Land Value Taxation

1 Introduction

Any change in the tax mix cannot be considered tax reform unless it includes the extension of Land Value Taxation. Land Value Taxation is a tax on the value of land excluding improvements. It is important to recognise that it is related to value and not to area or capital improvements. It is the only tax that is simple, efficient and equitable. Land Value Taxation is the only tax that is not a tax on production or exchange. It is therefore the only tax that encourages economic growth and fuller employment.

This paper presents the case for widening the base of Land Value Taxation. Currently a large percentage of land, both in terms of its value and area, is excluded from the tax base at the State Government level and to a smaller extent at the Local Government level.

1.1 Proposal

This paper supports the following reforms to Land Value Taxation:

(i) a flat rate with no threshold,

(ii) minimal exemptions e.g. public roads and railways, parks and recreation areas.

(iii) government instrumentalities and agencies at all levels included,

(iv) provision for deferment (with interest) for the aged, pensioners, the poor and those on seasonal incomes (temporary hardship), and,

(v) simplified payment methods.

The effect of the proposal is to simplify the administration and to extend the benefits of Land Value Taxation.

1.2 OVERVIEW

In the first part of this paper Land Value Taxation will be examined against the most commonly accepted criteria for evaluating taxes. These criteria are equity, efficiency and simplicity. In addition its relationship with the ability to pay and user pays or benefit principles will be discussed before proceeding to a discussion of wider social, planning and economic consequences of such a tax.

Although land values do rise and fall, the main cause of instability of liability/revenue has in the past been due to the effect of the threshold. Removing the threshold will lead to greater stability. The reduction in the speculative element in the price of land will also lead to greater stability. By appropriate adjustment of the rate a predetermined amount of revenue may be raised.

Changes in the tax mix as promoted in this paper encourage investment in capital as opposed to land. As economic activity is freed from the fetters of other taxes on production and exchange, a healthier economy will be reflected in the value of the land on which it operates.

Wage and salary earners will benefit from a shift from income tax to Land Value Taxation. They will receive more in their pay packets and will pay no more for goods and services.

The aged, the pensioners and the poor can be protected from paying the tax without unduly impairing the simplicity and equity of the tax. They would still benefit from the positive effects of the tax enjoyed by the rest of the community.

Industry and commerce are not penalised for efficient production of goods and services by Land Value Taxation. They contribute according to the advantage conveyed by the Land occupied. Land Value Taxation encourages the employment of capital and labour to optimise the use of land.

Land Value Taxation has some of the features sought in wealth taxes, capital gains, gift and death duties without the undesirable features of these taxes.

2 Three Criteria For A Good Tax

2.1 EQUITY

The equity criterion requires that people with equal income should receive equal treatment (horizontal equity) and people with different incomes receive different treatment (vertical equity.

2.1.1 Horizontal Equity

Ability to pay is generally taken simplistically to relate to income. However, for a tax to be truly equitable the total economic situation of the individual should be considered. Great effort is made to ensure that income tax is equitable as regards real income but significant anomalies still exist.

Income tax disregards notional income. The owner-occupier has a notional income in addition to any actual income, in that the dwelling is rent free. The tenant on the other hand must first pay the landlord before being able to assess disposable income. Furthermore, those on subsidised rents have a notional income equal to the difference between the economic rent and the rent charged. Fringe benefits and working conditions are also largely untaxed notional incomes. Land Value Taxation assists to correct the anomalies of income tax by taxing one of the contributing factors of a person’s total economic situation.

2.1.2 Vertical Equity

There is no tax treatment that actually constitutes vertical equity. Flat and progressive scales could all be claimed to meet the vertical equity criterion. Only a tax in which the wealthy pay the same or less than the poor cannot be claimed to be vertically equitable (i.e. not just a smaller proportion of income but actually less). It is generally acknowledged that it is easier for some to reduce their income tax liability. These people are more likely to have high incomes, consequentially there is a reduction in the effective progressivity of the income tax scale.

A study of the progressivity of the Australian taxation system claimed Land Value Taxation was regressive (relative to income). This claim was based on the council rating system in which tax rates vary from council to council. Naturally, rates can be lower in council areas where the land values are high and still collect the same amount of revenue. This same amount constitutes a smaller proportion of income. Additionally, it was assumed that all land tax is passed on to tenants. This assumption flies in the face of basic economic concepts.

