced. Increases in the value of land are primarily due to inaction on the part of the landlord; either through community-provided infrastructure and economic activity, or by increases in population.

This matter can been seen rather simply and empirically. Research from the Housing Industry Association over the past thirty three years shows quite clearly that the cost of building a house in Australia has gone up slightly less than the rate of inflation, that is an increase of 8.4 fold. However, in the same period the price of land has gone up sixteen-fold in Melbourne, eighteen-fold in Perth, nineteen-fold in Brisbane, fifty-one fold in Sydney and a massive seventy-fold in Adelaide.

The only brake on this mindless speculation has been land tax. It stands to reason that if land is taxed and other goods and services are not, then an investor will strongly prefer to put their money in something productive. This has been well-known to economists since the days of Adam Smith and if you read the statements of Nobel Prize winners in economics over the last thirty years you will discover that they are virtually unanimous on this matter; from the left-wing to the right you find the likes of socialist Franco Modigliani, the iconoclastic William Vickery, social democrats like James Tobin and the Keynesian Paul Samuelson, conservatives like Robert Solow and James Buchanan Jnr, and the arch-capitalist Milton Friedman.

These names are all Nobel Prize winners in economics; you can assume that they know something about the subject matter. The expert opinions in Australia say the same thing; the 2001 Harvey Commission on Business Productivity suggested rolling numerous property taxes into a single land tax. The Commonwealth’s Productivity Commission pleads to the states to broaden the base of the tax rather than thumping people with more onerous charges on the productive labour they carry out. Yet the politicians are not listening; or they are listening to the wrong people.

Future Problems and Solutions

Serious problems will arise due to the decisions made in the last state budget. Where a greater return is available from land speculation than from productive investment it is obvious that an investment will prefer the former; and whilst the individual speculator will benefit greatly in the short term the community as a whole will suffer in the longer term; this is as per the laws of the multiple prisoner’s dilemma problem in game theory. Ultimately it means that everyone loses – even those who gain in the short run relative to everyone else.

The most obvious effect of the changes will be that housing affordability will continue to worsen. Encouraging “investors”, to put money into landed estates rather than productive use will inevitably reduce the effective supply of land and reduce the quantity of dwellings produced. The rather dramatic statistics provided previously from the Housing Industry Association will get worse; the possibility of young people in this state ever owning their own home becomes increasingly remote and onerous.

Apart from the obvious loss of jobs in the home building industry resulting from such changes, one must also be aware of the losses in commercial and industrial building. And, as mentioned previously, whilst the modest cuts to payroll tax will slow down job losses it will not reverse them. The highly internationally competitive manufacturing industry will be harshly hit.

One final area of great concern is the viability and stability of returns on superannuation funds. Like any other individual investor, group investment organisations, like superannuation funds, will seek to maximise their return. If the taxation system is changed, as it has been, to encourage resource holdings rather than productive investment then the funds will follow; even if in the long-run there’s detrimental effects overall.

There are however some practical measures that can be taken to reverse these dire trends and some of the disconcerting changes in the last State budget and subsequent events. Indeed, it would be very remiss to come here with just criticisms and offering no solutions.

The first is to renege on the proposal to cut the top rate of land tax and use the monies raised to pay for the aforementioned school upgrades in needy areas. It makes sense to reduce a strong incitement to short-term speculation, preferring to encourage long-term investment to the more impoverished elements of society. The $167 million dollar gift to the biggest landlords in the state stands in stark contrast to the need to invest in our children and their future.

The second is to investigate the funding and provision of public transport infrastructure through increases in land values. The proposed construction of a train station at Coolaroo has, to say the least, taken far too long to be implemented in reality. To give an example of alternative method of funding consider California in 1890s who in 1887 passed the Wright Act which allowed communities to irrigate districts and pay for them by taxing the resultant rise in land value.

In the next ten years, the Central Valley was transformed into over 7,000 independent farms. Within a few decades, those tree-less, semi-arid plains became the “bread basket of America”, one of the most productive areas on the planet.

Thirdly, lobbying one’s local council is of critical importance. Despite an excellent history in Melbourne, following the forced amalgamations in the 1990s nearly all local councils rate property rather than land; Monash is the exception and the continuing success of that municipality is worthy of note. The rating of property rather than land means that rate-payers are punished for improving their home. A comparison can be made with cities like Pittsburgh and Harrisburg in the United States which rate land much more than property. The results are obvious; less vacant sites, less derelict buildings, more industry, more effective use of land.

