OMH: There has recently been much public debate about the introduction of a land value tax. To its supporters such a tax promises to achieve several goals simultaneously. On closer inspection, however, the arguments in favour of land value taxation are not convincing. On the contrary, the economic foundations on which proponents of this tax rely are dubious, and there are significant legal, moral and practical problems with land value taxation.

EJD: As a long-time proponent of the taxation of land values (i.e., the public collection of location rents), I offer some comments and responses in an effort to clarify both the theoretical and (from the limited application experience in the United States) the actual impact of this measure when adopted.

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OMH: …To many of the supporters of land value taxation, however, a potential LVT is not just another government revenue-raising measure, but something much more profound. They make a moral case for it by claiming it would only tax 'excessive, unjustified rents' without distorting the market. They claim it would solve the housing crisis by bringing idle and under-utilised land back into the market. At the same time they believe LVT would also counter 'urban sprawl', keep land prices and interest rates low and stop land speculation.

EJD: These results are certainly theoretically possible, subject to the simultaneous lessening of the tax burden on labor and capital goods. The underlying dynamic is that the holding of land - whether because the annual cost of doing so is insignificant or for designed speculative gain - becomes less and less profitable as the annual payment to the community is increased. From an investment standpoint, there is less and less of an imputed income stream to be capitalized into a potential selling price for locations. The land market becomes more competitive (i.e., land owners are financially driven to improve land to its highest and best use or sell it to someone who will).

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OMH: Some of the most ardent supporters like Dave Wetzel, vice-chair of Transport for London and chair of the Labour Land Campaign, even go further than this: he claims that LVT would also stop tax avoidance, create sustainable communities and lower other forms of taxation such as income tax. In other words: LVT, properly enacted, could cure all sorts of problems that modern society faces, according to its supporters.

EJD: At the center of this argument is a calculation of the "rent fund" that appropriately ought to serve as the core of public revenue. At the moment, the rental value of locations is subject to intense speculative activity. What landowners can lease their locations for today yields a much high rent than the rent that would be yielded if the land market was subject to the same competitive forces inherent in the markets for labor, capital goods (and credit). Economic growth, defined as the increase in the storehouse of capital goods utilized in wealth production, accelerates fastest when most public revenue is raised by the taxation of location rents and not income flows earned producing goods or providing services.

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OMH: In practice, however, one could hardly ever separate the incomes from land and from taxing land value is just another questionable tax improvements to the land. It would take a government agency and some highly questionable assumptions to determine which part of the value of the land was 'justified' and which was 'unearned' and thus taxable.

EJD: Somewhat difficult, but certainly not impossible, given the state of the "art" of property appraisal. Technical training is required but the methodology is well-developed. In the agricultural sector there is extensive market data (i.e., a great deal of agricultural land is farmed under leasehold arrangement). Also, a large amount of publicly-controlled land is offered to private interests under leasehold. The shortcoming is often that such leaseholds are not awarded under conditions of competitive auctions, nor are the "ground rents" adjusted frequently enough to reflect changing market conditions. The market "ground rents" for residential land can be reasonably derived by using a substitute market rate of return, such as that for medium- or long-term bonds (e.g., examining sales data and applying the bond rate provides a good benchmark of the ground rent, observing whether sales prices stabilize or fall each year as the amount of tax levied is increased year by year).

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OMH: But worse than that, modern economic analysis has moved beyond the old Ricardian land value theory and concludes that each factor of production will receive its marginal product. This means that land does not receive the residual value of all economic activity, but capital and labour equally receive value according to what they have contributed.

EJD: This is, arguably, a significant error in modern (neo-classical) economic analysis. Treating nature as simply another factor input (i.e., another form of capital) rather than as the source of capital goods results in analyses that cannot describe the real world. Nature has a zero cost in terms of labor and capital goods; nature comes to have an exchange value when, as Ricardo observed correctly, there is no longer any freely available land available of equal potential economic advantage.

The "all devouring rent theory" is, as I understand it, a matter of tendency, subject to many externalities (e.g., population growth, form of societal governance, laws protecting working conditions of labor, social welfare 'safety net', non-governmental organizations providing quasi-public goods and services, educational levels of population, etc. etc. etc.)

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OMH: Closer inspection, however, reveals that landowners perform a number of valuable economic tasks. Like the owners of any other factor of production, landowners have to make frequent decisions on what use to make of their property.

EJD: This raises the moral question of whether the control over land - over part of nature - is and ought to be treated under law as a form of economic license (as Locke suggested) or as property not subject to societal constraint but fully protected under societal laws. One historical observation is that under the laws adopted by social democracies, ownership of property has - by consensus - come under increasing regulation and imposition of certain responsibilities attached to the bundle of rights attached to ownership. Ricardo's law of rent informs us that the rental value of locations will tend to be higher where there are fewer restrictions imposed and lower where more restrictions (and, hence, costs) are imposed.

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OMH: They decide in which way to utilise their land, which could mean to keep land idle.

