Earth Rights Institute - Working Groups

Overall Land Value Capture SWOT

Summary

In economics “rent” is defined as payment in excess of necessary supply price. Since the supply price for land is zero, as it is a gift of nature, any payment for land is rent. Land value capture is a method of returning land rent to the public sector. It is an equitable, efficient and sufficient form of public finance.

The classical economists had a clear understanding of how and why land values increase as population increases and society develops. David Ricardo was the first to formulate the Law of Rent, building on ideas of those who preceded him. He wrote that, when an economy is growing, “rent is not only absolutely increasing, but that it is also increasing in its ratio to the capital employed on the land.”

Adam Smith and Henry George asserted that gains in land value/rent, generated by the efforts of the community as a whole, should be captured for the benefit of the community as a whole. George, in his book Progress and Poverty, explained how the failure to capture increase in land values for public benefits eventually and inevitably results in significant market distortion, severe maldistribution of wealth, and numerous social problems.

Neo-liberal economists eliminated land as one of the three factors of production, subsuming it into capital. They base their arguments on only two factors, labor and capital. Their variety of economics also discarded important concepts about what happens to land values as market economies progress along with the understanding of the root causes of the wealth divide. (For more information on this topic see The Corruption of Economics by Mason Gaffney and Fred Harrison.)

The theoretical and analytical insights of classical economists concerning land and land values hold important keys for how to harness market forces to more readily secure affordable access to land, hence enabling people to procure adequate shelter and fulfill other basic needs. Correcting market distortions by capturing land values for use by the public sector while reducing or eliminating taxes on labor and production, is a major one of those keys.

The Law of Rent explains how land values and consequently housing costs rise faster than wages, to the point where all advances in technology and wealth production inevitably push more and more workers to mere subsistence living conditions and worse. We see the situation quite clearly now in developed countries where, for most people, housing can only be owned by means of mortgaging, which means long-term, compound- interest debt, with a steadily escalating portion of the individual¹s income or wages going toward monthly mortgage payments. Those who rent housing live, for the most part, at or near subsistence levels, with little or no savings. Renters pay approximately ten times the cost of their rental unit over the course of a lifetime.

Developing countries must guard against replicating this system. They can instead move forward with properly harnessing economic incentives for both efficiency in wealth production and fairness in wealth distribution via land value capture policy.

Land economists estimate land and resource rents to be 30-40% of Gross Domestic Product (GDP). Yet worldwide, 94% of taxes fall on labor and productive capital, on average, with less than 6% on land and resource rents. The property tax, historically levied primarily on land value and a major source of public funds, is now a relatively small tax in most countries compared to income and other taxes. And within the property tax as currently structured in most places, around 70% of the taxes are assessed on buildings and just 30% on land.

Economists who specialize in property taxation tend to agree that the virtues of a tax on land values are contradicted, if not negated, by a high tax on improvements. They regard taxing improvements as a disincentive to construction and maintenance and an incentive to hold unimproved land off the market, leading to artificial shortages of land. Such a tax imbalance sets up a dead-weight loss for production in general and impedes further improvements. An enormous amount of socially generated economic surplus, in the form of increases in land and resource values, is essentially unearned income, captured by a few when, of right, it should be captured for the many.

Land value capture is essential in order to “recover public investments” called for in the Habitat II Action Agenda and also in Habitat I. Well planned, skillfully implemented public investments in transportation and other infrastructure improvements result in higher land values, which, if captured, are nearly always enough to pay for them. Thus the public – society as a whole - receives back the higher value created by public expenditure.

As for the private sector, if infrastructure improvements are made by private investment, then that sector can capture land values up to the point where the investment is repaid. Such improvements, therefore, will have been made with no public debt whatsoever. The increased productivity of those now living in improved locations further increases the land values (land rent) of such locations and thus this increased, socially generated value should be captured by public authorities for funding of additional public benefits.

When a society captures land value, land does not disappear, but becomes more affordable and available to those willing and able to put land sites to good use. But if we tax wages and profits too heavily then labor and productive capital will indeed disappear. Capital deteriorates and increasing numbers of those willing and able to work become destitute and vulnerable to homelessness and starvation.

When full land value capture is reached (most land economists assert that full land value capture is achieved when 10% of the capitalized value of land is recovered) the land tenure system becomes essentially a “pay for benefits received” system. Those with the best and most valuable land pay the highest fees for its use, protection, and infrastructure benefits. Private land use is thus conditional upon payment of fees to the public at large according to the desirability of particular sites. The more efficiently individuals, groups, and businesses use their land sites, the more advantageous is this to the community as a whole. Viewed in this way, a land value capture system synergizes the values of both fairness in land access and efficiency in land use.

Substantial evidence exists, from even partial implementation of land value capture around the world, to demonstrate that land value capture works in practice as well as theory. Historically, public recovery of land value was used consciously by various governments for various purposes. For example:

Hong Kong and Singapore targeted land rent via land lease systems; at the time of their founding, there was not much else to constitute a tax base. A significant amount land value continues to be captured via this approach, though currently full land rent is not captured by the public sector.
Indeed, all the “Asian Tigers” have more experience with recovery of land value than the mainstream literature usually gives them credit for. In fact, the results from their taxing land probably has as much to do with their success, if not more so, as does their more-noted public/private partnerships.
The state of California, USA, via enabling legislation permitted localities to tax land, not improvements, in order pay for irrigation and other infrastructure. The result was that enormous tracts of underutilized land was sold at affordable prices, thus giving land access to those willing and able to use land for agricultural production.
Australia and New Zealand likewise chose to tax land, not improvements, in order to break up enormous ranch land tracts that kept out farmers. Sydney, a world-class city by any standard, still does tax land to a significant degree as do some other cities around the world.

The GLTN program has available a number of SWOT analyses of historical examples of land value capture applications from around the world, including Australia, Argentina, California, USA, Denmark, Hong Kong, Jamaica,