What is the right level of land rent?
People make profit from land. Some of the profit comes from their improvement to the land (e.g. cultivating or building), and the rest is the natural value of the bare land. The bare land value is created by society, and the whole amount is owned by society. If society takes less than that, it is effectively giving wealth to the land owner, which is not fair to other citizens..
How is land rent calculated?
If we are very lucky, there will be bare land nearby so we can directly see its value. But usually we have to compare different land with different amounts of buildings, and do some calculations to infer the bare land values. This may sound complicated, but it is child’s play compared with the current thousands of pages of tax rules.
Rental value = total value x interest rate
If we have the total value of the land (without any improvements) we can calculate the rental value by multiplying the total value by the current interest rate. An interest rate is, by definition, the percentage of the price that you could make in any given time. So if the land is worth $1000 and the interest rate is 10% per year, then you would expect to make $100 per year if you rented the land, so and that is the land rent value.
That’s how to do it, now let’s look at why.
“How much would I pay?”
How much would you pay? On average, a lot less than you pay now.
In his recent book “Double Cross”, Ron Banks estimates that the introduction of Land Value Taxation to replace existing taxes would trigger the use of idle land that currently falls below the margin of production. He estimates that the financial effect of this would be to generate an extra annual bounty of a staggering £15,000 p.a. per head. Yes, £60,000 extra for a family of four!
- “Land tax needed to avoid wasted resources” Dave Wetzel, The Observer, April 6, 2003
For the exact amount, imagine that your house was in the middle of a desert. How much would it be worth? Subtract that from its present value, and work out the interest payments. And then remember that you would pay no other taxes. And remember that your mortgage payments would be much smaller, because land sale price would be much lower (though the bank would still want payments on existing mortgages - land rent would need to be phased in gradually, so that the benefits always outweighed the costs at every stage.).
The economic advantages of land rent
As long as people still want to buy land, the amount of land in use does not change, so land rent does not reduce land use. All other forms of taxation discourage work.
Land rent increases jobs and output, because land owners can hire people, manufacture goods and improve buildings without paying a penny extra in tax. So productivity increases, jobs increase, and prices fall.
Land rent causes land prices to fall, as noted above. So if anyone has a good idea for making money (that is, their idea will make enough money to pay the basic rent) then they will find plenty of land can be bought for a low price. This is heaven for entrepreneurs!
Land rent causes inefficient land users to sell, so more land is available and the land is used more efficiently. Land rent ends land speculation and so reduces boom and bust economic cycles and their accompanying inflation and unemployment. And land rent is simple to collect, so reduces red tape, avoidance and corruption.
In summary, land rent does not reduce the land in use, but increases all the desirable features of an economy - employment, manufacturing, freedom, stability, availability of land, and so on. In short, land rent creates the perfect economic system.
Examples of nations that have used land rent
Land rent today is like democracy in the ancient world. It is largely theoretical, and seen with suspicion by the rich and powerful. However, several nations obtain a modest proportion of their income from land values, and with very encouraging results. For a detailed examination of famous examples, see the links at the left.
Probably the closest the world has ever come to full land rent was in nineteenth century Japan. But even here the tax was fatally based on land produce rather than simple acreage, and it was finally overturned by the big land owners. But in the meantime it created an economic miracle.
“...the 19th century "Japanese miracle" was achieved, at the outset, on a foundation of land-value taxation. [2] An efficient centralized bureaucracy was set up. A modern army and navy were established. Compulsory education was introduced. Manufacturing, mining, transportation, and banking were promoted, frequently with advice from European and American experts. And a bicameral Diet or Legislature was formed, with an elected House of Representatives. “However, from the standpoint of social justice, the assessment formula embodied in the Land Tax Revision Act was severely flawed, in that it gave landlords a tax advantage over owner-cultivators. This was not the intention of the technocrats who devised it, for they had no personal bias toward landlordism. The tax was meant to fall on net produce (i.e., economic rent) in contrast to the Tokugawa land tax, which was a proportional levy on gross farm produce. But the assessment formula used to value holdings was faulty.”