EJD: There are certainly instances when the business plan of a landowner requires that some land held as an asset remain unimproved for some period of time (e.g., to allow for future expansion of a factory, or retail shopping complex, etc.). The interests of the community may, as determined by appropriate decision-making process, direct that land left idle for some period of time be considered "abandoned" by the deedholder, and ownership relinquished to the community for sale or lease to someone who will commit to a plan of development. This is, of course, a very touchy issue today here in the United States, because of the controversial use of "eminent domain" powers by local government to take not just idle land but improvements that are actively utilized and maintained consistent with current building codes, zoning and other requirements.

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OMH: For one, there is much more land than there is labour to keep all land in use all the time.

EJD: I am afraid I do not recognize the relevance of this observation. Most of us prefer to live in (reasonably) close proximity to one another, and we also prefer having access to some land that is set aside for purposes other than residence or commerce. It is also true that changes in population, in technologies and even climate generate changing highest and best uses of land in any geography. So, some land that is today being utilized for a low-rise factory building in the future might be redeveloped for other use. My individual preference is to try to reduce our footprint on the earth sufficiently to provide space for all other species to thrive, which requires that we intensely utilize some areas while leaving others undeveloped.

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OMH: Like any other investor they have to allocate scarce resources over time and ultimately direct them to their most productive uses. To take this role from them by means of taxing the value of their property means creating a distortion in the market as landowners would be unable to make independent decisions about their property. It resembles a kind of central planning in the land market.

EJD: As a community, a society, we are faced with decisions about how to achieve "equality of opportunity," and the proposal to collect location rent for public use is argued by us proponents as the appropriate means of achieving this outcome. Private property, we argue, is and ought to be defined by law as that which we produce from nature with our labor and capital goods, and not subject to public confiscation via taxation. This perspective leads to the conclusion that nature is outside the bounds of private property, that the awarding of a deed conveys exclusive, but somewhat restricted, use and is a form of privilege (as noted above, a license that normally carries economic value). The deedholder, then, is obligated to compensate all other members of society for the privilege extended. This compensation is best measured by the market-determined ground rent.

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OMH: People owning land should be treated like people owning other forms of capital. Owning a factory, money in a bank account or a plot of land should thus not be taxed on their respective values, but on the actual income - not a hypothetical income - generated from them. The proper tax for this is the income tax. An additional land value tax would be both unnecessary and undesirable.

EJD: I and others make our arguments against what you propose. That is all we can do. Some are convinced by the arguments. Some are not. You are among the latter group. One irony of the history of taxation in the U.S. is that proponents of the so-called "Single Tax" associated with Henry George were at the center of the effort to introduce a Federal income tax - with the idea that the tax would apply only to the highest incomes, which, their analysis concluded, were derived primarily from land ownership. Gradually, those with the highest incomes were successful in getting taxes imposed on lower and lower incomes (i.e., on incomes earned from the production of goods and services).

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OMH: Besides, it would not fit into our general approach to taxation. In our current tax system people are usually not taxed for the resources they own but for the income they make from these resources. For example, you would not be punished if you decided to keep your money in a money sock or a piggy bank instead of directing it to a high-interest investment. You would only be taxed once your capital yields an income. Thus the capital owner is free to decide how to use his resources, even if that means running the risk of not making the most of them. In a market economy with individual autonomy, however, this is something that has to be accepted. It is the general principle of a market economy with private property rights that property owners are free to make their own decisions.

EJD: I am guided by Locke's notion (elaborated on by the philosopher Mortimer J. Adler) that we come together to form societies in order to enhance our prospects for survival and to prosper. Locke's writing provided moral justification for overthrowing unjust governments, and for reform of existing socio-political arrangements and institutions. Democracy suggests that mistakes can be rectified and remedies applied to past injustices. Our view (despite the compromises of the early 20th century Single Taxers) is that the means by which government now raises its revenue is both economically harmful and morally unjust. We always must measure what we do and how we do it against what we 'ought' to do.

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OMH: As we have seen, in a market in which landowners make decisions about land uses, an LVT would have severely negative economic side effects. Yet in Britain, land-use decisions are not only made by landowners, but also by planners. In effect this means that landowners would often not even be able to make the most of their land, but they are restricted to what planners have allowed them to do. But when it then comes to imposing an LVT on these landowners, on what value should this tax be based? On the current use value, on the use allowed by the plan, or on some fictional use regardless of what is currently permitted? Once again, an LVT would turn out to be a source of extreme legal uncertainty - and it would be difficult to implement, practically.

EJD: To the extent local governments have adopted the moderate version of land value taxation (i.e., a higher rate of taxation on assessed land values than on improvement values), the market response has been quite positive in terms of economic vitality. Planning regulations are taken into consideration by any investor, of course, which impacts the price one is willing to pay to acquire land either by purchase or under lease. Taxable values on residential property are readily available in the U.S., as every property that changes hands subject to mortgage financing is appraised by an independent appraiser who gathers sales data on comparable properties and is able to determine what the replacement cost would be for the improvement (indicating that the difference between total purchase price and replacement cost of the improvement is a good estimate of the site value). Land values under office buildings and other commercial structures are more difficult because of fewer and less frequent sales, but the construction industry has quite sophisticated software programs to come up with replacement costs as well as values based on the capitalization of cash flows.

