by Dr. William Batt
Albany, NY
(Editor's note: For the 2002 Declaration of
Interdependence prepared by ARISE (A Regional Initiative
Supporting Empowerment), the Albany, NY affiliate of the
Gamaliel Foundation (www.Gamaliel.org), the following paper
was written by Dr. Batt to flesh it out with a Georgist
message. The portions are in italics that are quoted from
ARISE's Declaration.)
Preamble: We live in an interdependent regional community,
and this community has reached a crossroads. High tech
industries and other developments are poised to bring more
new work and new growth into the area than we have seen for
a long time. This situation confronts us with a fateful
question: Will this development take place haphazardly and
continue to fragment our region, or will we plan, market,
and unify our cities, suburbs, and rural areas in a way
that will lift all boats on the rising tide? We affirm
that our area can prosper in the long run only if all of
our citizens have access to educational and economic
opportunities and life in an ecologically sustainable
environment. We oppose the patterns that have tended to
separate us by race and class and have created unmanaged
growth and pockets of poverty in many places. The
following principles reflect our convictions and our
self-interest:
Principle One: Plan for Sustainable Growth
We, the people of our region, depend upon a
sustainable and healthy environment. We must curb the
sprawling, uncontrolled growth that leads to waste of
resources, the over-reliance on automobiles to reach
scattered communities, the destruction of our farmland and
open spaces, and the abandonment of our inner cities. We
support development within already existing infrastructures
and the redevelopment of brownfields.
Understanding the Problem of Promiscuous Sprawl and
Resource Consumption. What causes suburban sprawl
development and inner-city evisceration?
The problems facing American cities today have
arisen largely in the 20th century, with the institution of
identifiable government policies that altered economic
equilibriums between urban centers and peripheral
locations. With an understanding of the genesis of these
problems, attention can be given to their correction.
The centrifugal forces of urban sprawl are due to
two economic factors - the altered market price of
landsites and the distorted pricing of transportation
services. As most people easily recognize, the market
value of landsites in urban cores is many times what it is
in the hinterlands. Urban centers have high land value,
and as one travels out to rural areas and beyond, those
site values ultimately drop to points that are
infinitesimal. In the spring of 1998, one land parcel (the
building was to be razed) of less than an acre in New York
City's Times Square, and split in two pieces by Broadway,
was sold by Prudential Life to Disney for an estimated $240
million. To take another instance, a nine-acre tract on
the East River in New York City occupied by an obsolete
power plant was purchased by Mort Zuckerman to build
high-rise condominiums two years ago. The sale price was
in the neighborhood of $680 million, and would have been
higher were it not for some enormous costs associated with
the demolition of the old structures. These reflect the
land values; for comparison, the total assessed land and
building values of all real property in the four counties
of the Capital District are about $135 million. Why the
land value becomes so expensive I will return to in a moment.
The way in which geographers and some land
economists understand transportation is by using the terms
accessibility and mobility. As explained in one basic
textbook, "Accessibility refers to the number of
opportunities, also called activity sites, available within
a certain distance or travel time. Mobility refers to the
ability to move between different activity sites (e.g.,
from home to a grocery store)."
American transportation planners have focused
excessively upon mobility, with almost total disregard for
accessibility. The result is that we are frequently hard
put to accomplish our transactions for lack of easy access,
even though it is easy to travel great distances with
facility. One old joke will serve as a metaphor to better
illustrate the dilemma:
A man ordered a cup of coffee at a lunch
counter and shortly then ordered a second cup. After
quickly drinking that cup, he ordered a third cup, and then
a fourth, and then a fifth. The waitress, astonished at
this man's requests, finally said to him, "My Sir! You
certainly do like coffee." I certainly do," he replied.
Otherwise I wouldn't be drinking all this water just to get
a little."
The analogy is apparent: water is to mobility as
coffee is to accessibility. We do an awful lot of driving
just to do what we need to do. This is because
transportation engineers and land use planners have
confused two fundamental concepts: access and mobility.
If we were more mindful of access we would plan our cities
so that we wouldn't need to travel so far to get places.
But then we'd have to price transportation services in a
way that use reflected marginal costs. Right now, drivers
pay only about a tenth the true costs of their
transportation; our society picks up the tab for the rest.
So, when it comes to selecting where we want to have our
homes or where we site our workplaces, we give little or no
heed to the costs of travel. When the public screams about
a possible gas tax increase of a nickel, it's worth
pondering whether we'll ever really face up to the
imbalance in transportation designs - and this question
will loom much larger next decade when petroleum sources
start to dwindle.
