A tax to address housing prices, inequality

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Right-wing libertarian economist Milton Friedman is said to have called it the “least bad tax.” Max B. Sawicky, economist and author for the left wing, socialist magazine, Jacobin, says he is in favour of it. Jenny Schuetz of the “centrist” or centre-left Brookings Institution recommends it as one of three strategies for dealing with housing unaffordability.

The land value tax (LVT) is a familiar yet foreign concept. Locally, we now have a property tax – based on the Property Tax Act of 2009 – but it was once referred to as the land and building tax – based on the Land and Building Tax Act of 1920. The idea of a tax based on some percentage of a valuation of land is an old concept.

What differentiates the LVT from other forms of property taxation is that only the land itself is taxed, and not the structures built on it.

In 1879, economist Henry George argued in favour of the LVT in his book Progress and Poverty, which, according to the Economist magazine, sold more copies in the US in the 1890s than any other book except the Bible.

In his book Reconstructing Urban Economics Ghanaian economist Franklin Obeng-Odoom tells us that George’s central argument was:

“Housing costs tend to be high because of speculation and rent on bare land. It is the creation of rent and the process in which rent increases, including speculation on rent, which drives up housing prices. (And) abolishing rent on bare land either by making land common property or by taxing it heavily is likely to reduce speculation, house prices – as land cost becomes zero or minimal – and hence the cost of accommodation.”

In other words, private owners of bare land derive economic benefits from the land far in excess of the work – if any – that it takes to maintain or manage the land. As a result, land speculation occurs. Private actors with the means to do so buy land, and, given the low cost of owning undeveloped land, simply wait for its value to increase. Two options to remedy this are to abolish private property ownership, or to exact a high tax on the value of the undeveloped land.

The LVT can be seen as a socio-economic equaliser, especially in a country like ours where deliberate historical acts have left certain ethnic groups with a built-in economic advantage due to the inheritance of land. The value of land, according to proponents of a LVT, is largely created by public investments in infrastructure, and location to services and amenities, that society as a whole has paid for. Further, the land itself is a shared natural resource that belongs to all citizens. Therefore, the huge benefits that land owners derive – itself a source of great wealth inequality – should be more equitably shared by the entire society.

Economic efficiency is also one of its appeals. In his book Zoning Rules! The Economics of Land Use Regulation, William Fishel says, “Land will not go anywhere if you tax its income or value at a high rate. Owners of land essentially just have to shrug their shoulders and pay; they cannot alter their economic behaviour in response to high rates.”

Urban planners should fall in love with it for its impact on land use efficiency. With a LVT, a landowner would pay the same tax whether the land was undeveloped, or had a house or a multi-storey building with 20 apartment units on it. The landowner would have the economic incentive to put the land to the best and highest use allowed by the regulations, or sell it to someone who could. Where land is more expensive and scarce – in urban job centres – there would be an incentive to use it to house more people or activity using less land.

The LVT would, therefore, also serve as an impetus for urban revitalisation, by discouraging the use of urban land as surface parking lots or left as vacant eyesores.

Any land forfeited to the State for non-payment of taxes, as allowed for in the Property Tax Act, could even be allocated for the construction of affordable housing.

Fishel tells us that the LVT has unfortunately not gained widespread usage for a number of reasons, including political will, and administrative challenges in public valuators accurately determining the value of land separate and apart from the value of structures.

Interestingly, the LVT is used in a small Eastern European nation that, according to local media, has been on the tongue of the Prime Minister, as far back as 2019, for its remarkable progress in the usage of information technology in the public sector. Perhaps as we look to Estonia as a technology leader, we can also look for guidance on this “least bad tax.”

Ryan Darmanie is a professional urban planning and design consultant, and an avid observer of people, their habitat, and the resulting socio-economic and political dynamics. You can connect with him at darmanieplanningdesign.com or email him at ryan@darmanieplanningdesign.com

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"A tax to address housing prices, inequality"

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