Land Value Taxation at a State level imposes the same rating scale on all sites and therefore tends to be progressive. It is reasonable to assume that the wealthier own more valuable properties and the concentration of land ownership in terms of value bears this out. Therefore Land Value Taxation is effectively a wealth tax which increases the progressivity of the tax system.

The notion that income should be a basis for taxation, and for that matter what is equitable, is based on an assumption that one’s ability to generate an income is related to the services provided by the community. However, income can be a measure of what one gives to the community or what one takes from it. One cannot equate income earned through hard work with income gained through monopolistic powers or illegal practices.

2.2 EFFICIENCY

Efficiency as it refers to taxation is concerned with the effect of taxes on consumption decisions and the allocation of resources. A necessary assumption for all taxation is that public expenditure is at least as efficient as private expenditure. Therefore, it is the effect of the tax itself on economic decisions rather than the transfer of resources to the public sector, which is assessed for efficiency.

An efficient tax corrects market failures by compensating for externalities. For example, a tax on the sale of cigarettes compensates for the cost of medical care resulting from cigarette consumption.

Equally acceptable under the efficiency criterion is neutrality. A tax is neutral if it does not distort consumer or business choice.

A tax that alters prices in a way that causes a change of consumption choice creates an excess burden and is known as an inefficient tax. This burden is the loss of satisfaction due to the consumption of a less preferred commodity. For example if a beer drinker switches to wine because duty on beer makes it relatively more costly then that duty is an inefficient tax. At true cost the drinker would have preferred beer so his or her satisfaction per dollar spent is diminished.

Land Value Taxation alters the output decisions of firms in two ways. One, the point at which it is better to close down rather than operate at a loss is lowered. A firm will keep operating in the short run if the loss it makes through operating is less than the loss it makes through closing. Two, increasing fixed costs and decreasing variable costs by shifting taxation away from production and activity, will lead firms to increase production and decrease price. Company tax, payroll tax and employees income tax are all variable costs of production.

Land Value Taxation is an efficient tax. It does not create excess burdens but it assists in the efficient allocation of resources and encourages economic activity. Another level at which the tax may be seen to be efficient is at the level of land ownership.

Currently land tax is applied at the state level so selectively, and at such a marginal rate, that its effect on ownership is minimal. If the tax base were expanded and the rate increased then land use and land ownership decisions would be affected. Some of those decisions are examined here.

An owner of undeveloped land would continue to hold land in its undeveloped state so long as the satisfaction, the anticipated value of its future development or the potential capital gain appeared to the owner to be worth more than the tax liability.

However, a point would be reached where the liability would be greater than the motivation for retaining the land in its undeveloped state at which time a number of things may happen.

(i) The owner may sell the land to someone who values the land in its undeveloped state more than the owner;

(ii) The owner may develop the land thus gaining increased satisfaction and/or income which would compensate for the tax liability and

(iii) Lacking the funds, or the interest, the owner may sell the land to someone who is prepared to develop it.

In all the above cases satisfaction is actually increased as measured by what someone is prepared to pay for that satisfaction. This is not to overlook that a person may gain great satisfaction from owning the land but simply not have the funds to meet the tax. This is not a meaningful criticism for three reasons.

The first is that the most efficient means of measuring satisfaction and allocating resources is by a market system. Ownership of most resources and commodities operates on this system. It is accepted that material satisfaction should result from one’s contribution to society, that is, reward for work. If a person’s wealth is honestly come by then one cannot begrudge the use of it.

The second is that the operation of Land Value Taxation can allow for deferment of the tax liability (with interest) according to income and/or age. For example pensioners and those suffering temporary hardship should neither be forced to leave their homes nor permitted to pass on to others the benefits of not paying the tax. By deferring the liability, with interest payable, the person concerned is given no special privileges over others in the community. The accruing liability is a reminder of the economic cost. The inheritors of the person’s estate on the other hand must first discharge the liability before enjoying the proceeds of the estate.

Those eligible to defer may choose to arrange their affairs so that the tax is lessened (that is by moving to a less valuable land), and invest or consume more, but the choice will be theirs. With time the growth of the amount deferred over the whole community will stabilise as the payment of deferred tax compensates for that accruing.

Thirdly, those unable to afford ownership or use of valuable land pay less Land Value Taxation (directly and indirectly) while benefiting from the revenue.