In the 1970s Dr. Ken Lusht, visiting from Pennsylvannia State University, found those Melbourne councils that rated land alone had 50% more built value per acre than those that rated both land and buildings. Between 1974 and 1984, the last year the government released these statistics, the number of businesses in the towns taxing property decreased by 20% while in the towns taxing only land it increased by more than 10%.

Finally, joining Prosper Australia and advocating the justness and positive effects of land taxation is imperative. There are, undoubtably those who prefer to receive as much income as possible from the most unproductive investments. They are a powerful and well-financed lobby group. The distribution of income in Australia means that the the top twenty percent of Australia receives 48.5% of the national income whereas the bottom forty percent earns 13%, whereas in terms of household assets the top twenty percent have 63% of national household assets, whereas the bottom fifty has a mere 5%. One can be certain that the distribution of land values is worse still.

A handful of people in Australia receive the lion’s share of the site rent of this nation; this is monies extracted from labourers and productive investors and wealth created from such people. The economist, David Ricardo, saw with great clarity, describing the interest of the landlord (by which he meant literally – not the person who owns and invests in houses) as utterly opposed to the interests of all other classes. Then John Stuart Mill following this lead wrote;

“Landlords grow rich in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.”

This simple principle of public finance, so far-reaching in its justness and effectiveness, is the orientation that Victoria needs.

Further References

Indeed, it is fascinating to read of such organisations complaining bitterly about land tax, when the real tax slug on housing is invariably from stamp duty and GST. See: “Push to ease land tax pain”

‘A $366,660 house and land package on a housing estate in Melbourne’s northwest puts $54,520 into government coffers. The $54,520 tax bill includes $4548 land tax, $32,727 GST as well as thousands of dollars of stamp duty.’Sun reference on Stamp duty (now removed from website)

“Housing affordability in Australia has hit its lowest point since the residential property boom of the 1980s, a report has found.” The Age Affordability ref

“The cuts follow predictions by the Australian Industry Group in February that 40,000 manufacturing jobs would be lost this year – a third of them in Victoria – on top of a loss of 30,000 manufacturing jobs last year.”The Age Manufacturing ref

DOZENS of run-down Victorian schools will be forced to wait at least six years for long-overdue maintenance upgrades after the collapse of the Snowy Hydro sale left the Bracks Government with an unfunded election promise.The Age on Schools

* Had he acted upon their advice Gorbachev may have strengthened his hand, but was unceremoniously dumped in favour of Boris Yeltsin. The Russian people have an especially deep feeling for their motherland, and socialising land rents for revenue and slashing all other taxes may well have struck a sympathethic chord. Yeltsin too, however, has been told by western powerbrokers that he must sell Russia’s patrimony – ‘freehold’ her land – as a pre-condition for western assistance.

* The proposal to raise the greater part of government revenue from the rent of land – is a policy most clearly associated with Henry George, the American economist whose Progress and Poverty (1879) continues to claim the attention of social reformers. Leo Tolstoy was the most ardent Russian advocate of Georgist economics – for more on Tolstoy.

RENT FOR REVENUE

Mikhail Gorbachev
President
Union of Soviet Socialist Republics

Dear Mr. Gorbachev,

The movement of the Soviet Union to a market economy will greatly enhance the prosperity of your citizens. Your economists have learned much from the experience of nations with economies based in varying degrees on free markets. Your plans for freely convertible currency, free trade, and enterprises undertaken and managed by individuals who receive the profit or bear the losses that result from their decisions are all highly commendable. But there is a danger that you will adopt features of our economies that keep us from being as prosperous as we might be. In particular, there is a danger that you may follow us in allowing most of the rent of land to be collected privately.

It is important that the rent of land be retained as a source of government revenue. While the governments of developed nations with market economies collect some of the rent of land in taxes, they do not collect nearly as much as they could, and they therefore make unnecessarily great use of taxes that impede their economies – taxes on such things as incomes, sales and the value of capital.

Social collection of the rent of land and natural resources serves three purposes:

* First, it guarantees that no one dispossesses fellow citizens by obtaining a disproportionate share of what nature provides for humanity.