Addressing the proper pricing of transportation
services is a challenge that is worthy of more discussion
at another time - even though it certainly falls within the topic of building sustainable
economies and communities. Suffice it to conclude here,
for the moment, that for transportation planners and many
land economists, the price of locational landsites is a
function of capitalized transportation costs - the costs of
travel converted into the price of attractive site access.
Another way to understand the high value of urban
landsites, however, is to view them as the economic surplus
of high volume community activity. Where there are no
people, land has little or no site value; where people
elect to be, sites nearby rise in market price accordingly.
This has nothing to do with what site owners may do or not
do to their sites; it's a function, rather, of what
everyone else does. To this extent, urban land values are
socially created, and this is important.
The Concept of Economic Rent, or Land Rent
Consider, for example, a remote and vacant land area on which is imposed a tic-tac-toe template. Now let's
suppose that some structures - perhaps a combination of
apartments, office buildings, and public service buildings
are built on every square except the one in the center.
Whereas previously, when totally empty, that vacant land
had very little value, now the whole lattice has an
impressive market value. And what square has the highest
value of all? The center square, of course, even though
the owner of that parcel did nothing to improve it! The
creation of that landsite value, what economists call land
rent, is a function of the community's enterprise only, the
original owner was a passive beneficiary of that rise in
value; his gain is a windfall.
To understand the dynamics of a modern city, then,
one has to realize that the landsites are often either
vacant and held off the market for speculative gain, or
filled with depreciated structures not sufficiently worthy
of the high-priced landsites on which they sit. Meanwhile,
because titleholders of available landsites are holding out
to sell for all they can get, builders cast their eyes to
more remote second-best locations - ones that they can
afford. If landsites are too expensive for either
households or businesses to use, they remain unoccupied
while less expensive locations are chosen as suboptimal
alternatives. Land use configurations in urban settings
therefore evolve in suboptimal ways. I will return to this
point later.
Most Commonly Employed Solutions
The answers most often touted for urban blight and
sprawl development are various public subsidy and
investment programs downtown, and public purchase of open
space and curtailment of its development at the periphery.
These are hugely expensive and questionably effective
solutions - particularly keeping in mind the causes of the
problem outlined above. They try to correct the symptoms
rather than dealing with the underlying economic cause and
dynamic.
When publics buy up landsites - either to seize
the initiative for downtown development or to remove sites
in outlying areas from development pressures - they
frequently do exactly what land speculators hope they will.
They walk away smiling, all the way to the bank. Even when
land is removed from development pressures through grant of
easements or for tax write-offs, it is done in haphazard
and inequitable ways very expensive to the general public.
It is worth investigating how much the preservation of open
space has cost the public in the past few years - but
attempts to ascertain this information are met with
incredible difficulty at every level. It's frequently
gifted for tax write-offs as well as bought, so no one
really knows.
Projects are often initiated through public-private
partnerships that require special incentives for their
creation, a tacit admission that the free market by itself
is not working. What is it, one should ask, about the
economies of cities that prevent initiatives by the private
sector alone?
In recent years, several planning advocates have
touted the virtues of curtailing development beyond defined
lines - in what have come to be known as "urban growth
boundaries," UGBs. All serious study of their history
(Portland OR and Boulder CO are the only two instances of
any sustained experience) shows they are questionably
effective, and usually succumb to development pressures
over time. The reason should be apparent: as the demands
for buildable land rise, pressures increase, ultimately to
the point that leaders relent in their attempts to maintain
the boundaries. When they can't hold the line any longer
against inexorable economic pressures of increased land
values induced by artificial girdles, political decisions
are made to alter their design. These answers don't induce
more intensive use of landsites as much as they raise the
value of the interior land itself, treating symptoms rather
than root causes, all due to a lack of understanding of the
underlying dynamics of land economics.
The reality is governments have only two
constitutional mechanisms by which to effectuate policy:
every initiative must be grounded in either its tax powers
or its police powers. These translate more easily into
what are often called "command-and-control" approaches, and
"fiscal" approaches. To be sure, many revenues of
government are collected under police powers, and there is
no one-to-one correspondence here. Suffice it to say,
however, that governments are limited largely to censuring
people and institutions when they don't abide by the law or
to inducing them to modify their initiatives when they
don't meet with adequate public favor. When it comes to
fostering behavior in others, governments are better at
prohibiting than facilitating. The alternative is to
undertake projects directly, which is expensive.
