Why is it that, every year, the average American spends almost an entire work week and more than a week’s pay stuck in traffic?
Why are we wasting so much time, money, and gas making our daily rounds? Is there a better way of doing things? We all know that better public transportation and more fuel-efficient cars would help. But, to focus solely on better transportation is to ignore the elephant in the room. Instead of focusing on how to get from A to B faster, we ought to ask how to make the distance from A to B shorter.
How can we create walkable cities with affordable housing, a strong sense of community, more parks, the means to innovate, explore, create art, enjoy nature, and all of the other things that make communities thrive? What’s the secret?
You’ve just moved into a new apartment. The mattress is in the middle of the floor, your dresser is blocking the doorway, random piles of clothes, a suitcase, etc make it impossible to walk around. Your new roommate asks if you’d like some more furniture. Things already feel cramped. You might not think there’s enough space, but if you were to simply organize your stuff, you could add a great deal more, while simultaneously making it feel more spacious. Push the bed and dresser against the wall, slide those suitcases under the bed, sort the random mounds of clothes with stacking containers. Presto, you can actually walk.
We can make similar use of space in cities. Everybody can have affordable housing near job opportunities, parks, public transportation, and nature. However, many vacant and underused sites make this impossible, dividing neighborhoods, forcing people to sprawl to outlying areas, increasing demand for oil (war?), and causing a great deal of ecological damage in the process. Car culture ensues; walk-ability and the social nature of space decays.
Increasing commercial and housing units within a city center can accommodate more people from outlying areas. Taxing land value (not buildings) encourages such development. This is because land owners require a higher return to cover the land value tax and still make a profit. City centers have the highest land values, land value taxes, and thus the strongest incentives to develop vacant and underused sites. Done properly, as the main or only tax, the land value tax (Cet par) increases the housing supply and lowers rent in and near city centers. As such, it can reverse sprawl in the long term.
Up & In vs Down & Out
Our modern sprawled-out reality has taken a long time to get as bad as it is, lots of resources have been invested in building those ridiculous big-box stores, McMansions, etc. It stands to reason that the effects of the remedy outlined in this article would be gradual as well. A high land value tax, uniformly applied, can gradually reverse sprawl, putting vacant and underused land to its highest and best use. There are many other positive social, environmental, and economic effects of land value taxation. However, many of these other positive effects can only be understood by first understanding the spatial effects. Under such conditions, cities develop up and in toward the city center, instead of down and out, away from the city center (see Image 2 below).
Comparing “Land Value Taxation” with “Current Sprawl”
See Image 2 above showing a cross section of a typical city’s skyline. Compare the top image “Current Sprawl” to the lower image “Land Value Taxation.” There are many areas in the city with nothing but vacant lots (red X marks). This forces the total surface area used for buildings, asphalt, roads, etc to be greater than the land value tax city, meaning less space for buildings and parks.
In the land value tax city, all of the space in the central business district has either been built upon or converted to park area and other forms of public space. More than just filling in the vacant land though, buildings are consistently higher closer to the central business district. More people have the opportunity to live and work closer to the urban core, if they choose to.
With the land value tax, much of the wild areas destroyed by current sprawl (Image 2.) are reoccupied by trees and other natural features, though some people choose to remain far from the city. Farms, also represented by green, are closer to the city. Thus, while more land is available for nature, more farming takes place closer to where it needs to be transported. The land value taxation city also has a great deal of green on buildings, indicating that it incentivizes ecological architecture in the form of vertical, rooftop, and green wall farming.
How Land Value Taxation Improves Density
Use it or lose it.
See “Current Sprawl” (Image 2.) where the red X marks appear. These represent vacant lots, ground level parking -barren and paved areas that are left unused for long periods of time. Consider the X furthest to the left. This is an extremely valuable piece of land in the central business district. If a tax is applied to the value of land here, a land value tax, the total tax paid will be drastically higher relative to land further to the right.
Imagine that you are the owner of that vacant lot. Will you continue to leave it unused if the tax bill is high? Without land value taxation, you may have left the land vacant because you did not want to take a financial risk to build anything. You were simply waiting for the land value to rise. However, that rising value is taxed away under land value taxation. Thus, you start to view owning the land as more of a burden than a passive investment.
You will decide to either start generating income on the land to pay the tax, or sell it to someone who will. Similarly, if you own a short building among tall buildings, you will be incentivized to build higher, to generate more income in order to pay the tax and keep what is left over. Take this McDonald’s in Manhattan for example (Image 6). The landowner here would be incentivized to add residential and commercial units above it in order to pay the tax.
Use it or lose it, as the saying goes. While there would be no law that said the land must be used for a particular purpose, people would want to use the land well out of financial self-interest. Yet, they would inadvertently be doing what is in the best interest of everyone.
Cumulative Spatial Effect
Under land value taxation, all landlords are faced with the same incentive, meet the market demand for space in the area, by building more apartments, offices, vertical farms, etc (where they are demanded) or sell to someone who will. When many landlords respond this way, it means that more of the demand to use central locations is satisfied and there is less demand to use outlying areas.