Land Value Taxation encourages development and redevelopment according to the highest rate of return, eliminating speculation and capital gain as primary motives for land ownership. Implicit is the development of the most valuable land first, and to the greatest degree, while marginal land remains unspoilt.

2.2.2 Economic Incidence

The legal incidence of Land Value Taxation is on land but, as with all taxes, the question must be asked: can the cost of the tax be shifted? Who is it that feels the economic incidence of the tax?

The residential owner-occupier bears the legal and economic incidence of the tax as no one else is involved.

A landlord could be expected to attempt to pass on the tax to a tenant, however, there are impediments to doing so. It can be assumed that most landlords are charging as much as they feel the market will bear and therefore cannot increase the rent further. Landlords may move in unison to raise rents above current market levels. However, higher rents will change consumption patterns towards owner occupancy, sharing, etc., resulting in smaller demand. Those with under-utilised dwelling stock or vacant land will seek to bring it into production. The cost of inactivity will have risen due to Land Value Taxation, so the initially higher rents will appear even more attractive. The consequential increase in supply and competition amongst landlords will erode initial gains and rents will again fall.

A company can be expected to attempt to shift the burden of the economic incidence of Land Value Taxation. Companies are generally viewed as following one of two pricing policies. One is to maximise profits by producing at a level where marginal revenue equals marginal cost and the other is to maximise sales by maintaining a price below marginal cost. Land Value Taxation cannot be expected to affect either pricing policy as it is a fixed cost and not a marginal cost. If the introduction of Land Value Taxation is accompanied by a reduction in one of the taxes that contribute to marginal costs then output will increase and prices will fall. In short, business will not attempt to shift Land Value Taxation to the consumer.

The economic incidence of the tax can be assumed to rest with owners where companies own the land on which they operate. The size of profits due to site advantage are diminished while profits resulting from efficiency are unaffected.

2.3 SIMPLICITY

The simplicity criterion requires that the cost of collection to the taxation department and the compliance cost to the taxpayer be as little as possible. Land Value Taxation meets the simplicity criterion.

2.3.1 Collection Costs

Collection costs include not only the assessing of the liability but enforcing compliance. Land values are currently assessed for state land taxes and local government rates. A high tax rate may lead to contested valuations but once the relativities and acceptable margins are established, disputes would be rarer. Once a value is set then agreement is likely in that and similar cases for some years. State land tax assessments and council rate notices could be issued together to simplify procedures.

Elimination of the threshold would eliminate the expense of enforcing grouping provisions and controlling whether a property has a liability on it at the time of sale. Grouping provisions identify properties that effectively have the same owner(s).

Linking the Land Titles database and the Valuer-General’s database facilitates automatic assessment of liabilities.

2.3.2 Compliance Costs

Compliance costs include the method of payment. For example: queuing to pay stamp duty, the keeping of records that would not otherwise be kept and the expense of minimising the liability (for example: employing tax accountants and lawyers).

Compliance costs should be minimal as land values and ownership are well documented. If no land were exempt, no return would be needed unless seeking to defer payment. A flat rate is easy to calculate by those administering the tax and is easy to understand by those complying with the tax. A flat rate also avoids anomalies where the liability is greater if a whole site is jointly owned (corporate title) than if the parts are separately owned (strata title).

Regular automatic deductions from salaries and bank accounts could be facilitated.

2.3.3 Avoidance

A further collection and compliance cost arises through tax avoidance. Avoidance and associated costs do not arise with Land Value Taxation because transfer of title is not permitted without first meeting one’s tax liability or "carrying it on" to another property in the case of those entitled to defer the liability.

All valuations should be open to the public. Inspection would aid appeals against unfavourable valuations and a control against dishonest valuation. The factors and methods involved in each valuation should be available for public scrutiny.

3 APPROACHES TO TAXATION

Two views commonly espoused but not recognised as economic criteria for good taxation are the "ability to pay" principle and the "user pays" or benefits principle. A concern expressed by governments is the need for a steady but growing tax base. A concern of taxpayers is that the liability be predictable.

3.1 Ability To Pay

Ability to pay is the basis on which some believe taxes should be paid. These people generally prefer a progressive tax scale reasoning that the wealthier can forego more without incurring a greater loss of satisfaction. In other words a dollar is worth proportionately less to a rich person than to a poor person. Therefore, the rich can contribute more and not feel a greater loss. The correct degree of progressivity is a subjective position. Ability to pay does not relate only to income. Wealth can be regarded as a significant determinant of one’s ability to pay.