Command-and-control approaches are limited in their
facility to foster better urban designs and practices. And
when they are employed, it is only after having had to
coopt vested interests - these days, the word is
"stakeholders" - to insure that anything will happen at
all. Solutions still remain sub-optimal. One example will
suffice to show how command-and-control approaches have not
worked. In 1996 six Bay Area communities "locked in" long term protection for a greenbelt by adopting a UGB covering a total of 3.75 million acres. For perspective, this translates to 5,860
square miles, an expanse equal to that of Connecticut and
Rhode Island together! But only 731,000 acres, 1,142
square miles, are urbanized at the present time and it
could be a century before "buildout" and any significant
impact from such measures. It was politically impossible
to impose any more compact design, which illustrates the
difficulty, and indeed the fallacy, of using
command-and-control devices to constrain inexorable
economic forces.
Tax powers also have their limitations - it was,
after all, John Marshall who noted that the power to tax is
the power to destroy. And the public has certainly come to
understand that taxing wages tends to depress work, taxing
sales discourages consumption, taxing capital tends to
dampen investment, and taxing savings discourages saving.
But to conclude that all taxes are harmful is to reveal an
ignorance that needs correction. There are some taxes, in
fact, that actually foster economic enterprise, just as we
would like them to: this is what needs to be recognized to
advantage the public.
Solving Urban Blight and Stemming Sprawl Development
To better understand a fiscal approach that has proven its value in many American municipalities and hundreds worldwide - it is helpful to go back to the
tic-tac-toe board example above. Recall that the increased
value of the landsites accreted in the form of capitalized
land rent that was a socially created product. That
accreted land rent resulted in the rise of market value of
the parcels regardless whether they were improved upon or
not. Rent is created regardless of who owns the sites.
This offers an opportunity for the collection of value to
serve the community's public needs without in any way
diminishing the incentives to build upon them.
In fact it enhances them. By collecting the
economic rent in taxes from land parcels - vacant,
underused, and even efficiently used - the incentive to use
them to the full extent of their worth is increased by
exerting a downward pressure on the market price of those
sites while raising their carrying costs at the same time.
Shifting the burden of holding titles up front liberates
their use in open markets. Raising the tax on land higher
induces titleholders to improve them, because it then makes
no sense for them to wait for their value to increase and
to capture any windfall gains. Capturing the economic rent
that is otherwise capitalized in the value of sites not
only encourages their better use but encourages improvement
also for all the sites in the general vicinity. Rather
than second-best locational decisions on landsite uses, the
collection of land rent actually fosters their most optimal
use. This is an instance where higher taxes actually
foster greater economic health. It also has the effect of
lifting all the boats on a rising tide as the Preamble to
the ARISE Declaration calls for.
The collection of land rent partially occurs
already in the form of the conventional real property tax
that so many people find anathema. But the property tax as
it is presently employed is really two separate taxes, each
with its own economic dynamic and each working in a way
that negates the behavioral and economic effects of the
other. The tax on land - actually on the land rent -
fosters better use of parcel sites; the tax on
improvements imposes a penalty for the maintenance and
improvement of sites, whether they be homes, office
buildings, shops, or factories. The current property tax
is like a train with an engine on each end, each pulling in
the opposite direction. Gradually removing the tax on
buildings and getting the same aggregate revenue from land
sites has the effect of incentivizing investment in land
sites and removing the penalty that now obtains for fixing
up homes and offices. Every time the tax on improvements
is lowered, there is greater incentive to improve; every
time the tax on land is raised, there is, in the same way,
an increased incentive to improve. In this way,
municipalities are quickly induced to revitalize their
total physical plant. Harrisburg, Pennsylvania, was
adjudged the second-most depressed city in the nation in
1982, with 1,400 boarded up old brownstones. Today there
are essentially none, and Mayor Stephen Reed attributes the
change to the implementation of a regime that gradually
phases out the tax on improvements and increases instead
the tax on land value in a revenue neutral manner.
In a shift of taxes off buildings onto landsites,
homeowners, typically about two-thirds of them, see a
decrease in their tax bills, with underused landsites in
high-value areas picking up the difference. Healthy
structures on small footprints of land typically see their
taxes go down; buildings which occupy small spaces on
sprawling lots - parking lots or drive in convenience
service sites typically pay more. Cities become more
densely developed and walkable, more transit friendly with
less need for parking. Moreover, because these taxes are
linked closely to the capitalized value of the property
they affect operating budgets of businesses in a very minor
way. Nor can one evade or avoid a tax on land - and you
can't take your land to the Cayman Islands. Someone is
going to own that land! It is a win-win situation for
everyone.