The areas with the highest land values pay the highest land value taxes. Thus, these high value areas also have the strongest incentive to build high, while those areas that are lower in value have less incentive to develop. Incidentally, it also means using all available constructed space efficiently. Many centrally located places that would otherwise close early in the day or on the weekend could be used 24/7. For example, a coffee shop by day can be a bar or restaurant at night. Rooftops, and other unused areas, can be used for growing food. The possibilities are endless.
As explained in the sections below, the incentive to build high exponentially decreases moving away from the city center. That is why Image 2’s land value tax scenario has so many tall buildings in the center of the city and so few buildings as one moves further away.
Boost to Urban Farming
Farming can use very little land and still produce a lot of food. The video below shows a man who produced a million pounds of food in one year on only 3 acres. His permaculture farming techniques could be stacked closer the urban core and spread out moving away from the city on community farms. Necessity is the mother of invention and practices could be widespread with the proper economic incentives in place. Such an operation requires a lot of labor but little land. Therefore, if taxes are shifted off wages and onto land, these activities become more feasible, practical, and profitable.
There are many people who prefer to be more or less secluded in nature, to not hear jack hammers and honking cars. There is nothing about land value taxation that forces those that want their space to live in dense areas. Under the current system of sprawl, however, those who venture out into nature to escape the hustle & bustle soon find that others have followed them. Since land value taxation accommodates those that want to live in dense areas, it means that those who do not can enjoy more peace and quiet. Individuals who prefer a balance can enjoy nature without having to travel long distances, deal with traffic, etc to reach the city center. This is because activities move up and in toward the city center under a land value tax. There are other important checks on density under land value taxation as well.
More Idyllic Farming Communities Nearby
Environmentally destructive farming practices, such as widespread use of pesticides, only make financial sense when land is cheap relative to labor, but the equation is reversed when taxes were moved off of laborers and on to land. Though cities would welcome more people, it would also make living and working in outlying areas much more affordable too. This is because the cost to buy or rent rural land would decrease and wages for rural workers would increase.
Those wishing to live more traditional rural lifestyles would not be under the compensatory power of a sprawling economic system to live and work in cities. This ultimately would give people greater freedom with respect to where and how they lived. Today’s huge monoculture plantations would be broken up, and would employ more labor. An increased demand for such labor would further increase wages. For all of these reasons, cities could develop much less “up and in” than that shown in Image 2, but it would not be because people were forced to live far away. They would not need to commute as frequently as those who live in the center of the city. When they did commute however, it would not take as long, considering that such farming communities would be closer to cities.
“No one would want more land than he could profitably use. Instead of scraggy, half-cultivated farms, separated by great tracts lying idle, homesteads would come close to each other. Emigrants would not toil through unused acres, nor grain be hauled for thousands of miles past half-tilled land.” -Henry George (Social Problems)
More Public Parks
Image 7. Parks raise the value of land and are thus encouraged under land value taxation. Properties near central park are vastly more valuable than those even a few blocks away.
Parks raise the value of land. Despite the already astronomically high land values in Manhattan, those locations with views overlooking Central Park (Image 7) are vastly more expensive than those only a few blocks away. Land value taxation is often thought of as a “single tax” or “central tax.” Thus, if implemented in this way, governments are required to obtain most or all of their revenue from land value taxation. Any increase in tax revenue must come from increases in land value.
To raise annual revenue, governments must construct parks, public spaces, infrastructure, etc that raise land values. This pushes landowners to build higher (in central locations), accommodating more renters, as explained before, but it also means that government has an incentive to create and properly maintain such spaces if they want to have the necessary revenue to fund new activities.
People have to actually like the spaces in order for government to be able to increase revenue. If people don’t like the public space, they won’t pay more to live next to it, which in turn means that land values do not increase. Thus, the land value tax will not bring in more revenue. Similarly, if the area feels too dense for prospective tenants and buyers. that will lower land values (revenue) too. The nature of government intervention in building codes for safety, sunlight, wind, etc will likely better reflect people’s needs rather than poor bureaucratic approximations of those needs. This concept applies to roads, sidewalks, and many other public works.
One anomaly of the urban environment is the privately owned public space (POPS/POPOS). These are sometimes on upper-floor terraces of luxury buildings, rather than street level. From the sidewalk, they often implicitly communicate [no trespassing, keep out] despite their nominal public status. Even the street level POPS have such an exhaustive set of rules that they serve almost no purpose other than sitting (but not on the ground). With a uniformly levied land value tax, such areas will probably become much more useful or revert to regular public spaces. This is because land owners will not want to hold such spaces vacant for speculative purposes, nor will government want to pass up an opportunity for more revenue by exempting such spaces, as they would have little incentive to be used in a manner that increases land value (revenue).
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.
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.
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, the Saharan desert, Antarctica, everywhere perhaps. This faulty understanding stems from thinking that the incentive to use land intensively applies to areas with low land values.
If the land value is high, the tax bill for the owner is high too. To cover the tax and make a profit, the owner must find ways to generate more income than they would have needed in the absence of the tax. This is often accomplished by constructing taller buildings, more units to collect rent from. 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 the city center.