Land Value Taxation complements income tax from the ability to pay point of view in that resource ownership enhances one’s ability to make an income and adds to one’s well being. For example: non-monetary income. The Australian taxation system is not generally regarded as progressive. It is regressive for lower incomes, proportional in middle incomes and mildly progressive for higher incomes. As many believe progressivity is necessary to meet the ability to pay principle, the correlation of land ownership with income and wealth will cause Land Value Taxation to increase the progressivity of the tax structure.

Some argue Land Value Taxation is regressive relative to income. This seems very unlikely given that many of the lowest income recipients are in public housing and therefore unaffected. It has been shown earlier in this discussion paper that not only can Land Value Taxation not be shifted to tenants but that it is in fact beneficial to them. While part of the rent relates to land value they pay it regardless of Land Value Taxation, therefore no shift occurs. With the wealthier generally living on the more valuable land, and being wealthier as a result of higher income, then Land Value Taxation should be mildly progressive if anything! (Local rates may be regressive but only because rates vary from council to council according to the value of the tax base.) Those on a high income are more likely to own additional property (hobby farms, beach houses, ski lodges, etc.).

Income tax is based on declared monetary income and does not include income as capital gains or imputed rent. An owner-occupier gains the benefit of a property without paying income tax on that benefit while a person who invests the equivalent to the purchase price of a home in stocks and receives an income sufficient to pay rent for the same house pays income tax on it. In short, the imputed rent of the owner-occupier is equivalent to an income which many argue should be taxed to end the tax system’s discrimination in favour of home ownership. This is just one example of the inefficiency of income tax.

The simplistic notion of ability to pay being reflected in the liquidity of the taxpayer is a nonsense. The asset rich have the ability to generate income or borrow on the asset to meet that liability. The not-so-rich, those facing fluctuating income or those considered deserving can be permitted to defer payment of Land Value Taxation.

3.2 User Pays

The benefit principle requires that those who benefit from government services should pay the cost through taxation. Where this principle works in practice there should be efficient resource allocation. Vehicle registration and petrol tax can be related to the user where the revenue is spent on roads, police, etc.

In the case of Land Value Taxation one must look at the source of the tax base. A site has no intrinsic value. The value of land is derived from its exclusivity which is granted by government title and from demand by others who value the natural features it has (level, scenic views, etc.) and those features created by the community. These features vary from: defence; healthy economy; closeness to transport, shops, employment, amenities, etc.; quality of communication, neighbourhood, etc. A large proportion of these are a result of government spending.

The efficient allocation of public resources is assisted when landowners can identify a government service as affecting their land values and therefore their tax liability. Those who do not use the service will lobby for the removal of the service, or for a fee to be introduced for the service. The service will increase their land values and therefore their tax liability without benefit to them. This is a positive element in that it helps curb the community’s demand for services. Presently those who do not benefit directly from a service do not oppose it because of the affect on land values which can be realised as a tax free capital gain.

The collection of Land Value Taxation is cheaper than the collection of road tolls and many other petty fees. The collection of these fees often results in the sub-optimisation of resources. Economic theory indicates that price should be set at the marginal unit cost. The marginal cost of a car using a road, for example, is zero or near zero.

3.3 Stable Revenue/Predictable Liability

The effect of the rate on the size of the tax base is debatable. Land Value Taxation increases the cost of land ownership and therefore puts downward pressure on land values. On the other hand higher real incomes due to reductions in other taxes would put some upward pressure on land values.

The rate can be adjusted to meet revenue targets.

3.4 Balance Of Tax Mix

It is commonly put forward that there should be a balance in the composition of the tax structure. This desire for balance reflects the belief that the cost of taxation should not be borne exclusively by one sector of the economy.

Income tax, company tax and sales tax all relate to production and exchange. The N.S.W. Taxation Review Committee implied that there was insufficient contribution made by property taxes: a greater emphasis on Land Value Taxation would correct this imbalance without the undesirable aspects of death duties or a net worth tax.