Even as the land value tax is effective in
revitalizing urban cores, it also reverses the centrifugal
forces of sprawl development. Current taxes have a
profound distorting effect on behavior, especially the
property tax, and the tax on land value removes that
distortion. It is completely neutral in its influences.
So settlement can evolve optimally. Businesses, given the
option, prefer to be in easily accessible areas, not out in
remote hinterlands. Even homeowners, despite their
oft-expressed preferences for pastoral venues, largely opt
for walkable, neighborly, communities over
automobile-dependent commutes. Most people elect to settle
in outer rings because they can't afford the real estate in
more accessible locations, or else that they find the
despoliation of those neighborhoods risky spots on which to
stake their most important investment.
Removing economic distortions allows people to settle where
they would logically choose to. As neighborhoods gradually
improve once more, people with discretionary income are the
first responsible for what has come to be called
"gentrification." But poor people in old run-down homes
they've owned for years are typically delighted when they
see upturns in the value of their property. And paying no
taxes on their buildings is also a bonus.
Winners and Losers in a Tax Shift to Land
For poor people who don't own homes and rent -about a third - they will pay no tax at all. The land tax cannot be passed on to tenants, because land, being inelastic in supply, is capitalized (see below). Thismeans that the tax is borne about half by residential and
about half by non-residential titleholders. Because
typically 3/4 of the parcels are homes and not situated on
the highest value landsites, their burden is shifted to
sites of greater value - those downtown or by traffic
nodes, especially in high-value underused sites typically
marked "available" for commercial development. Rural
tracts - farms, forest land, etc. - have negligible value
and pay a trivial proportion of the tax.
Many people wonder whether there are sites in their
cities that have any potential for further development,
especially if they see few vacant lots. The answer becomes
clearer when one sees not only vacant lots but underused
landsites relative to their value. Fully depreciated
structures on sites that have very high land value usually
warrant totally new buildings. Depending upon the method
of appraisal, the aggregate percent land value on an
assessment roll is typically between 30 and 40 percent.
When a ratio is computed for the aggregate improvement
value to land value, any single parcel with a fraction far
below the aggregate average likely needs new investment.
Those parcels with a fraction far above the fraction
average are buildings that use their landsites efficiently
relative to their value. The way the land tax works is
that any site with a fraction below the aggregate
district-wide average will end up paying a higher tax, and
those sites with a lower fraction will be rewarded with a
lower tax. In this way every incentive is offered for
titleholders to spruce up their holdings.
How is it that there are typically so many winners
and so few losers with the application of a land tax? It
is because it releases the latent surplus, it fosters
greater efficiency in the use of land, in the economic
sphere, and in the life-enhancing aspects of community
renewal. Its administration is transparent, almost
costless relative to the burden of other taxes because
there are few if any challenges to assessments. That many
fewer challenges and appeals after assessments are
performed means a significantly lightened load on local
government. It has a legitimacy that makes its payment
comprehensible to citizens. The difference comes from the
reduction in the amount of "deadweight loss" that comes
from a shift from one kind of tax to another. Studies show
that many conventional tax designs today deaden the
productivity performance of the economy - perhaps by as
much as 50 percent. This will be dealt with in discussion
later, but it is significant to note here.
Principle Two: Develop a United Front Against Poverty
We, the people of our region - no matter what race, gender,
political persuasion or religion - can either rise together
on one tide of prosperity or sink into division and
stagnation. No municipality or township should be so
overwhelmed by poverty that it can no longer counter the
social consequences of such poverty. Policies that
concentrate poverty intensify a host of social problems -
struggling schools, violent crime, addiction, eroding tax
base - that spread and threaten the social and economic
well being of the region as a whole.
Can Changed Tax Policy Relieve Poverty?
If one does a websearch on the words "economic
justice," the first site that springs from Google is
www.progress.org site and its branches - all of which
describe and explain the economic and tax philosophy which
this paper urges. To academics, this realm of discourse is
also known under the name "distributive justice" (to
distinguish it from "retributive justice"). Distributive
justice deals with the question, "What is fair?", of how
the wealth and productive capacity of societies should be
shared. A full discussion of the subject would take us far
afield of the immediate question, but the progress.org site
is commended to readers here along with earthrights.net and
georgist.com, which will link the most adventurous searcher
to many other sites that address these matters from the
standpoint of ownership, taxation, and principles of
fairness.