* Second, it provides revenue with which governments can pay for socially valuable activities without discouraging capital formation or work effort, or interfering in other ways with the efficient allocation of resources.

* Third, the resulting revenue permits utility and other services that have marked economies of scale or density to be priced at levels conducive to their efficient use.

The rental value of land arises from three sources. The first is the inherent natural productivity of land, combined with the fact that land is limited. The second source of land value is the growth of communities; the third is the provision of public services. All citizens have equal claims on the component of land value that arises from nature. The component of land value that arises from community growth and provision of services is the most sensible source of revenue for financing public services that raise the rental value of surrounding land. These services include roads, urban transit networks, parks, and public utility networks for such services as electricity, telephones, water and sewers. A public revenue system should strive to collect as much of the rent of land as possible, allocating the part of rent derived from nature to all citizens equally, and the part derived from public services to the governmental units that provide those services. When governments collect the increase in land value that results from the provision of services, they are able to offer services at prices that represent the marginal social cost of these services, promoting efficient use of the services and enhancing the rental value of the land where the services are available. Government agencies that use land should be charged the same rentals as others for the land they use, or services will not be adequately financed and agencies will not have adequate incentive or guidance for economizing on their use of land.

Some economists might be tempted to suggest that the rent can be collected publicly simply by selling land outright at auction. There are a number of reasons why this is not a good idea.

* First, there is so much land to be turned over to private management that any effort to dispose of all of it in a short period would result in an extreme depression in prices offered.

* Second, some persons who could make excellent use of land would be unable to raise money for the purchase price. Collecting rent annually provides access to land for persons with limited access to credit.

* Third, subsequent resale of land would enable speculators to make large profits unrelated to any productive services they offer, resulting in needless inequity and dissatisfaction.

* Fourth, concern about future political conditions would tend to depress offers. Collecting rent annually permits the citizens of future years to capture the benefits of good future public policies.

* Fifth, because investors tend to be averse to risk, general uncertainty aboul the future will tend to depress offers. This risk aversion is sidestepped by allowing future rental payments to be determined by future conditions.

* Finally, the future rent of land can more justly be claimed by future generations than by today’s citizens. Requiring annual payments from the users of land allows each year’s population to claim that year’s rent. While the proceeds of sales could be invested for the benefit of future generations, not collecting the money in advance guarantees the heritage of the future against political excesses.

The attached Appendix provides a brief technical discussion of issues of the duration of rights to use land, the transfer of land, the assessment of land, social protection against the abuse and subsequent abandonment of run-down property, and redistribution among localities to adjust for differences in natural per capita endowments. While these issues need to be addressed, none of them present any insoluble problems.

A balance should be kept between allowing the managers of property to retain value derived from their own efforts to maintain and improve property, and securing for public use the naturally inherent and socially created value of land. Users of land should not be allowed to acquire rights of indefinite duration for single payments. For efficiency, for adequate revenue and for justice, every user of land should be required to make an annual payment to the local government, equal to the current rental value of the land that he or she prevents others from using.

Sincerely,

Nicolaus Tideman,
Professor of Economics,
Virginia Polytechnic Institute and State University.

William Vickrey,
President for 1992,
American Economic Association.

Mason Gaffney,
Professor of Economics,
University of California, Riverside.

Lowell Harris,
Professor Emeritus of Economics,
Columbia University.

Jacques Thisse,
Professor of Economics,
Centre for Operations Research and Econometrics,
Universite Catholique de Louvain, Belgium.

Charles Goetz,
Joseph M. Hartfield Professor of Law,
University of Virginia School of Law.

Gene Wunderlich,
Senior Agricultural Economist, Economic Research Service,
U.S. Department of Agriculture.

Daniel R Fusfeld,
Professor Emeritus of Economics,
University of Michigan.

Carl Kaysen,
Professor of Economics,
Massachusetts Institute of Technology.

Elizabeth Clayton, Professor of Economics,
University of Missouri at St. Louis.

Rohert Dorfman
Professor Emeritus of Political Economy,
Harvard University.

Tibor Scitovsky,
Emeritus Eberle Professor of Economics,
Stanford University.

Richard Goode,
Washington, D.C.

Susan Rose-Ackerman,
Eli Professor of Law and Political Economy,
Yale Law School.

James Tobin,
Sterling Professor Emeritus of Economics,
Yale University.