4 TAX COMPARISON

4.1 Death Duties

Death duties penalise a certain form of consumption and cause a great deal of upset and anguish. Initially, income is taxed and then, if not consumed but invested, is taxed when the person dies. Consumption in the form of giving others satisfaction is discriminated against. In addition death duties are uncertain as death comes with varying frequency from family to family. A large proportion of inherited property is land. The payment of deferred Land Value Taxation by the estate and the continued payment of Land Value Taxation by the beneficiaries is equitable, simple and efficient.

4.2 Consumption Tax

Consumption taxes result in fewer goods being sold, prices increasing and profits falling. The consequences are less production and less employment in almost all sectors of the economy. If the vendor passes on all the tax then he or she will sell less. If the vendor does not pass on the tax the incentive to be in business will be diminished.

What contribution has the government made to the book industry, the insurance industry, the exchange of land, cars, etc. that it can claim a percentage? The government cannot justify sales tax on the basis of user pays or ability to pay approaches. Consumption taxes are neutral where universally applied, efficient where they fall exclusively on products with high externalities and inefficient when applied in any other form. Consumption taxes are usually not simple or equitable. They are generally costly to comply with and enforce and tend to be regressive.

Elementary supply and demand theory shows that the effect of an external cost on exchange is to diminish the returns to the seller, increase the cost to the buyer and decrease the volume of exchange.

4.3 Company Income Tax

Company tax increases in accordance with the success met by companies . The economic incidence of company taxation has not been established by empirical evidence. No significant changes in the cost of goods, dividends to shareholders, perks to directors or pay to workers has been perceived as accompanying changes in the rate of company tax. This may be because the economic incidence is spread among all those mentioned above, largely according to their relative power.

Taxes on interest and capital investment penalise people for foregoing the immediate use of their money, so that others can use it. We all know that capital is essential to production (as are land, labour and time). Those who wish to start a factory, open a mine, build a home, stage a theatrical production or whatever, require capital. Yet investment is taxed along with other activities by the taxation of profits and investors’ income.

Recessions are essentially periods in which economic resources such as land, capital and labour are under-utilised. The current tax system contributes to the situation by lowering production levels and causing factory and shop closures. The tax system increases the variable cost of production so that the marginal cost of production equals marginal revenue at a lower level of production.

Production ceases altogether if the minimum loss due to continued production exceeds the minimum loss of ceasing production. Many taxes relate to production and therefore add to the cost of production. These taxes increase the size of short term losses and therefore the likelihood of closures.

Land Value Taxation relates to land ownership and not production levels. As such it does not reduce the optimum level of production. As a fixed cost, Land Value Taxation increases the likelihood of continued production despite short term losses.

4.4 Capital Gains Tax

A comprehensive capital gains tax is costly and complicated to administer and full of inequities. A capital gains tax reduces the incentive to invest and participate in sunrise industries. Successful companies in sunrise industries are often sold as a capital gain to established companies. A significant part of capital gains are due to increases in land values. Land Value Taxation reduces the size of the unearned capital gain by keeping land values down and recoups a proportion of the capital gain. It should be noted that the capital gains tax applies to land, even though it is not ‘capital’ in the economic sense.

4.5 Income Tax

Labour (in its broadest sense) is also the object of exchange. The legal incidence of income tax falls on the recipient of income, but the economic incidence is often passed on, and back. All workers be they blue collar or executives will seek a higher gross income to offset the loss to income tax. Some may work more to increase their after tax income. Others will see the benefits of working more as inadequate, due to the effect of income tax, and not bother. Others still will find ways to disguise their income.

As these pressures increase the cost of labour by less labour is employed.

In brief, income tax decreases the level of employment by reducing incentives on both sides of the exchange. Income tax also diminishes investment. The perpetual issues (the cost of living, unemployment and interest rates) are all contributed to by income tax.

4.6 Payroll Tax

Payroll tax provides a disincentive for the employment of labour.

4.7 Stamp Duty

Stamp Duty is notionally a tax on documents. However, often, a document does not even exist. The tax is an additional cost on sales and rentals and various forms of legal agreement. The revenue for a transaction can vary from a few cents to hundreds of thousands of dollars. The tax is complicated to administer and to comply with. In many cases complex legal documents need to be carefully examined to assess the liability. The tax is a disincentive to doing business.

Some argue that it is a defacto wealth tax but as it is only collected when the wealth is transferred it has more in common with a consumption tax.