Incidentally, even if the land value tax paid by a particular owner is low, there is still an incentive to not own enormous tracks of land for mere speculation. This means that it is easier for small scale farmers to get started, instead of the current tax system which favors large tract monoculture agribusiness.
Who pays and where?
A progressive income tax is said to be pro-poor because those with more income pay more than 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. The land value (tax) curve is very steep as you can see in Images 8&9. This means that wealthy landowners pay a vastly higher tax than owners of outlying parcels.
Of course land value is not a perfectly smooth curve as seen above. Below is a land value map of Chicago, as seen looking south toward the loop along Lake Michigan. The height of the squares are proportional to the plot’s value. Notice that the land values in central Chicago are so high that the screen cannot capture their full height. 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.
Tax the Rich
Who owns the most valuable land in Chicago (image 9 )? Are these your average Joes? This is the heart of the financial district in Chicago, Wall Street & Times Square in New York, The City of London’s financial district, the richest people in the world own this land. By shifting to a land value tax, the vast majority of revenue would come from the super-rich, not 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 areas with strong land value taxes for this reason. There surely will be defectors, Wall-Marts with massive parking lots and single story McDonald’s restaurants. These companies could adjust their business models to take up less space and leave more room for other businesses to compete. However, if a few decide to leave, those that take lots of space and hire few employees, land values (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 the community.
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’ & pa’ shop.
How exactly is a land value tax levied?
The land value tax is not the same as a property tax. Property taxes are 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 land owners near the city center pay more than those further away. Let’s imagine for example that the land value tax is set at 10% of the market value for all land. The rate does not vary, only the land value. Value is what determines how much is paid by each 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. This is simply because 10% of a larger land value is greater than 10% of a lower value. Breaking the tax into monthly payments is ideal.
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.
In order to have the effects described in this article, assessments need to be accurate and the land value tax needs to be sufficiently high so as to motivate landowners to use the land well. . It is not an additional tax, but a replacement for most other taxes like those on wages, sales, etc. Pollution taxes and a few other good taxes should remain, but the land value tax would be the primary source of revenue. There are many approximations of a single tax on land values, but they do not collect sufficient land value, more precisely “land rent” for the economists reading this, to generate the large scale effects described in this article.
The Average Person
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. It would still be prudent to charge pollution taxes, congestion charges for cars, car parking fees (higher during peak hours), etc but less sprawl would help accomplish the same ends on its own. Individuals could avoid these other environmental taxes simply by not wasting electricity, reusing plastic bags, etc. Public transportation could be free because such services increase land values and thus revenue. Again, see the public revenue model endorsed by Nobelists Joseph Stiglitz and Willam Vickrey, the Henry George Theorem.
The land value tax does not preclude rent control, tenants’ rights, renter insurance, or other measures designed to protect renters, though it does make these protections less necessary. See the section “High Rises, Not Just for the Rich” below. The two can be used in combination to create more affordable housing for everyone.
What about the average land owner, those who do not own highly valuable urban land? Many of them would actually pay far less than they currently do in property taxes, since they own land at the periphery and beyond. Add to that all of the money these outlying land owners will save in other taxes (taxes on buildings, income, wages), and their total tax burden would be drastically lower as a group. Almost all revenue would come from ultra-wealthy city center landowners. If a rural area did gentrify quickly, landowners could protect themselves by purchasing insurance in advance. Those wishing to become land owners 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. People want short commutes. Even if they prefer not to live in tall buildings, they would still prefer to travel short distances to enjoy the many amenities that cities offer. The more ground level units, parking lots, etc between them and the city center, the longer it takes to reach their destination. Thus, if more space is available where people want it, ceteris paribus, the rent decreases, facilitating more urbanization and, in time, reversing sprawl.
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, people will find ways to streamline the process. The 7 story apartment 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, banishing people from their neighborhoods. This effect would be greatly diminished if a land value tax were in place. In the current system, fancy high rises are 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 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, if a group of rich people move into an area, it would spur the creation of more housing units nearby. Structures would indeed be rearranged, but people wouldn’t be pushed far away, as they currently are. With a land value tax, the following happens when rich people quickly move into an area.
↑ land value → ↑ land value tax → ↑ development incentive → ↑ the area’s housing supply
This greater supply of housing units in turn lowers apartment rent relative to its high just before additional construction. Even though some areas of a neighborhood may fall to the rich newcomers, there would be a fresh supply of units built nearby.
Notice that this pattern of development is exactly what has been described for land in the city center. If land value goes up, landlords have the incentive to accommodate more people closer to where they want to be. Of course, the high income tenants are the ones that landlords can get the most rent from, and they will still be their priority for this reason. Once again though, instead of supply being limited by speculation as it currently is, new affordable housing will be constructed quickly nearby.
Much of the following only applies to tenants in big cities, cities currently gripped with displacement. 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 the city 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 (shorter commutes), services, a citizen’s dividend, public renters insurance, etc.
The pervasiveness of land speculation is why everyone believes 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.