The worth of land value tax

Land is a Big Deal: Why rent is too high, wages too low, and what we can do about it

Author: Lars A Doucet 

Publisher: Shack Simple Press

Pages: 306

Price: $29.95

Who do I work for? My employer or landlord? Someone, sometime, living in a city like Mumbai, must have wondered. The price-to-income ratio of a house in Mumbai is three times more than in New York. Or, rents are sky high, and relative to it, income is low. According to Henry George, the 19th-century political economist, sky-high rents are a symptom of a malady in which land is wasted. And its effect is “oppressed workers, ruined businesses, depleted natural resources, a polluted earth, and an impoverished society”. Lars Doucet’s book, Land is a Big Deal is about how a land value tax (LVT) is the medicine to cure this illness.

The book, posted first as a series of articles on the blog Astral Codex Ten, finds its idea by reviewing another book, Progress and Poverty, written by Henry George. Out of the three factors of production, land, labour, and capital, in George’s view land is the most misunderstood and distorted factor. Actions of tenants, and the community, add value to land. Yet the landowner pockets any increase in value by extracting higher rents from tenants.

LVT splits the value of the ground, and the value of the structure on this ground, into two separate values. Property tax, however, does not differentiate between the two values. With a property tax, structures built on land and rented by tenants, bear a larger burden of the tax, than landowners. The book advocates levying a tax on just the land value.

A great feature of LVT is that it does not get passed onto tenants, unlike taxes on other commodities, as the supply of land is inelastic. When oil, for example, is taxed, it becomes unviable for some producers to supply at the old price while bearing the tax burden. Supply then falls, and in response, oil prices increase. Land is an exception. All land that could be produced has been produced, and taxing it does not rule out any producer or reduce its supply. The price of land, that is the rent, does not get affected. At any point, the landlord has found the highest bidder willing to pay the rent and increased rent because of LVT, will not attract another tenant to replace the current one.  

Taxing just the land can open a huge value for society. The revenue earned by the state from LVT can reduce, even replace, existing distortionary taxes like the income tax to boost overall income. It will also discourage land speculation, make housing affordable, and encourage efficient use of land.

LVT just takes out a part of the landlord’s revenue and transfers it to the state. Higher the transfer better the outcome. Believers advocate for an 85 per cent LVT. Most jury members agree that LVT is not distortionary and is probably the most benign form of tax. Jury members include economists like Friedrich Hayek, Milton Friedman, Karl Marx, and Joseph Stiglitz.

Land distortion can even be an important lens to view India’s history. Henry George, way back in 1879 remarked: “The millions of India have bowed their necks beneath the yokes of many conquerors, but worst of all is the steady grinding weight of English domination… India now is like a great estate owned by an absentee and alien landlord”. Land allocation and rent must become India’s paramount concern.

To implement a land value tax, assessing the value of land, correctly and regularly, is the main focus. Indian cities are far behind the curve when it comes to it. Thanks to technology, the challenge of poor market transaction records, and weak institutions can be overcome. The book dives deep into an innovative land valuation model used in the city of Baybay, Philippines to fit the purpose. It uses expert opinions to assign weights to key components of land value like distances, accessibility and location. These weighted components are then fit statistically, into the observed market prices of recent land sales for verification. This method helps to split the value of land and the value of improvements made on it. Assessing land values correctly is among reforms with low-hanging rewards.

A reader demanding the Indian context will have to make her estimates. But those made for the USA are awe-inspiring. Conservative estimates suggest, LVT can fund any one of these three state expenditures, entirely: Defence, social security, or combined medicare and medicaid. In Australia, receipts from LVT can replace the corporate and personal income tax, and still leave a surplus. If advocates of wealth tax mean business, they must switch to rallying for LVT. The top 1 per cent of Americans own 14.7 per cent of all land, and the top 50 per cent own 88.5 per cent of it. LVT can make funding a universal basic income quite achievable too.

Henry George’s ideas may have been best conveyed by Elizabeth Magie, who upon reading George’s book, created the board game Monopoly to show what happens when rents go higher with every new round on the board. Lars Doucet’s book does as well. The clarity makes his claims bold and verifiable. His ideas challenge imagination yet remain sincere.

The reviewer is an associate at Artha Global, a policy-research organisation based in Mumbai. The views are personal