- From Japan, American Journal of Economics and Sociology, Dec, 2000 by Yoshisaburo Yamasaki, Robert V. Andelson.
So the landlords finally gained all the power and overturned the reforms. But not before Japan was transformed from a medieval backwater to a twentieth century industrial economy. Which illustrates the power of land rent, and the importance of getting it right.
The arguments against land rent
Land rent means land had to be used efficiently, and valuable land must be used even more efficiently than other land. In a competitive environment, this might lad to great changes in the countryside, home ownership, investment practices, and so on. Opponents of land rent could make it seem like the end of civilization.
Even though most of the arguments are without merit, any major change risks short term disruption. So a wise government will introduce land rent in stages, so as not to hurt people as they adjust to the more efficient system.
Society might even decide to pay some groups to continue their old ways because they are deemed to be valuable to society. But land rent makes us face reality: if we prevent the most efficient use of land, we prevent wealth creation. We may choose to do this for some higher purpose, but land rent makes the choice crystal clear
Practical proposals for the short term
Land rent, like democracy, or civilization itself, may take hundreds of years before it replaces less efficient economic systems. But what can we do to encourage the process in the short term?.
Short term proposals for government
Short term proposals for business
Popular policies for political parties
A challenge to think tanks
Short term proposals for government
A new form of tax
Governments are always looking for ways to raise money. So it is entirely possible that land rent could be introduced by stages. As people become less happy with taxation-by-theft, land rent will become the only acceptable form of taxation. And eventually the word taxation itself could become obsolete, as land rent is simply a form of justice.
A popular form of tax
The idea that “the polluter pays” is simply land rent in embryo. It’s a popular form of taxation that should be continually expanded until all taxation is taken only from those who take wealth from society. Then we won’t have tax at all, but land rent: a perfect system for encouraging wealth creation.
An easy and popular way to fund infrastructure
When the British government extended the Jubilee railway line in London, it cost £3.5bn ($5bn). But it caused land values to rise by £13bn. Next time, the government should pay for it by taxing the land value increase. Landlords would benefit because, even after the tax, they still make big profits from the new transport link that otherwise would never be built. And everyone else benefits from the link itself. Everyone wins!
How to protect the countryside and revitalize inner cities
At present, commercial buildings are taxed, but not land values. So unwanted buildings are often left to crumble, thus attracting no tax. Meanwhile, new buildings are built on green field sites. This leads to urban sprawl, not to mention long commuting times. But if we simply taxed land instead of buildings, the same tax revenue would come in, but unwanted sites would be sold to businesses who could use them, and those businesses would have an incentive to invest more in each plot (instead of looking for green field sites), since the buildings were tax free. Finally, with all the land being used, there would be more tax payers in the city, so individuals would pay less. Everyone wins!
Learn from the auction of airwaves
In 2002, the British government auctioned use of part of the electromagnetic spectrum for new 3G phones. They raised £22.4 billion, with no distortion of the market, since those airways would be used either way. The British government should be congratulated, and look for other ways to make a lot of money without hurting the market, instead of taxing (and discouraging) work.
Simplify successful taxes
At time of writing (Sep 2005), Norway is judged the best country on earth, for the fifth year running. And Norway has just voted in a new government dedicated to raising taxes on oil revenue in order to benefit society. And a runner up in the ‘best country’ category is Denmark, which already has a limited form of land rent. We could all learn from Norway and Denmark. If these taxes were simplified - so that we simply take back the wealth that is provided by society - then real land rent, real justice, economic sanity, would be a reality.
Short term proposals for business
Entrepreneurs: get rich quick
The driving force behind land rent is that it offers vast wealth to entrepreneurs. Once you pay the flat tax on the land, you are free to make as much money as you like, and keep it all! Entrepreneurs should lobby government for special tax zones where land rent can be practiced in all its glory. The government loses nothing, since it gets its tax, and also gets innovation and world class competition.
