Read Reversing Sprawl: Part I here.
Public Good Funding Public Good
Properties near Central Park are vastly more valuable than those even a few blocks away. Parks are among many publicly funded amenities that can raise the value of land because people want to be near to them. Since a Land Value Tax is designed so that governments obtain most or all of their revenue from it, any increase in tax revenue must come from increases in land value. This is why LVT is often thought of as a “single tax” or “central tax”.
To increase annual revenue, governments must construct parks, public spaces, and infrastructure to raise land values. This spurs the ‘Up & In’ private development discussed in Part I, but it also creates an incentive for government to develop and maintain such spaces and amenities.
People have to actually like the spaces in order for government to be able to increase revenue. Therefore, the nature of government intervention in urban planning and infrastructure will likely better reflect people’s needs under LVT, since government revenue will depend directly on the quality of public spaces. This concept applies to roads, utilities, amenities, and many other public works.
Using land value as the central or sole source of revenue aligns the government’s interest with that of the general public in many ways. Though it would improve government incentives in many ways, Land Value Tax would not render zoning completely unnecessary. There are many legitimate and illegitimate zoning restrictions, and these do not disappear ipso facto a land value tax.
If government spends money efficiently, in line with people’s needs, tax revenue will also increase vis a vis land value. For more information on this, see the Henry George Theorem. The theorem, supported by Nobelists Joseph Stiglitz, Willam Vickery, and others describes how governments can sustainably fund all activities, solely using a land value tax, through the creation and maintenance of public works. For an example, watch the video above.
Skyscrapers Everywhere? No.
Some people become confused when thinking about a Land Value Tax, believing it would cause tall buildings to be constructed in the middle of the Amazon rain forest or the Sahara desert. This mischaracterization stems from thinking that the incentive to use land intensively applies to areas with low land values.
If the land value is high, a landowner must generate more income to cover their high tax bill. This is often accomplished by constructing taller buildings, offering more units on which to collect rent. However, if the land value is low, the incentive to build is low as well. This will be reflected in the height of the building, or the lack of a building altogether in areas further from city centers.
Incidentally, even if the Land Value Tax paid by a particular owner is low, there is still an incentive to not own enormous tracts of land for mere speculation. Speculative gain becomes less attractive when any increase in land value will be accompanied by a heftier tax bill. This means that it is easier for small-scale farmers to get started, whereas the current tax system favors large monoculture agribusiness.
Who Pays And Where?
A progressive income tax is said to be pro-poor because those with more income pay more than those with little. In theory, this is a proxy for taxing all wealth progressively, but it is not so in practice. Land value taxation is progressive in a spatial sense. Those who own the best locations pay much more than those who own less valuable locations, and renters do not pay taxes at all. The Land Value Tax curve is very steep as you can see in Figures 2 and 3. This means that wealthy landowners pay a vastly higher tax than owners of outlying parcels.
Of course, in practice land values do not make a perfectly smooth curve. Below is a land value map of Chicago, looking south toward the loop along Lake Michigan.
Tax The Rich
A square meter of land in New York City will buy an acre of land in upstate New York. An acre of land in some parts of the Saharan desert are the price of a hamburger. Yet, $120,000 will only buy you a square meter of land in Pollock’s Path, Hong Kong. Who owns the most valuable land in Chicago, in the City of London financial district, or in New York’s Times Square and on Wall Street? There are not your average Joes. By shifting to a land value tax, the vast majority of revenue would come from the super-rich, not from regular working people. However, unlike taxes on income and abstract financial instruments, land can not be hidden in Swiss bank accounts and the Cayman Islands.
Some worry that multinational corporations will leave high-value areas for this reason. However, if a few decide to leave, it will be those that take up lots of space and hire few employees. Land values and taxes will drop until an equilibrium is reached. What remains are the productive businesses who use space for employees rather than cars, companies who pay their fair share of taxes and contribute to the economic vitality of their communities.
Leave Ma & Pa Alone
Productive businesses will get a boost. With zero taxes on wages and sales, hiring people and selling things will be less expensive. Such businesses will also benefit from lower rent, especially for the average ma and pa shop.
How Is A Land Value Tax Levied?