This is because Henry George, the greatest and most
fervent exponent for economic justice a century ago, and to
this day perhaps its clearest thinker, remains an
inspiration to moralists the world over. Among those who
subscribed to his views were Winston Churchill, Leo
Tolstoy, John Dewey, Theodore Roosevelt, Robert Hutchins,
Upton Sinclair, Mark Twain, and Charles Beard. The ideas
he expressed have been kicked around for a century and
more, but today we have the data and the computer power to
test them empirically. Some eight Nobel-Prizewinning
economists have endorsed the view that the best possible
tax would be a tax on land value, and contemporary pundits
endorsing his ideas range from William Buckley and Stephen
Moore on the right to Molly Ivins and Michael Kinsley on
the left. To be sure, they do so for different reasons:
those on the right appreciate that investment capital would
be relieved of taxes, and that it meets the principles of
sound tax theory more than any other tax design; those on
the left especially appreciate its progressivity - that it
best relieves poor people of tax burdens. But for both, it
is attractive because the economic pie is expanded
substantially, economic drag is reduced, and efficiency and
simplicity are increased. Indeed all the principles of
sound tax theory that have been worked out for three
hundred years are satisfied.
One hears so often that the conventional property tax is regressive. But now we know it's the opposite. Studies for the last thirty years, in what is called the "New View," have shown that the property tax is progressive. One needs to understand that the
conventional property tax is really two separate taxes -
one on land values and one on improvement values - that
work in very different ways, have different patterns of
incidence (i.e., burden shifting), and fall on
non-residential as well as residential parcels. Because
part of the tax is conflated with capital wealth over time
and is deductible from state and federal income taxes, its
final incidence is difficult to identify. It has taken
some of the best econometricians and most powerful
computers to analyze the data, but now the matter is mainly
settled. The upshot is that each part of the property tax
needs to be analyzed separately, the land part and the
improvements part.
So why is a tax on land value progressive?
Recognizing the land component, first, leads to the
conclusion that the tax is significantly progressive.
Consider first of all that roughly 65 percent of all
households in the nation "own" their own homes - or at
least have title to them regardless whether they are
mortgaged or not; the remaining 35 percent are tenants
that rent. These latter include mostly poorer elements of
the population. Further, the tax on land value part of the
current property tax is not shifted to tenants - it cannot
be - as land, being inelastic in supply, will see the burden
of the tax capitalized instead in the market value of the
parcel. People who don't understand economics frequently
ask what is to prevent the landlord from raising the rent
to include the land tax component. But if the apartment is
to find a renter, it must be priced at the general market
level, and that is nothing to do with the incidence of the
tax burden or other expenses the landlord has to bear.
How does the Land Tax Shift Play Out?
In assessing the aggregate burden of the property tax throughout a municipality, roughly half its weight falls on residential parcels and the other half on non-residential parcels of all sorts. The non-residential
parcels, largely business properties, are frequently rented
to tenants, and are usually located in high land-value
sections of urban areas. Agricultural property, even if it
is the overwhelming proportion of acreage, constitutes only
a trivial proportion of the taxable value, even less when
many of the tax breaks for farmers and others are applied.
Residential parcels, even when they number about 3/4 of all
property parcels, don't contribute much revenue except in
the aggregate. The frequent exemptions, deductions, and
offsets of the tax structure make it difficult to estimate
the aggregate incidence except by looking at the tax roll
as a whole - and simulations would be as complex as the tax
roll as it stands.
What likely accounts for the resentment over the
property tax is its palpable unfairness in its current
form. It relies on assessments of land and improvements
that are infrequently performed, difficult to compare, have
no apparent logic, and invite challenge. And no one takes
pains to explain it. Lastly, the tax is paid all at once
(unless it is paid into an escrow account as part of the
typical mortgage). But when the tax is on the land alone,
its logic as a user fee is clearer.
Buildings depreciate in value over their useful
life, just as cars, refrigerators, and any other
manufactured goods. But land, on the other hand, typically
appreciates in value, so the land value increase accounts
for a home's appreciation. The land rent capitalized in
the titleholder's market value explains the increase in its
worth. If all the land rent was captured totally in taxes
there would be no appreciation of the land site whatsoever.
What many people expect, warranted or not, is to treat
their home as a profitable investment and to cash out at
life's end with a sizeable corpus, even though they did
nothing as individual titleholders to create that added
value. In municipalities where land taxation is applied,
only some portion of the rent is collected, still leaving
substantial rent accretion to the titleholder. This allows
the combined collection of land rent from neighborhoods
along with the absence of any tax on improvements to
encourage its economic vitality, in the final analysis
increasing each individual parcel's value more than would
be the case otherwise. It should be noted, however, that
municipalities like Pittsburgh that have long favored the
taxation of land value (1914-2000), have some of the
lowest home prices anywhere, making homeownership less
prohibitive than elsewhere.