Richard Musgrave,
Professor Emeritus of Political Economy,
Harvard University.

Franco Modigliani,
Professor Emeritus of Economics,
Massachusetts Institute of Technology.

Warren J Samuels,
Professor of Economics,
Michigan State University.

Guy Orcutt
Professor Emeritus of Economics,
Yale University.

Eugene Smolensky,
Dean of the School of Public Policy,
University of California, Berkeley.

Ted Gwartney,
Real Estate Appraiser and Assessor,
Anaheim, California.

Oliver Oldman,
Learned Hand Professor of Law,
Harvard University.

Zvi Griliches,
Professor of Economics,
Harvard University.

William Baumol,
Professor of Economics,
Princeton University.

Gustav Ranis,
Frank Altschul Professor of International Economics,
Yale University.

John Helliwell,
Professor of Economics,
University of British Columbia.

Giulio Pontecorvo,
Professor of Economics and Banking,
Graduate School of Business,
Columbia University.

Robert Solow,
Institute Professor of Economics,
Massachusetts Institute of Technology.

Alfred Kahn,
Ithaca, New York.

Harvey Levin,
Augustus B Weller Professor of Economics,
Hofstra University.

There is a Secret of History. The mot de l’enigme is Land. The great historians of the rank, for instance, of Mommsen, say the word, but then pass on, as though in haste to leave a dangerous ground. Lesser historians shun the mention of it altogether, or mention it in faltering accents. Time, with its effacement of old meanings, helps this obscurantism and oblivion falls upon the theme.

What is the cause of this conspiracy of silence? The answer is again in one word, landlordism. Historians are proteges of those whose interest lies in keeping dark concerning land. Now a protege must not discuss what patrons do not wish to mention. But that would come to writing nothing of man’s greatest struggles, longest wars, and bitterest distress. “Well, then, let the historians write of wars, political struggles, and distress in social life. Let them write freely of the things that happened, and the suffering endured. But let them never mention land and the ownership of land as being the ultimate causes of these happenings. They can write out the story, showing their knowledge of the facts; and if they are pressed for explanations they can point to intermediate collateral causes: man’s natural pugnacity, notions of honour, foolish mistakes, wild aspirations towards political freedom, and the like. That will satisfy the few inquiring minds, and the rest will never question. Only no mention of the land and the landlords!”

These were the orders tacitly given by those who had the powers of censorship and suppression of books, removal of professors, and withdrawal of patronage. How could a man explain that land and landlordism were ultimate causes of nearly all wars and sufferings of the peoples, when his payments and his patrons were of the landlord class, or members of that nameless party whose sincere and secret faith was landlordism?

Besides, the peoples loved the soldiers. Tales of great battles always interested. Pity could be awakened and wild patriotism. There was no need to talk of land and ownership in order to fill up the lecture time or make a book of history. “Agrarian laws?” Well, they made such dull reading!

Dull, yes, but the dullness was deliberate, or else was due to plain stupidity. Let us consider a few national histories, and see what could have been made of the story of land and landlordism The national history best known throughout the English – speaking world is that of the “Children of Israel”. The story of the Hebrews is the only history which has been read aloud for centuries in the hearing of the people, and diligently taught in all the schools. It is a story of a struggle to “possess the land”, then to maintain a fair division of it among descendants of the conquerors. The institution of the Jubilee return of lands to their original owners is now known to have been a dream of prophets and idealist lawmakers, but its importance as a principle cannot be over-estimated. Although the cleverer landholders retained (by what the Bible calls oppression) lands of their less ambitious “brethren”, they kept them against the express injunction of the Tribal God – that is, of the prophets and liberators who declared they spoke for Him. “The land shall not be sold for ever”, said Yahweh, “for the land is mine; and ye are strangers and sojourners with me”. (Leviticus XXV. 23).

To paraphrase: “No just man of our people must make claim to permanent ownership of any land: the land has been distributed to all our free men on a principle of equal justice, and the good patriot must be loyal to the general system. No individual can own land absolutely; he has it only in usufruct; it belongs to the whole tribe, and is in the unchanging guardianship of the Nation’s God” .

