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Module 3: LAND RIGHTS AND LAND VALUE CAPTURE

1 Brief Review of Modules One and Two

1.1 In Module One – “Land Rights and Poverty” – you learned that the ownership and control of land is highly concentrated worldwide and that the human right to land and natural resources is can seldom be found in human rights documents. Democratic institutions have not affirmed the human right to the planet as a birthright, even though land is a gift of nature and without it we cannot live. Module One drew your attention to the injustice of so many people living in poverty when there is land available from which they could make a simple livelihood – if only they had access.

1.2 Module Two –“ Land Price and the Law of Land Rent” – gave a deep historical context (albeit a European one) to our current land problem by describing how land, formerly viewed as a commons, was ruthlessly privatized and enclosed for the exclusive use of a few, resulting in the impoverishment of vast numbers of people. European colonization, which began as internal colonization, spread to vast reaches of the world as this same process of land and resource grabbing continued under the guise of “improvement” and “development.”

1.3 You learned that when land is treated as a commodity for profit and speculation, land prices eventually rise faster than wages of working people. Careful study of the “law of land rent” shows that this problem is the root cause of the maldistribution of wealth. Now just a few hundred multi-billionaires have more wealth than half the population of the planet. Those who have no or few capital or land assets must then borrow and pay interest for housing mortgages or pay high rents relative to wages for the rest of their lives.

2 What is Land Value Capture?

2.1 Module Three – “What is Land Value Capture?” – introduces a practical way to build a fair economy via an ethical and practical approach to public finance policy. Simply put, Land Value Capture equitably returns to the people as a whole the value – “land rent” - that attaches to land as economic development proceeds. Taxes on wage income and productive activities can then be reduced or ideally, entirely eliminated.

2.2 When land rent is captured for social purposes and needs, there is no private profit to be made in the unproductive activities of land speculation and real estate investment. Thus land is no longer treated as a for-profit commodity, and the boom (and consequent bust) cycle is eliminated. Land prices are stabilized. In areas experiencing a land price bubble the land costs are reduced significantly, giving more affordable access to land for those who need it. In areas where a few have been hoarding or underutilizing land, land value capture is a steady nudge urging these lands to be released so that others can use them.

2.3 Full implementation of land value capture policy provides a solid source of public revenue to pay for social needs such as water and sanitation systems, education, roads for transport and/or public transport systems, and other public services.

Montessori classroom Signatures against poverty
2.4 When land speculation is no longer an economic incentive, funds previously directed to profiteering in land become available to invest in productive enterprise and for improving the stock of housing and other buildings. With no or greatly reduced need to borrow to buy land people are also freed from the extra burden of high land mortgage interest payments..

two women working 2.5 Production of genuinely needed basic goods and services is encouraged in yet another way with the land value capture policy approach. A corollary of the public collection of land rent is the reduction or best the complete elimination of taxes on wages and productive capital. Removing the tax burden from the backs of workers means they will receive their full payment for their labor. People who want to begin their own individual or family owned enterprise or cooperative will be encouraged to do so because their productive capital – tools, machines, communication and other expenses – would not be taxed. Nor would houses and other buildings be burdened with taxes, further increasing the capacity to buy, build and renovate needed dwellings and other structures.
"Pure rent is in the nature of a ‘surplus’ which can be taxed without affecting production incentives"
- Samuelson Hancock and Wallace, Economics, 2nd Australian ed., p. 623


3 Land Value Capture: “Third Way” Economics

3.1 Land value capture is a key policy for building a “third way” economic system which affirms the positives from both the right and left sides of the political spectrum.

3.2 From the right, land value capture retains and furthers the FREEDOM to produce and exchange wealth by untaxing productive efforts and maintaining land affordability. The private sector thrives when transportation and other public benefits are available. Land value capture is a correction to a flawed market system which concentrates wealth in the hands of a few.

3.3 From the left, land value capture is based on the fundamental and equal economic human right to the basic means of all production – surface land and natural resources. The left’s concern for FAIRNESS in the distribution of wealth is affirmed and furthered via land value capture when it is correctly and fully implemented. In tandem with the reduction of most other forms of taxes the stronger the implementation, the faster the wealth gap closes.