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OMH: In addition to all these economic difficulties, there is a further moral complication to LVT. As the supporters of LVT claim, the tax should be levied on the intrinsic value of a site. But it turns out that such values often depend on the surroundings of the plot and not only on the plot itself. There is no purely intrinsic value, especially when it comes to land in the cities. In other words, changes made by your neighbours will affect the value of your property. If your neighbour builds a polluting factory, your land value and thus your LVT will fall.

EJD: If, as I stated above, one believes we come together to form communities and societies for our mutual benefit, then the laws of the community must protect our right to a pollution-free environment. Polluting is the exercise of license, inherently criminal even if government unjustly fails to prevent this behavior. If, unfortunately, our government fails to protect our rights in this regard, the ground rent we owe to society for the land we hold is legitimately lower than if our rights are protected; the economic value of polluted locations is bound to be harmed. Thus, if some advocates of LVT are arguing that such externalities are immaterial, then I conclude their argument is flawed. Externalities do matter.

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OMH: If your neighbour, however, opens a theme park or if a new tube line stops in front of your door, your land value will increase and with it the tax you would have to pay on it. So in other words, the tax one has to pay does not actually depend solely on one's own property positions, let alone one's financial situation, but on the consequences of other people's actions. Surely, such a system of taxation cannot be regarded as fair or just.

EJD: And yet, few people have any problems with profiting by the investment others make on adjacent, contiguous or near locations. When the entire community is taxed to fund the construction of a new highway or rail line into a rural area, the access to this once inaccessible land increases considerably. Distance is converted from that of kilometers to that of hours or minutes. When the owner of land adjacent to a transit stop or highway interchange is approached by a potential buyer who wants to construct a business to serve travelers, the owner does not set a price based on its agricultural value but on the value created by aggregate public and private investment in the new infrastructure. This gain is certainly unearned (i.e., a windfall).

As you may know, there is a strong public concern in the U.S. over rising property taxes on homeowners who have retired or are living on lower fixed incomes. The impact is that long-term residents of many communities are being financially forced to sell and leave, moving to lower cost communities. This is certainly not in the best interest of the community as a whole. And yet, as noted above, when the individuals sell the home and lot they own, they are perfectly willing to take the gain in land value that occurs. The solution is not to exempt these property owners from their legal obligation to pay the taxes owed under existing law. What I have proposed to my state government here in the U.S. is a provision that would permit residents (i.e., owners of property utilized as their primary residence) to apply to have their annual property tax payment capped based on a formula that considers household income plus liquid assets (e.g., savings accounts, money market funds, etc.). The amount not collected annually would accrue as a lien on the property to be paid to the community at the time the property is sold or the deed is transferred via inheritance.

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OMH: Nor would it be fair or just to treat different circumstances equally for tax purposes. Two landowners may have equally sized plots of land in similar locations, but one of them may have a big, luxurious house whereas the other one only lives in a small cottage. One may have a high income, whereas the other one lives on a small pension. Yet when it comes to paying their LVT both would be assessed on the value of the land alone, regardless of real estate values or income. Most people would not think that such a tax system fulfilled the basic criteria of equity. It is actually the same argument against LVT that is also often used against council tax, i.e. that it is unfair to treat different circumstances equally and that it is highly regressive.

EJD: This generally occurs because of the current situation that land parcels are only infrequently reassessed based on market data. Over time, some communities or neighborhoods lose population for various reasons, land values fall but the assessed value is not adjusted downward; the result is that the tax on the property (improvement and land) tends to be at a higher proportion of current market value than in communities/neighborhoods where land values have been increasing but assessments have not been adjusted upward accordingly. In the latter instance, the low effective rate of taxation on location rent allows for a speculative rate of capitalization. Developers who purchase land at these higher and higher prices have two choices: obtain approval for higher density (i.e., more units for hectare/acre) or construct much larger housing units that only much wealthier buyers can afford to pay. Higher density development is often opposed by existing residents/voters because of fears this will bring more automobile traffic to the area and more school age children, driving up the taxes paid to the school districts (which derive most of their funding from the local property tax). To what extent land rent funds ought to be used to pay for publicly-owned and administered schools is an issue separate from whether the land rent should be collected. An argument has been made that some portion of the rent fund ought to be distributed equally to each person as a "citizens dividend" to use for the purchase of goods and services that are better provided by private entities than by government.

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OMH: To sum it up, LVT does not hold the promises its supporters frequently make. In practice, it would simply be another tax, which would create distortions in the property market, lack legal certainty and violate some basic moral principles of taxation. It may be understandable that politicians of otherwise different convictions may all realise the budget-increasing potential of introducing an LVT. But the potential tax revenue should not make us blind to the serious shortcomings of taxing land value.

EJD: To sum up my views, LVT is neither a panacea nor a silver bullet solution to all our social ills or market anomalies. That said, I have become convinced of its fundamental soundness and justness. I disagree with you on the shortcomings asserted in your commentary and have endeavored to provide my reasons. I hope you find my detailed comments of some value.