4.8 Nationalisation

It has been argued that to tax land is to nationalise it. By this logic, labour and goods have already been nationalised. A tax or levy is not equivalent to nationalisation. A tax on land-holdings merely entails that, for the sole use of a portion of this country, a fee is paid to the community. A fee the community deserves by way of compensation for what is withheld from it and in return for services that the community provides to that site. Land Value Taxation does not say who should own a piece of land, who it can be sold to, or how it should be used. Land can be held idle, used for private purposes such as the locating of a dwelling or for commercial purposes (factory, shop, agriculture, rented dwelling ...) and the level of taxation remains unchanged.

5 SOCIAL EFFECTS OF LAND VALUE TAXATION

5.1 Improved Access To Housing

In the housing sector the first change due to the introduction of Land Value Taxation, that can be foreseen, is the development and utilisation of the more valuable vacant land and premises. It would no longer be possible for people to make money through increases in land values for two reasons. Firstly, Land Value Taxation is a cost that is offset against any capital gain. Secondly, Land Value Taxation tends to stabilise land values. Home sites would come within the range of more people’s purchasing power as land values fell, so reducing the demand for rental and state owned accommodation.

5.1.1 Rental Housing

In reaction to the introduction or an increase of Land Value Taxation landlords may attempt to put up rents. If charging below market rent landlords would not have any difficulty in raising rents to market levels. Otherwise landlords would have difficulty raising rents as the housing market becomes more competitive.

It is worth considering why rents are as high as they are and not more nor less. It is safe to presume that the landlord generally charges the highest rent a tenant will agree to. Sometimes it is said that additional costs such as higher rates or higher interest on a mortgage are simply passed on by the landlord to the tenant. The landlord can do this if the tenant has no choice of accommodation. The argument that such increases exist throughout the market and so no choice is available is not completely true. A limit exists for each tenant as to what he or she is prepared to pay for particular accommodation. When this limit is reached the tenant will look elsewhere. The occupier will move further away from the shops, the beach, work-place or into smaller, older accommodation in a less fashionable area or move in with others, perhaps with family. The landlord then has to compete with other landlords to find a new tenant willing to pay the rent.

One reason landlords can charge rents at the level they do now is that so much land is held out of the market (neither used nor put up for sale or lease) or is represented in the market far below its potential (underdeveloped). Land Valuation Taxation will in fact create greater competition among landlords. What happens then to the tenant if Land Value Taxation is introduced? The landlords’ immediate impulse is to put up the rent, and this may happen. However, there are also owners of unoccupied property who will decide to make it available for occupancy or sell to someone else who is prepared to. The addition of these properties to the market will decrease the competition for housing and so keep rents down.

If a landlord succeeds in raising the rent it may be evidence of a higher land value which will in time be reflected in a higher Land Value Taxation liability. A landlord’s net income will be in keeping with the improvements made. If however the tax is high because the land is valuable but the rent is low because the development is not of commensurate value, the landlord will have an incentive to make improvements. As this is done over large areas of decaying inner city suburbs the land value will in fact increase. This encourages a uniformity of development: the isolated developer is not penalised by the neglect of his neighbours as they are encouraged to follow suit. In this manner our inner city heritage would be maintained and at no expense to the taxpayer. The cost would be paid by those who have the good fortune to live there.

5.1.2 Home Ownership

For the home buyer land would inevitably be cheaper as those holding land for speculation sell. Unused land would be developed by the owner or sold to someone who had access to the capital to do so. Thus the pressure to extend into rural land holdings would diminish.

Parents who have raised families that are now grown up would find an incentive to move from a site convenient to work to a site convenient to leisure - near the beach, the mountains, the golf course, the country, etc. Young couples raising a family or working in the city would be better able to find a suitable home. The community would save in not having to close down inner city schools only to build new ones on the perimeter and less time and energy would be lost in commuting. The city and its resources would be recycled.

Land Value Taxation should replace stamp-duty thus relieving the home buyer of this further initial expense. As Land Value Taxation encourages the exchange of properties it would be unfair to also tax the exchange.

5.1.3 Public Housing

Government policy should necessitate as little resumption of private land as possible. One means to this end is to reduce the need for government housing. Land Value Taxation encourages the private sector to provide housing for all sections of the market. One reason why the private sector currently provide so little low cost housing is that it must compete with government housing provided at below market rents.