The Land Value Tax is not the same as a property tax, which is levied on both land and buildings. The Land Value Tax is levied on land only, not buildings. All land is taxed at the same rate, but landowners near the city center naturally pay more than those further away. Let’s imagine for example that the Land Value Tax is set at 10 percent of the market value for all land.
The amount of tax paid by each owner varies as a function of the land value only. The tax rate does not vary from plot to plot, and the value of the building on a given plot will not change the amount of tax paid by the owner.
Hypothetically, land in the city center assessed at $1,000/sq ft will pay $100/sq ft in Land Value Tax per year. Land relatively further from the city center assessed at $100/sq ft will pay $10/sq ft in Land Value Tax per year. Breaking the tax into monthly payments is ideal.
In order to have the effects described in this article, value assessments need to be accurate and the Land Value Tax needs to be high enough to generate the right incentives. LVT is not an additional tax, but a replacement for most other taxes like those on wages and sales. Pollution taxes and a few other good taxes should remain, but the Land Value Tax would be the primary source of revenue.
No Taxes, Just Rent.
So, what does all this mean for the average person? People who do not own land do not pay any taxes under Land Value Taxation, including wage or sales taxes. Public transportation could be made free because such services increase land values and thus revenue.
Many landowners would actually pay far less than they currently do in property taxes, since they own land at the periphery and beyond. Add to that the savings from other types of tax being eliminated, and their total tax burden would be drastically lower as a group. Almost all revenue would come from ultra-wealthy central landowners. If a rural area did gentrify quickly, landowners could protect themselves by purchasing insurance in advance. Those wishing to become landowners pay a lower purchase price, since buyers and sellers know that the Land Value Tax must continuously be paid.
Apartment Rent Decreases
We know that if the supply of something rises, the price falls. If more space is available in and near urban centers, ceteris paribus, the rent decreases, facilitating more urbanization and reversing sprawl over time. Increasing the supply of residential and commercial units will likely become a much faster and cheaper process as advances continue to be made in modular construction and 3D printing. Buildings can be stacked upon one another like legos as demand for particular locations rise or even fall. With the removal of taxes on buildings, labor, demolition, and other construction inputs, developers will be able to streamline the process. The seven-storey apartment building below was built in 11 days, even in the absence of Land Value Tax incentives.
High Rises, Not Just For The Rich
Fancy high-rises currently cause displacement and are often built with speculative returns in mind. Land values are going up, but these values are not being taxed away, as they would under Land Value Taxation. Rather than build for the people who need housing now, property owners build for the rich elite that will occupy the units later, perhaps years after.
Thus, whole buildings sit vacant in the United States, while entire cities sit vacant in China! Under Land Value Taxation, an urban landowner would have to run at an exorbitant loss to accomplish this, and would instead opt to provide relatively less extravagant units in the short term.
Under Land Value Taxation, new luxury developments or an influx of rich people to an area would spur the creation of more housing units nearby. The first thing to be pushed higher is land values, then tax, followed by development incentives, and the area’s housing supply.
This greater supply of housing units, in turn, lowers apartment rent relative to its high just before additional construction.
The Land Value Tax in no way terminates or precludes existing safeguards protecting existing tenants from gentrification, safeguards like rent control. If rent control were still in place under Land Value Tax, developers would simply have to find ways to create more units at a fixed rent in order to generate the required income to pay the tax.
The land value tax would make rent control unnecessary, but that is a decision financially liberated renters can make for themselves after land value tax has been in place for a long while. Remove economic chains before crutches. Let people decide for themselves what protections they want to pare back after they have the luxury of thinking in terms of economic efficiency and utilitarianism rather than their day to day survival.
Tenants would benefit from land value tax for three reasons:
- First, it would make cities more compact overall, so affordable housing units will tend to be closer to the city center than they are now;
- Second, a city would have a stable and ample source of funding for public transportation, services, a citizen’s dividend, public renters insurance, etc.
- Third, it would reduce the pervasiveness of land speculation, which causes the belief that housing markets don’t work and must be interfered with. The reason for this market failure is speculation, not new construction per se. Speculation, holds down supply, creating a sense of scarcity and desperation, like a few people hogging all the seats on the metro train -while pregnant women and the elderly are forced to stand, cramming together near the doors.
In truth, the Land Value Tax would be an enormously powerful tool for fostering inclusive communities that benefit everyone.