Opinion: The merits of Land Value Tax; lessons from Hong Kong

Neville BennettBy Neville Bennett

We need a more efficient and equitable tax system compatible with economic growth and productivity.

In our mobile society it seems reasonable, a priori, to move taxation from relatively mobile bases like income and profits to relatively immobile bases like land, rent and consumption.

Such a switch rewards the enterprising.

A land tax could be a necessary part of a better system. My space limitation means that the argument will lack convincing data, and I have had to excise counter-arguments.

I also recognize that its implementation would be fraught with difficulty.

My purpose is to sketch an idea at a time when Government is reviewing tax.

I saw the merits of the tax while working in Hong Kong and seeing the benefit of free-trade, a small state and low taxation. I taught Japanese economic history and became convinced that Japan's modern economic growth was founded on a vibrant agriculture and a land tax. Ideologically I respected increasingly the nineteenth century liberal ideology of Mill, Ricardo, Bentham, Cobden, Bright, Smith, and Macaulay. They seem timeless.

I give a typical quote from Macaulay about "pests to society" ....a prying, meddlesome government which intrudes itself into every part of human life, and which thinks it can do everything better than anyone can do for himself"
or J. S. Mill warning against "the great evil of adding unnecessarily to the power of the state."

Mill insisted on a land tax because "the land of every country belongs to the people of that country."

Ideally the state would own all land and lease it out, getting the unearned component of price rises. Hong Kong adopted Mill's recommendation.

Henry George also advocated a land tax in "Progress and Poverty"(1879). George noticed in California that poverty increased as land prices increased. He advocated a tax on land value but not on improvements, as that would destroy the natural right to the fruit of labour, and, "act as the spoliation of industry and thrift."

The tax suggested is a land value tax (LVT). It taxes all land, urban and rural (except parks and reserves). It does not tax improvements.

Revenue

LVT is excellent source of government revenue. It can raise substantial sums without damaging the economy.

Hong Kong raises about 38% of its revenue from a land tax. It is usually in surplus, and imposes very low taxes in other areas. W

hen I lived there, the threshold on income tax was very high and the maximum was about 12% (by memory). Singapore and Taiwan also operate land taxes. It broadens the tax base and produces very predictable returns in contrast to more volatile taxes made on profits.

The supply of land is very inelastic, and its value does not fluctuate so much if the speculative element is removed. It is also easy to collect. The authorities need only registers of owners and a valuation of the land. It is hard to evade, because land cannot be hidden, nor transferred into tax havens abroad. The cost of collecting some taxes is very high, but a land tax is a low cost tax.

Because LVT is cheap to impose and a reliable revenue raiser, it can reduce the need for other taxes. A LVT mitigates the case for a capital gains tax.

A land tax ...

" ... reduces speculation because it imposes a holding cost. This should have the effect of returning land to productive use.

Wikipedia suggests it reduces urban sprawl because it reduces the number of vacant lots in a city. An example is Harrisburg, Pennsylvania, which has used a land tax since 1975. " Deters bubbles.

The existing structure in New Zealand encourages speculation. Land gets bid up to levels which predicate very low yields. The boom and bust scenario is very damaging to the economy. A land tax is a factor for stability. 

... is easy to collect. The authorities need only registers of owners and a valuation of the land. It is hard to evade, because land cannot be hidden , nor transferred into tax havens abroad. The costs of collecting some taxes is very high, but a land tax is a low cost tax. 

... is so cheap to impose, so reliable in producing the goods, that it can reduce the need for other taxes.

... diverts investment from unproductive property activities. These are directed in large part to making capital gains or rent.

"Rent seeking" is disapproved of by economists because it extracts uncompensated value from others without making contributions to productivity. Rent is not payment for a lease, in this example, but derives from Adam Smith's division of income into wages, profit and rent.

... would lower the price of land. An ideal rate forces land to be used productively, and profitably. This will lead to a lower value because the speculative component of the land's value is removed. The speculators would reduce their land holdings and land would be used only for economic activities. Cheaper land would allow more able farmers to enter the industry. (more later)

... lower land values should exert downward pressure on urban rents. If tenants are already paying a high proportion of their disposable income on rent, a low rent would, others things being equal, have the effect of increasing their net wages. Higher wages could stimulate both higher saving and consumption.