5.2 Urban Consolidation

Land Value Taxation counteracts urban sprawl with the associated high cost of services. The city is consolidated before further marginal development takes place. But just as there is pressure to spread there is pressure to go up. At present the few lots released for redevelopment in the inner city benefit from the high demand for new office space and accordingly attract high prices. The demand and the cost of the site justify greater capital expenditure and the creation of larger buildings. Land Value Taxation moderates the height of buildings as well as the spread. Land Value Taxation guarantees a uniform and rapid development but does not dictate how land should be used. Rational development is guaranteed without the need for the expense and rancour of a bureaucracy and its legislation. Horizontal expansion of the Central Business District is likely leading to a reduction in the pressures on services.

Land Value Taxation encourages the development of more valuable sites first. Where values are high more sites change hands and are developed. With an increase in supply (sites on the market) prices fall and the need for high capital investment to attract a return on the initial investment (the cost of the site) is reduced. As demand is spread over a larger number of sites building heights and floor space ratios are reduced. Legislation is not needed to dictate how high buildings may be built. Developers would be wary of over-development in this competitive market which could lead to an oversupply of floor space.

Land Value Taxation fosters an awareness of the rent factor in costs leading to a greater degree of economically rational decentralisation which logically puts less strain on the natural environment, resources, the individual and society.

It is hard to estimate how much land is being under-utilised in a city or district or even to arrive at a definition of what under-utilisation is. ABS Census results show that nearly half a million dwellings were vacant in Australia. Of these a third were holiday homes, a third in transition between sales, and a third simply vacant. To these can be added vacant land suitable for development and land used for a single dwelling where medium density housing is the norm. Land Value Taxation encourages appropriate levels of development.

The community zones areas for preservation as historic sites, or as structures of historic merit, or for use as commercial, residential, industrial, or recreational land. In theory, determining usage by zoning is neither desirable nor necessary if Land Value Taxation is operative. Zonings affect the value of the site. A site restricted to having a building of two stories on it, because there is a two-storey building of historical or architectural value on it, will not have the same market value as a neighbouring site zoned to permit a twenty storey building. Only those wishing to use the site with its current development would purchase the site, and pay less in Land Value Taxation for having accepted the restrictions. The tax is an incentive to maintain the structure on the site so as to maximise the return on it.

How the property is used is not so important. Usage will in part be determined by demand and in part by costs. A site valuable for residential usage may also be a valuable commercial site. It is unlikely to also be a valuable industrial site. Where usage detracts from the value of surrounding properties the owners are in part compensated by a decline in their Land Value Taxation liabilities. Where a development adds to the value of surrounding properties the owners’ unearned capital gains are moderated by an increase in the Land Value Taxation liabilities. An example of the efficiency of Land Value Taxation is that both positive and negative externalities are catered for.

5.3 Government Expenditure

The tax bill overall would be reduced because the size of many government departments could be reduced. The cost of collection and compliance of Stamp Duty and Payroll Tax could be eliminated. A universal flat rate Land Value Taxation would actually decrease the cost of collecting Land Value Taxation. As the market would offer more low cost housing the expenditure of the Department of Housing could be reduced. The expense of providing infrastructure to new housing developments would be reduced while urban consolidation takes place. Other departments would have reduced expenditure.

The State Government controls the exchange of titles and the valuation of sites. Councils issue rates notices to most landowners. There is no need to create any additional bureaucracy.

5.4 Industry and Commerce

At present, industry is burdened by company tax, stamp duty, employees’ income tax, payroll tax and sales tax. None of these assist industry to make a profit, streamline production or use resources more effectively. As with most taxes they are taxes on activity. These taxes combine to encourage industry not to show a profit, to employ fewer, to raise prices and to seek concessions and assistance. The bigger or more prosperous a company the more it is taxed for its effective use of labour and capital.

Companies which gain their profit through ownership of resources be it mining, agriculture, timber, fishing, etc. are encouraged to exploit the resources even more. Companies that have the resources or sites convenient to the market or the workforce, have an advantage. There is little incentive for enterprise or effort. Land Value Taxation levies companies according to their land holdings and not for employing more people, or for having a large payroll, or for using capital. They pay for using national resources and for the services provided by the community.