With greater reliance upon a land tax, housing for
tenants is also likely to be less expensive. The
temptation to hold urban landsites for speculative gain is
reduced, thereby freeing up property parcels for the
development of apartment complexes and other cooperative
household units. With no tax on building improvements to
discourage efficient use of landsites, there is every
reason for developers to invest in those sites to the full
extent that their value warrants. High-value sites attract
investment in high-value buildings with no penalty for
their improvement. Sites with strategic value due to their
accessibility to infrastructure investments like schools,
transit stations, shopping centers, and office buildings
also attract developers interested in serving either
household or office tenants. Rental prices will reflect
real demand without prospective tenants having to pay
additionally in the form of waiting lists, under-the-table
fees, and the like.
Relying more upon a land tax avails a city of a tax
base adequate to support the services of good public
services. It is there, after all, where the most valuable
land is located. Collecting the economic rent to support
public services instead of leaving it to titleholders means
better schools, better transit services, better public
safety provision, all the while as it fosters further
economic vitality. The prospect of a growing financial
base alters the economic, as well as the political and
social, equations so that the urban context acquires
renewed health and livability. Why should the economic
rent accruing to landsites be allowed to stay in the hands of titleholders when in fact it is
socially-created value in the first place? Economic
justice calls for its recovery by the public for public
purposes. John Stuart Mill, a subscriber to 19th century
classical economic thinking, put it well. More than a
century ago he noted that Landlords grow richer in their
sleep without working, risking or economizing. The
increase in the value of land, arising as it does from the
efforts of an entire community, should belong to the
community and not to the individual who might hold title.
Land speculators appreciate very well that the
public has neglected to recover economic rent, and they
learn the practice of keeping their holdings until they can
get their price, but at a public cost.
Principle Three: Promote Access to Housing and Education
for All.
We, the people of our region, affirm the right of
low- and moderate-income families to be free of
discrimination in their choice of housing and to have
access to a full range of educational and economic
opportunities. It is not in the best interest of any
municipality or township, or of the region as a whole, to
use zoning, or any other restrictions - official or
informal, public or private - to entirely exclude low-and
moderate income housing. Mixed income neighborhoods create
equity and social stability.
Fostering Greater Public Good by Efficient Taxation
The greatest benefit to be had through proper tax design is an appreciation of what is really public and what
is private. Classical moral philosophers and political
economists from Adam Smith through John Stuart Mill divided
all factors of production into labor, land, and capital.
Their meanings were simple: those efforts performed with
our own hands and minds, with the sweat of our brow or by
the genius of our minds and hearts, were ours to possess,
or else to sell as we saw fit. To the extent that these
products were ever given over to others, they were in tacit
or explicit exchanges with liege lords, churches, kings and
others for services which they in turn provided. Labor is
easy to understand, and so is capital which is the product
of labor. But land? Land was all that part of value which
came from God and Nature, over which we are but the
stewards, and which we are free and licensed only to use so
long as we treat it with reverence and care. Land could
not be owned in the same sense as could clothing, armor,
jewelry or pottery. Land, rather, included all that which
was natural, whether it be the earth, air and water. There
was a religious dimension to this ownership, and many,
indeed most, cultures had rich theologies that incorporated
these meanings into its use. Many religious leaders argue
for a return to this.
Land Titles as "Bundles of Rights" - Usufruct and Fee
Simple Ownership
It is particularly important to note that land in19th century classical economics does not refer only to what we today refer to in the vernacular as land. As those
economists used the term, it refers to all commodities in
nature. Those parts of nature which by right are the
common heritage of all humanity - our birthright if you
will, include not just locational points on the planet but
air, water, minerals, fish in the sea, the electromagnetic
spectrum of radio and television frequencies, time slots
for airport landings and take-offs, the geosynchronous
satellite orbits, and others as well. As Jefferson noted,
"the earth is given as a common stock for men to labor and
live on ... [and] belongs in usufruct to the living."
Usufruct ownership - that is, the right of use - was
distinguished from fee-simple ownership. Property held in
usufruct required the payment of rent for its use,
essentially as a tax. It did not include title for
purposes of buying and selling as a commodity. Other terms
used in contrast were leasehold, as distinguished from
freehold. Were all these titles to nature auctioned for
collection of rent, rather than conveyed to private
ownership, there would easily be enough revenue for the
support of public services. Somehow, in the time since
Jefferson and his era, land titles have come to be regarded
as a commodity to be bought and sold for profit, and the
rightful source of public tax revenue has been supplanted
by claims on people's labor and the fruits of that labor,
capital, rather than from the natural and logical, readily
available source of revenue, land rent.