...  improves the equity in a taxation system. Some people, like children, students and beneficiaries, generally have little wealth and land. A land tax would affect only the better off in those categories.

... encourages investment and productivity. At present a land owner is taxed only on income (less expenses) arising from land. There is no particular incentive to use land productively. Land- owners, including life-stylers, can merely lightly stock their land and wait for capital gains. Capital gains in the South Island, 1990-2007 averaged 17% a year (NBR May1).

... induces efficient sized units. New Zealand's farmers often hold more land than they need for production. A surplus is attractive because increased size increases capital gain. A land tax encourages greater intensity of farming, with more labour and capital per unit. It frees up land for new entrants.

... encourages improvements in order to maximize returns.

Conclusion

It is inefficient and inequitable to avoid taxing land. Land taxes are avoided, however, by political systems which have a large landed interest.

In the UK it was sought by the liberal party, with powerful advocates like Lloyd George and Winston Churchill, but would never have passed through the self-interested House of Lords.  

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* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared. neville@bennetteconomics.com www.bennetteconomics.com

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9 Comments

Neville.........firstly I fully agree with Mark Hubbard's comments throughout this thread.
 
I think that perhaps you are suggesting a land tax for the sole purpose of keeping the Socialist spending going......If you dislike taxes then you also have to dislike where that tax is being spent.
Changing where the tax comes from doesn't change where the tax is being spent.
We can't have Political and bureaucratic interferring in every of our lives.  The purpose of Government should be to uphold the Freedoms, Liberties, Rights and Responsibilities of the people and you don't need to much money for that.
 

a thread from 5 years ago?
regards

Haha so it is...I followed someone else from the comments thread......where did all these great bloggers go to.....did you chase them from this site?

... and not a single mention of peak oil in this thread either!

... it had peaked then ... and therefore must've run out in your future world , 2014 .... are you on your bike , or walking to the daily blog ?
 
Haaaaaaaaaaaaaaaaaa !!!!!

Facts have a habit of doing that.
regards

..

Goodness, almost five years have elapsed since this discussion. Excellent article Neville. While the New Economics Party arose out of a passion for monetary reform, we realised immediately that with zero interest rates you get a property bubble (read "land bubble" because it is only land value that increases).
So then we had to come up with policy that encompassed both.
Of course when you think about it, it is the banks that effectively gather the "land tax" in the form of "interest". They create credit for your property, create a loan and then a deposit, but they need the security of the property. They are not interested in lending on multiple owned land. They know full well that land is the wealth of the nation, and they certainly don't want the government to benefit from land tax. 
The book All the Presidents Bankers by Nomi Prims has carefully documented the close links between presidents and bankers for over a century. It is going to be no different in NZ. The banks influence the government. All the Tax Working Groups led by eminent people like Arthur Grimes that have recommended land taxes have been completely ignored by succesive governments when it comes to land tax.

The introduction of land tax is a most difficult political challenge because of the power of the banks. Now we have the election focussing on poverty/inequality and the same time on affordable housing. A generation of landless young people unable to reap unearned capital gains from home ownership. The issues are essentially the same. When you tax land you transfer wealth from the wealthy to the poor, from those who have the privilege of owning the best land to the landless and from the old to the young. 
I note that Bernard wrote an article on land tax just a month ago on this site. 
I have been trying to get my head around this political challenge for three years and with the help of our members over this time, have finally come up with a slideshow that is incredibly different from everything that exists now. It might take an economic collapse for it to be considered seriously. But for those willing to grapple with it try here at http://www.slideshare.net/deirdrekent/the-land-dollar-a-national-land-backed-currency.
I also have a short slide show on the history of land tax in NZ, including local bodies rating policies at http://www.slideshare.net/deirdrekent/why-land-value-taxes
 
This week I did a calculation that the public loses $37 b/year through failure to collect what is rightfully belongs to the public here. Gosh the Labour Party proposes only to collect $1 billion of this and the Greens $4.5b through their capital gains tax. 

Thanks for the links on land value taxes.