Read about Dividing the Fruits of Labor at www.henrygeorge.org/isms.htm.

3.4 In short, this third way policy furthers both economic freedom and fairness, efficiency and equity in wealth production and distribution. People benefit when their wages are not taxed and land and thus housing prices are stable and affordable. Everyone’s life improves when there are well-funded public benefits and services such as sanitation, transportation, education and health care.

3.5 Australia provide evidence of some of these affects. This country's states have had significant experience in land value capture, reported in numerous studies over at least 60 years, proving the comparative advantages of the system.

  • Malvern (city): A marked construction spurt was experienced after the municipality adopted land value capture, the most extensive building occurring in Malvern's most blighted neighborhoods. Before the tax shift, they accounted for only 22% of building permits, but in the 5 years following initiation of land value capture, that percentage climbed to 47%.
  • Victoria (state): 12 studies of rural communities show that towns using land value capture averaged construction and renovation growth of 29%, compared to 2.6% in neighboring communities which taxed buildings much more heavily than land values.
  • Western Australia (state): 17 localities taxing land values only, experienced a 34% increase in total number of new dwellings built during the period studied, compared with 0.02% decrease in new dwellings in nine neighboring localities taxing buildings as well as land.
3.6 Harrisburg, the capitol city of Pennsylvania, was once the second most economically distressed city in the US and had high unemployment and large areas of blight and boarded up buildings. Harrisburg gradually implemented land value capture and now taxes land values six times more than building values. During a 20 year period thousands of buildings were renovated, good jobs created, and there has been very significant drops in rates of crime and arson. The city’s economic resurgence has garnered national acclaim and Harrisburg has won a number of civic awards.

3.7 Mayor Stephen Reed has written that land value capture “has been and continues to be one of the key local policies that has been factored into this economic success."

3.8 In the case of Allentown, Pennsylvania’s third largest city, the citizens pushed for land value capture by means of a home-rule charter initiative. They voted for a municipal charter that froze or eliminated all other taxes and permitted tax increases on land values only for 12 years. This city now experiences self-sufficient economic revitalization, the logical and expected result of this kind of tax shift. Allentown's new construction and renovation grew by 82% in dollar value, in the 3 years after the system began. This was 54% more than that of Bethlehem, a nearby city of similar size, despite the latter's receipt of much federal grant money.

3.9 In none of the above cases was there full land value capture and national income taxes were still a burden on workers. But since these well-studied examples (just a few of many positive experiences of land value capture around the world) show substantial improvements it can be anticipated that capturing 100% of land values, while shifting taxes away from labor and productive activities, can result in prosperity for all.

4 Land Value Capture is a Sufficient Source of Public Finance

Most often, the taxable capacity of land is such that land value capture can yield more than local government needs to fulfill its basic responsibilities for the provisioning of basic services for all.
– Joshua Vincent, Director
Center for the Study of Economics


4.1 Economists who have an inadequate understanding of land rent sometimes state their opinion that it is an insufficient base for public finance. They say that land rent cannot provide the required funds needed to finance social necessities. This mistaken perception can usually be traced to the lack of up-to-date and correct land value assessment records. Economists with expertise in land value capture policy have determined that land rent is in fact a substantial amount of the GDP of most countries, ranging anywhere from 20% to 30% and even more.

4.2 For example, please carefully study this graph compiled by land value capture economists with Land Values Research Group in Australia:


4.3 You will note that in 1974, resource rent was only 12% of GDP while net incomes of labour and productive capital was 63%. Taxes amounted to 25% of GDP. By 2004, as the overall economy grew steadily during the twenty year time period, we see the workings of the Law of Land Rent. Resource rent has increased to 31%, or nearly one third of GDP. The tax burden increased 6% during that period while incomes of labour and capital took a big hit, going down to just 38% of GDP, a loss equal to 25% of GDP.