Small businesses that do not require valuable sites to function would pay little tax. Competition would keep the profits down in these low taxed industries. Those industries less dependent on port or airport facilities would tend to move away as those more reliant on these facilities moved in. The government would not need to underwrite decentralisation projects as economic pressures would be sufficient. Commercial enterprises would be similarly affected. Businesses in premium locations would pay more Land Value Taxation than those further from main roads, stations or shopping centres. To optimise the return from a site shops would employ more people (which would cost less given a reduction in payroll tax). This implies a trend to fuller employment.

5.5 Schools, Hospitals and Churches

Schools, Hospitals and Churches often have architectural merit deserving of preservation. However this merit is independent of use. Not all Religions have the same land-holdings and the older more established Religions have an advantage in this respect. There is no justification for maintaining this advantage outside of bigotry. It is reasonable that parishioners pay the Land Value Taxation for their local church as should any other local club or group for their land. At very least the land values and the amount lost to revenue should be made public so that the public can decide to what extent, if at all, it wishes to subsidise religions. Subsidies to any group should be through the budget.

Education is valued by the community and to be encouraged. Schools would benefit greatly by the reduction of Payroll Tax which adds to the wages bill - the major component of education costs. However, schools should be expected to rationally use land, just as any other institution. Schools belong in urban environments - that is where they find their clients - so it should not be distressing for them to be priced out of the Central Business District. Some schools which tend to be the older ones find themselves located on large tracts of valuable land. Newer schools, whether private or public, cannot afford to establish themselves on similar sites and so must go further out or settle for a lot less. Accordingly, sites owned by educational institutions should be included in the tax base. Land Value Taxation encourages schools to rationalise and share their resources. Schools would have an incentive to open out of hours for adult education, community meetings, extra-curricular sport or whatever. As for the heresy of taxing education, it is taxed already through income tax. Revenue raised from schools based on land value may be reallocated to schools based on the services provided, as opposed to resources consumed. A similar argument may be made for hospitals.

5.6 The Poor, The Aged and The Infirm

Consider the poor, the aged and pensioners that live in rented premises. The rent notionally has two components, one component is for the rent of the improvements and the other for the land. In other words, these people are paying land value taxation already to the landlord and would be no worse off if it went to the government. But since the tax is coming through the landlord there is no way that they could be exempted. The landlord deserves the rent on the improvements, for providing a service.

It would be inequitable to exempt the poor, the aged and pensioners who own property when there can be no exemption for the propertyless aged and poor. A fairer solution is to increase the pension and remove the means and assets test and have no exemptions from the land value tax.

Thus the elderly could either use the increase to pay the tax or to compete for rented accommodation. Alternatively, the aged and pensioners could be allowed to defer the liability with interest. In this way they would be able to continue living in their home but on their death the tax owing would be payable by the estate.

5.7 Rural Land

Rural land, whether marginal or highly profitable, should be included in the tax base. Land Value Taxation will not cause farmers to sell-up nor for rural land to be left idle. The tax on marginal land will be small. The land tax liability is deductible from income for the calculation of income tax.

While land values do vary with economic and climatic cycles, Land Value Taxation liabilities are predictable. Provision for deferment due to low income should be permissible. Land Value Taxation is far more equitable than death duties and capital gains taxes which are as unpredictable as visits of the Grim Reaper.

Differences in the wealth of farmers often has more to do with the potential of the land than the individuals’ skill and effort. It is preferable to tax farmers for the natural potential of the land they own than for the skill, effort and capital they apply to it.

5.8 Macro-Economic Effects

With the removal of payroll tax, the employment of labour would be cheaper. As the use of land increased, labour and capital would be in greater demand thus easing unemployment. The Social Security cost would decrease as would the social cost of unemployment. As the urban sprawl slows, local and state governments would need to spend less on new roads, schools, supplying electricity and telephone lines, water, police, etc. Communities would maintain a continuity of age as people moved to the resources instead of expecting the resources to be created wherever they go. Gone would be the waves creating demands which then disappear as another generation grows older. Examples are hospitals, baby health centres, kindergartens, schools, colleges, factories and offices, golf clubs, flats, old peoples’ homes and hostels. The monetary and social costs of unemployment, slums and alienation in the suburbs would be reduced.

Government and the community could then direct themselves more attentively to other issues. Land tax won’t cure inflation but it will help the country balance its budget and create a healthy economy both of which will help to control inflation. Land is part of the package of goods and services used to calculate the Consumer Price Index. A reduction in the cost of land will have a direct effect on the Consumer Price Index.