Could a land tax achieve fairer conditions for all?
ON A RECENT radio talk-show a representative of the Cape Town City Council explained that the City had become aware of the fact that it owned a property on Clifton beach. The house on the plot was apparently run-down and the conversation was about what the City intended doing with the property. We learnt that it was to be auctioned with the proceeds being ring-fenced for social housing.
Our talk-show host concluded that selling the property was the best option, but he seemed rightly sceptical that the proceeds would be used for the stated purpose.
Subsequently, listeners called in to give their views, and one person expressed concern that only some “developers” would benefit. The host pointed out that this was an unlikely scenario as the property comprised a single plot.
But this caller’s instinct was correct. The property comprises the land and, of course, the construction on it. But why should the council sell the land and forgo the increasing value of it? Why should it not rent out the land, securing an income in perpetuity, while assuring the first and subsequent renters of ongoing security of tenure on the basis of which they would have the confidence to incur the large cost of building on it?
This example leads into the general debate about why any city should sell land which, in the opinion of many, belongs to the people. Why do we continue to dispose of wealth and allow private individuals to accrue the future increase in value which they do nothing to earn (see below)?
The land question is a topical and delicate matter, but while it is true to say that private ownership of land has its genesis in some form of conquest, this observation does not help us in the pursuit of social justice (see below).
This writer believes that the vast difference in fortune between rich and poor has its roots in the ownership of land and the resultant economic power that goes with that. It is as if a great wedge works its way through society, benefiting those who manage to acquire ownership of land through separation into the upper tier cut out by that wedge from the remainder in the lower tier who thereafter struggle.
The following is an attempt to set out the various relevant issues, and draws on the thinking of the American political economist Henry George, who died in 1897. The controversy is not new. His writings inspired an economic philosophy named after him and which is based on the belief that people should own the value of what they themselves produce but that the (increasing) economic value derived from land should belong equally to all members of society.
Substitute His most famous work, Progress and Poverty, published in 1879, sold millions of copies worldwide. In it he argued, among others, that the least constraining tax from the point of view of the general welfare is a land tax as this tax does not penalise the productive effort of labour, nor of capital. He proposed to substitute land tax for income tax and company tax.
It’s important to note that George’s ideas were not a product of socialist ideology. His ideas were a product of his fervent desire for social justice and they attracted support from across the political spectrum.
Milton Friedman wrote that the least bad tax is the property tax on the unimproved value of land (for example, Henry George’s contention), while Joseph Stiglitz wrote that one of the most important but under-appreciated ideas in economics is the Henry George principle of taxing the economic rent of land.
But, importantly, Henry George believed that confiscation of land does not help us in the pursuit of social justice (see above). He believed it is not necessary to confiscate land, it is only necessary to confiscate unearned rent of land through the application of a tax upon it.
One can fast-forward to current times and assess whether the advice of Henry George has been applied and, if so, to what extent.
First, however, with regard to the above contention of unearned income, reference should be made to the chapter in Progress and Poverty titled “The Unbounded Savannah”, www.henrygeorge.org/savannah. htm, in order to obtain an understanding of the notion that it is population growth and increasing commercial activity within a community that is responsible for the increasing value of land, and none of this increase can be attributed to specific actions of the owner. The resultant conclusion is that it is the community that should benefit from this increase in value.
What about the rates we pay? We must put things into the correct boxes. Rates pay for services, the charges for which should be derived from zero-based budgets which in turn should be based on the needs of the overall community. But to the extent that rates are paid in proportion to the value of a property which includes the value of the land, a portion of the rates could be conceived to be a form of land tax but only if there were equitable delivery of service throughout the community. When one sees the newly built cycle tracks of the Constantia Valley and the heaps of open garbage among the communities in the Cape Flats, equitable delivery appears not to be the case. One would have to see the overall budgetary figures to be able to accept otherwise.
As an aside, the plight of property owners in Cape Town who do not have the available cash to pay increased rates because of soaring property prices is an issue which needs solutions that are not difficult to identify. The stimulus of foreign investment in property which is promoted by the City and its developer-partners is questionable when one considers the effect on ordinary citizens. The city should be run for its citizens, not as a property business.
What about the capital gains tax which we are exposed to? This could be considered as a form of land tax when applied to property.
Payment However, on close examination, as far as property is concerned, this tax is ineffectual in its current form. The taxpayer, through postponement of payment of the tax until the property is sold, can realise the benefit of an interest-free loan which, grown over a period of 10 years or so, for example, renders the taxpayer in a position where he would effectively pay no tax at all.
Returning to the land tax itself, as described above with regard to the impact of increased rates due to the inordinate increase in the value of properties, for the owner of a single property which is his home, the shift to payment of a land tax out of cash he does not have could be devastating and force the sale of his home. This would favour special attention in the treatment of land tax on a primary property whereby, for example, the tax could be accrued with interest and paid out of the eventual proceeds of the sale of the building on the property.
But beyond the first property, land tax should be payable on a regular basis, say annually, with periodic recalibration against actual increase in value. This will, of course, dampen speculation on land, and the holding of it in its unutilised form.
To all of those property owners who will be adversely affected by a land tax, one can only say that the “loss” ought to be offset by reduction in other taxes and through participation in a more thriving economy. However, the objective of a land tax is undoubtedly to retrieve wealth from the current landowners.
The intended result is the achievement of fairer conditions for all. The economy would be expected to prosper but thenceforth on a more equitable basis.