4.4 Taxes currently fall mostly on labour and productive capital. Still using the Australia diagram as our model, removing the 31% of GDP of taxes and adding it to the return to labor and capital increases that percentage to 69%, which is 6% higher than in 1974. The 31% of GDP which is resource rent would be captured back for the benefit of society as a whole. It would adequately provide the funding base for education, transportation and other public infrastructure, police and fire protection, good urban and regional planning, etc. With incentives for investing in the “bads” of profiteering in the gifts of nature eliminated, both public and private funds would be directed to the “goods” that people need and want.

LVRG graph: Earned and unearned incomes, 'Classical' distribution of GDP 1911-2005

4.5 The following diagram is another way of representing the information based on the Australian data. “As Is” shows the three way division of wealth among:
  1. Rent
  2. Taxes
  3. Net Income of Labor and Productive Capital


4.6 The second diagram - “If We Captured Land Values”- is an ideal model which has eliminated taxes on work and production with full rent captured for the benefit of society as a whole.


4.7
"How much revenue can land yield by itself?" I assure you it can yield more than local governments need. The taxable capacity of land is camouflaged in our times by a consistent modern tendency to underassess it, relative to buildings. – Mason Gaffney, The Taxable Capacity of Land


4.8 In his recent book Double Cross Ron Banks has estimated that if the UK were to raise its revenues from natural resources rather than use existing taxes, each man, woman and child would be better off by an astonishing £15,000 per head, per annum. If Banks is only half-right, this would mean that a family of four could be £30k a year better off!

4.9 Optional Reading: Who Says Cities are Poor? They Just Don't Know How to Tax Their Wealth!

4.10 Student Activity: Please read at least four of these case studies of Land Value Capture and then write a 500 word essay summarizing what you have learned so far in this module. Following your essay write down any questions you have about this material and send to your course instructor.

5 Rent-Seeking

5.1 Money is a symbol of wealth, it is not wealth itself although of course it is used to acquire tangible wealth. Money is an efficient mechanism for exchange of wealth. But when land is treated as a market commodity with a monetized price, the price escalates and inflates. There are no land factories making more land so that supply can meet demand at an affordable cost. A productive economy then evolves, or rather devolves, into a “rent-seeking” economy.

5.2 Considering the current nearly worldwide rent-seeking system, it is no surprise that workers desire to own homes not only as a basic necessity but also so in order to have a small stake in the land price inflation game. As wages lose purchasing capacity, the average working person is vulnerable to all sorts of schemes through which they can buy a tiny piece of land for their house to sit upon. The recent and ongoing collapse of the home mortgage system in the United States, sending shock waves throughout the banking systems of the world, is one indicator of the problem of treating land as a for-profit market commodity.

5.3 Here are two more examples of how an improperly harnessed tax system can have disastrous results for so many people:
  1. As China's economy rapidly heats up, those dealing in rising urban land values have been making enormous profits from real estate while others plunge into poverty. For instance, Yuchen Zhang, a Beijing real estate developer, built his $50 million castle complete with moat, uniformed guards, and a spiked fence to defend it. The 800 peasants who used to grow wheat on Zhang's 1.5 square mile estate are now landless.
  2. The Rand Corporation, a U.S. think tank, in its 2001 annual report, listed the April, 2001, sale of 11.3 acres of its Main Street, Santa Monica, California property for $53 million, or $4.69 million per acre. The gain on sale of Rand's land was shown to be $44.984 million, making the original purchase price $8.016 million, or $709.38 per acre. Who created this land value boon for Rand? The 84,084 people of Santa Monica as a whole, who would have each received $534 if the land value increase had been captured by the city and distributed to all residents as their fair share of the profits from such a spectacular rise in city land values.


5.4
Pius Fischer in his book Rent-Seeking,Institutions and Reforms in Africa...identifies rent-seeking behaviour as one of the main causes of poor economic performance, observed, among other places, in many countries of Africa. Rent-seeking describes the ability to capture incomes without producing output or making a productive contribution.
In a Rentier Economy, The Landlords Get the Free Lunch

In a rent-seeking economy, as land prices inflate the “haves” invest their funds into capturing the economic surplus represented by land rent and thus become the “have mores.” The private appropriation of land rent via real estate investment, speculation and profiteering is an unproductive activity lacking any social utility. Rent-seeking is plain and simple an efficient and effective way to concentrate wealth and power in the hands of a few while making life that much more difficult for everyone else.