Even though it is often observed that the public
really owns the airwaves of radio and tv stations, the fact
that they are often bought and sold for millions reveals
that it is not the electronics in the stations that are
being conveyed. Rather it is the license to the
frequencies they have secured that is really the item of
value - the claim of public ownership has fallen by the
wayside. The potential annual rent collection from those
public airwaves is unfathomably large. Quick estimates are
that the economic rent available to be taxed by American
governments is in the neighborhood of between 20 and 30
percent of GDP, enough to finance all government services
and abolish taxes on labor and capital. Indeed there are
many who argue that there would be sufficient surplus that
every citizen could be provided a "citizen's dividend"
sufficient to give him or her a "leg up" on the economy,
similar to what now is provided to Alaskans in their
Permanent Fund. Considerable thought has been given to how
the revenue from economic rent should be taxed were such
regimes to be put in place. It is not difficult to
envision a distribution among local, national and
international governments: locational sites being the
basis of local taxation, regional authorities supported by
oil and mineral resources, and global governing agencies
reliant upon deep-sea fishing resources, the
electromagnetic spectrum, geosynchronous satellite orbits,
and other transnational resources like air.
As a nation and as a world we are in the process of
commodifying and privatizing many of these dimensions of
nature. Just as happened with land in the western world
for three centuries, the rest of the world is now
experiencing the same transformation. The notion of a
"commons" is becoming a thing of the past, and all is being subordinated to inexorable profit motives and bottom line reasoning of institutional decision-makers, frustrating and negating anything
resembling community. Those very locally based
institutions that foster community - schools, churches,
fraternal organizations, parks, museums, libraries and
others - are all being starved for lack of revenue, all
because we have become confused about what should be taxed,
what can be taxed, what rightfully is ours and what we hold
and use at the behest of society, nature, and God.
The open access of all people to those elements of
the earth that are natural seems a reasonable enough
principle when one reflects upon it. Limiting the private
sequestration of what is more properly public is in accord
with tenets of economic justice to which most of us would
subscribe when put to the test. If we recognize the logic
and the limits of the concept of ownership - when lawyers
refer to property law, they're talking about a "bundle of
rights" - we can sort out what we should pay taxes on and
what we should not pay taxes on. Economic opportunities of
other sorts are likely to follow such institution of tax regimes.
Principle Four: Create Regional Business and Job
Opportunities
We, the people of our region, need to work together to
create more jobs that attract and retain creative people
and provide a living wage for all workers. When cities and
towns engage in bitter infighting for jobs, economic
development and tax base, concessions are often made that
greatly reduce the benefits to the community as a whole.
This diminishes the competitiveness of our region in
relation to other regions. We must promote policies that
encourage cooperation, provide a sound workforce education,
and create adequate transportation to jobs that provide a
living wage.
Creating More Regional Economic Vitality and More Job
Opportunities
Eminent economist Herman Daly writes in one of his books that we need to foster quality more than quantity in our pursuit of greater opportunities. It is a book very worth reading by our ARISE leaders, the reason being that the primary boosters of "growth" in our area have no notion
of the distinction that he is talking about. As he employs
the terms, development is intensive; growth is extensive.
Development depends on high value-added investments and
returns; growth consumes resources commensurate with their
return. Development is good; growth is bad. If we look to
foster sustainable economic development, the return on
inputs must be far higher than they now are, and this is
the strategy we need to pursue. Constraining the
consumption of land, energy, time, and other natural
resources through various public policies will enhance our
productivity and foster efficiencies that give higher
returns of all sorts.
Frequently the advocates of economic growth are the
very elements of the community that most endanger the
quality of life we seek to engender. The land speculators,
for example, want more suburban sprawl - after all, they've
staked their bankrolls on it. So has the automobile
industry, and the oil industry, and indeed much of the
construction industry. And yet, if they just really
understood, there would be more return on investment
through the process of intensive development than extensive
growth. This is the distinction that needs to be borne in
mind most of all as the Capital District pursues what may
otherwise be will-o-the-wisp short-term strategies. Do our
political leaders really understand the difference? There
is little evidence so far that they do. As they voice the
catchphrases of business opportunity and more jobs, they
need to be made to appreciate that public well being,
quality of life, and rates of development need to be built
into the planning for these returns. The first three
principles enumerated in the ARISE Declaration evoke an
appreciation of these factors; the fourth, reflecting the
boosterism more common among Chamber of Commerce members,
needs more careful discussion.