The usual struggle, of course, went on, in the course of which much land was claimed and kept, and the expropriators got such wealth and influence that they controlled even the opinions of the people; and the peasants of Galilee thought Jesus mad when he declared that the rich men of His time were not the best of men. “How hard it is for a man of property to come to see the higher truth”, the Master pointed out to His disciples. “Well! Who, then can be saved?” the poor men said, in pure bewilderment.

When He went on to pour His condemnation on those same high-placed proprietors because they “devoured” widows’ houses and “for a pretence” made long prayers, “the common people heard Him gladly” – and the landowners knew they must take action.

In the history also of Sparta redistribution of the land was tried. The reforms in this direction, piously credited to the great Lycurgus, were really undertaken by Agis and Cleomenes at a later date. The struggle was keen between the true patriots, who were prepared to give allotments in Laconia to the landless citizens, and those who meant to keep exclusive privilege.

At Rome, again, if there is any meaning in the hundred years’ revolution which divided the Senate (mostly the landowning classes) from the people, from the reforms of Gracchus to the settlement made by Caesar, it is that the people wanted land in Italy and the Senate would not yield it; that the people wanted to assert the principle that the ager publicus was the domain land of the State. i.e., the property of the community alone, and the Senatorial party, with others who came in for profiteering, wanted to keep rent-free the lands assigned to them, and make them instruments of economic slavery; and that the lawless individuals of the nation, tempted by the notion of the absolute ownership, themselves in time and on occasion became petty landlords, too, and asserted the same claim to dominium where they should have been content with usufruct.

Of course there were wars in Italy and in the provinces, and very few of them were about anything but this dominium and its consequences, until at last the Roman world grew weary of the strife, and the great statesman Julius Caesar made some adjustment of the claims of common freedom against privilege. If Caesar had not seen that provinces must live their own lives, in the enjoyment of their lands within one common state, and made the taxation represent acknowledgment at once of freedom and responsibility, there would have been no Roman Empire to endure five hundred years.

The story of our own land for the thousand years between the fifth century and the fifteenth is a story of land and land ownership far more than anything else. Our Saxon forefathers came to win land, and all through the so-called Heptarchy engaged in ceaseless fighting over what they had won.

The Feudal System brought another new order in. The English law (according at least to Coke and Blackstone), asserts that as a changeless principle all land is holden, mediately or immediately of the King, ie., no one can have true freehold land; all land is subject to old charges, services which sale or transfer cannot remit. Civil wars occurred through efforts of land-holders to shake off the claim for these services due to the State or larger community, represented by the feudal overlord.

One meaning of Magna Charta, as Professor Pollard has pointed out, is that it was such an effort; the liberty which certain barons wanted was liberty to decline to render these dues, the “liberty” was a freehold each one wished to have created out of his feudal tenure. The lawless Barons of Stephen’s and other weak reigns were playing the same game, and as in the Roman Republic, so here landless individuals have gradually joined in it, until most Englishmen suppose that land can be private property, and that “freehold” land, so far from owing rent or service to the State, can be actually let or sold to the State, as well as to other tenants or purchasers, for the private profit of the alleged “owners”

The purchaser of any “freehold” piece of land owes to the community the services which have anciently been charged upon it, for example, that he should present himself in the full armour of a knight on horseback at the call of the proper superior representing the State, unless he pays for another person to go in his place. “But”, it may be said, “such services ceased to be required”; to which the reply is, only when money payment was accepted instead. Again, it may be said: “Well, but it is three hundred years since the claim was made”; to which we reply – then there are arrears long overdue! How else could the public charges have been met? How in the interval have the public moneys been raised? The answer is that they have been raised pro tem. by taxes laid upon the workers’ work, the employers’ capital, and the people’s food and homes gradually and almost secretly: no wonder that historians were not to mention the transference.

No wonder that much was made of John Hampden’s protest against ship-money. No wonder that histories represent the English people as madly desirous of “the vote”, “the Charter”, religious equality, and other desirable things. No wonder that we are supposed to have been oppressed by tyrannous kings. No wonder that the thirst for the destruction of neighbouring peoples and the glory of warfare have been emphasised – anything rather than that the people should know that the one indefeasible title which the English law permits is the title of the whole community to inalienable possession of the land, the soil of Britain. Anything rather than that the peoples of Europe should know that they are fighting each other throughout the centuries, in order that the unlawful ownership of State lands may be left without taxation, and that attention may still be diverted from the history of Land.