5.5 Student Activity 1: Please give one or two examples of individual or institutional land rent-seeking in your own city, region or country:

5.6 Student Activity 2: Do a websearch using the phrase “rent-seeking” and scroll through a few of the pages of articles online. What did you learn?

5.7 Optional reading on general rent-seeking: High-Level Rent Seeking and Corruption in African Regimes: Theory and Cases.

6 Real Estate Speculation and Land Price Bubbles

6.1 One of the most destructive aspects of finance capitalism is the borrowing of money to purchase land in the expectation that the land rent will increase in order to repay the loan while making a profit from land. In other words, borrowing money to play the game of rent-seeking. There may be different phrases in different languages, but in English this game is sometimes called “making a killing in real estate.”

6.2 Meanwhile tens of thousands of people die of hunger each day because they cannot access productive land from which to make a living. Just as slavery was abolished, so must be real estate speculation and land hoarding.

6.3


6.4 Land speculation produces no tangible wealth and leads to land price bubbles. When the bubble bursts, the banking system managers try to stabilize the situation by manipulating interest rates. But if the interest rate is placed too high, the economy slows and the “real” economy goes into recession. Workers lose their jobs and source of income. If the interest rate is placed too low, the real estate speculation game starts again and the land price bubble (and thus the housing price bubble) begins to grow. Once again, those who must work for their living have to work longer and harder to buy their house lot. When they take out a mortgage before the bubble bursts they are left with negative equity.

6.5


6.6 There is in fact no “just right” interest rate when the land problem is the real culprit. The average person suffers if the interest rate is high or low. See-sawing the interest rate back and forth in this way is commonly understood as an attempt to stabilize the economy but the end result is the same. The rich get richer at the expense of the rest. The wealth gap grows, sometimes faster, sometimes slower, it is just a matter of speed. Land rent is privatized and those who work for a living are penalized.

6.7


6.8 Note again what you have learned about the two dimensions of the land problem: (1) a small percentage of people now own and control a largely disproportionate amount of land and natural resources and (2) as development proceeds, land rent increases faster than wages and the return to other economically productive activities due to the treatment of land as a market commodity.

6.9 The core solution to both market malfunctions and the growing wealth gap lies not with interest rate manipulations but in solving the land problem. This is the primary goal of land value capture and from which flows a number of additional social benefits which we will describe as we continue through this Module Three.

6.10 Student Activity: Please view this Land Values Research Group powerpoint on Land Price Cycles and Wages: www.earthrights.net/pubs/australia.ppt

6.11 The land problem is an ancient one and land value capture or equitable land distribution was used in centuries past to restore economic justice. In this next section you will briefly review a few of these ancient truths.

7 Ancient Truths, Ancient Roots

7.1
Confucius (BC 551-479), Chinese philosopher, said, "When the Great Way prevailed, natural resources were fully used for the benefit of all and not appropriated for selfish ends... This was the Age of the Great Commonwealth of peace and prosperity."

Mencius, the philosopher and contemporary of Confucius in ancient China, said: “In the market places, charge land-rent, but don't tax the goods.”

Sun Yat-sen (1866-1925), Chinese revolutionary, "Father of the Nation", first president of the Republic of China, wrote: The (land tax) as the only means of supporting the government is an infinitely just, reasonable, and equitably distributed tax... The centuries of heavy and irregular taxation for the benefit of the Manchus have shown China the injustice of any other system of taxation… When modern, enlightened cities levy land taxes, the burdens upon the common people are lightened, and many other advantages follow.”


7.2 Economic historians (see the chapter on Mesopotamia and Classical Antiquity by Michael Hudson in the book Land Value Taxation Around the World) who have studied systems of land tenure and taxation back through antiquity have discovered that the more fiscal policy (from the Persian word “fisc” the basket used to collect money or goods from Persia’s provinces) is related to “benefits received” and “ability to pay” the fairer and more democratic the society. But as public and communal lands were privatized, wealthy landholders increased their political power and democracies devolved into oligarchies. The richest people avoided