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

By 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