Lobby for lower taxes
Some businesses use more resources than others. Businesses that give great benefits while consuming few resources should lobby government for lower taxes. They deserve it! In this way, taxation gradually moves onto those businesses that actually take wealth. Gradually, taxation stops being theft and starts becoming rent.
Popular policies for political parties
The Citizen’s Dividend (CD)
A Citizen’s Dividend is money paid to every citizen for the wealth that is taken out of society.
For example, Alaska has a CD to cover oil extraction. every citizen receives money directly from the oil industry. This is very popular with citizens, and does not discourage the oil companies.
To work best, a CD needs to be run by a trust, separate from the current government. Otherwise it will be treated as just another tax.
Advantages of CD over other ideas
- CD is popular with ordinary people: it means real cash in their hands.
- CD can be implemented item by item, as gently and slowly as you like.
- CD ensures that everyone has a basic income, so the welfare system can become gradually smaller.
- CDs deal with only a single product, so they are simple to run.
- If CDs are paid to each citizen equally, they are simple to administer, and safe from government interference.
- If CDs are organized at a local level, different systems compete to become more efficient. (Local people will vote to use the services of a more profitable CD system from the next city, thus encouraging efficiency).
It’s your money! Claim it!
A Citizen’s Dividend is wealth created by, and belonging to, every individual in society. It is not created by government decisions, but by millions of individual decisions. It therefore belongs to every individual, and cannot be used by government.
Voters would be encouraged to claim their money! Of course, individuals rely on government to ensure that everything runs smoothly. So a government may need to adjust its tax and benefit policies to compensate for any uncomfortable changes.
The guarantee of success
Voters will demand more and more CDs - they want cash in their pockets!. Governments will only be elected if they allow more CDs. Gradually, CDs will cover all forms of society’s wealth.
This desire for wealth is the guarantee of success. First, people want to maximize their wealth, so will not charge too much as CD, in case they scare away potential investors. Second, CDs provide everyone with a guaranteed minimum income. This gives people the security to take risks. Add land rent’s ability to create wealth, and we create a nation of entrepreneurs. .
Promote justice!
Land rent is just a pure form of justice. It is just life without theft. Anything that increases choice and reduces theft brings land rent closer. So we should campaign for transparency in government and business, and freedom to trade between nations and individuals. Then people who work hard will be rewarded, and people who steal will be charged for what they steal. Call it what you like, but that is land rent: we keep the wealth we create and pay for the wealth we destroy.
Win over non-voters
Imagine if you could find a few hundred thousand new voters from somewhere. Well a lot of people don’t vote because they want a radically different form of government and know they will never get it by majority voting. But imagine what would happen if you made it easier for people to start intentional communities (self-sufficient communities with their own rules). A lot of new people would vote for your party so they could have the community they really want.
Obviously the rules would need to be clear about boundaries and responsibilities, so people outside these communities felt safe, and the communities paid for any inconvenience. But they would act as experiments, to find better ideas for the main government. If land rent, or any other idea was really good, the outside government would learn from this and benefit, without taking any risks.
More money for everybody!
“In his recent book ‘Double Cross’, Ron Banks estimates that the introduction of Land Value Taxation to replace existing taxes would trigger the use of idle land that currently falls below the margin of production. He estimates that the financial effect of this would be to generate an extra annual bounty of a staggering £15,000 pa per head. Yes, £60,000 extra for a family of four!”
A challenge for think tanks
Challenge the thinkers to be consistent
Land rent is fundamentally rational. Other theories are fundamentally irrational. We need to challenge the intellectuals who care about being consistent. Challenge them to be consistent.
Many thinkers claim to be against theft, yet they live in countries based on stolen land. Many thinkers claim to have a rational foundation, yet their concept of property is scientifically unmeasurable - it is thus meaningless
Thinkers should be challenged to be consistent and rational. Where the thinkers go first, eventually others will follow.
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