There are many steps that can be taken to enhance
the rate of development and the growth of job opportunities
that lie within the local governments capacity to
implement. This section addresses just those steps. As
noted earlier, governments can constitutionally influence
social and economic behavior by only two means: by its
police powers and by its taxing powers. And each of these,
applied, have far greater facility to delimit and prohibit
than they have to facilitate. Of course governments can
carry out tasks themselves, but then that usually means
relying upon higher taxes to finance the projects, which
then tend to discourage private sector effort. That is, at
least, the prevailing assumption among not only the general
public but in prevailing economic theory as well - that all
taxes reduce activity of the private sector, and that the
more government spends, the less is available to the
private sector of the economy. But this is the point that
needs to be challenged, and is so here.
Deadweight Loss and Economic Productivity
The current tax system used in American cities
does indeed have a deadening effect on their vitality.
Anti-taxers use this as an argument for reducing taxes as
much as possible, believing that by starving the public
sector they are thereby encouraging economic activity.
They see the economy as a limited good, as a "zero-sum
game," where the more government takes the less is
available to the private sector which they see is the real
generator of economic activity. But there are taxes that
actually engender economic health and growth, taxes that
are able to provide the resources for adequate schools, for
stable communities, for reliable and sufficient public
safety, and for economic opportunity. There are taxes, in
a word, that actually grow the total economic pie.
Moreover, they do this without incurring any dampening
effect on economic health.
The key to understanding how taxes facilitate or
depress economic activity is in the economic concept of
"deadweight loss." Deadweight loss, also often called
excess burden, is the measure of productivity that is foregone due to the design of the tax system itself. According to most models, a completely efficient economy functions at 100 percent productivity
only before taxes are levied; humming along without any
drag, friction, or deadweight loss. Anti-taxers argue that
each additional tax burden imposed on the economy reduces
its efficiency commensurately, thereby actually costing
communities more than is gained. Using the obligatory
supply and demand curves of the discipline, it is easy to
see where the inefficiencies in the economy obtain.
The concept of deadweight loss is not trivial when
evaluating the choice of tax design to institute. One
recent study by Harvard economist Martin Feldstein shows
that the deadweight loss due to the federal income tax
alone is 30 percent, closer to 50 percent if one includes
the social security tax. This loss of productivity is
significant enough that it means that we all must work
substantially harder in order for there to be the same
reward for our efforts. No wonder it is that people resent
their tax duties so much! One other study calculated that
the deadweight taxes in the US economy in the early 1990s
collectively cost us $1 trillion in lost output annually.
In Britain, the equivalent figure was 400 billion Lbs.S.
every year.
Deadweight loss in an economy only occurs, however,
if the supply curve - the one going from southwest to
northeast - has a slope showing changed responsiveness to
market price. This slope reflects its "elasticity," the
measure of that responsiveness. With elastic supply, the
higher the market price, the greater the volume of the good
or service will be provided; inelastic supply curves, on
the other hand, show no change in the volume available
regardless of the price. So the more vertical the supply
curve is, the less it is responsive to price changes and
the smaller the deadweight loss when a tax is imposed. It
follows that if we're going to slow the economy least, we
should impose our levies on those items or tax bases that
have the least amount of elasticity, that have no change in
supply in response to demand price. And what tax base has
the least or no change in supply regardless of price: LAND!
Its limited and fixed supply means it is totally inelastic
- completely vertical. As Will Rogers once said, "the good
lord ain't makin' any more of it." The result is that it
is the perfect tax base - there is no deadweight loss due
to a land value tax whatsoever. Whatever tax is imposed on
landsites is incorporated into the capitalized market value
of the site, is not passed on to any tenant, and in no way
reduces the efficiency of the economy. What it means, in
different terms, is that we can all be as much as half
again as productive as we are - or that much wealthier - if
taxes with no deadweight loss are instituted. Another way
to see it is that we could all work 1/3 less and be just as
well off financially!
Alternate Economic Paradigms are the Key
Land taxes indeed encourage, rather than dampen,
economic development. This has been amply demonstrated
even though it is not well recognized in neoclassical
economic theory. Other economic frameworks recognize it
very well, and these heterodox perspectives are quickly
supplanting mainstream economics as it now collapses from
its own internal contradictions. In Economics 101, one
learns early on that there are three factors of production
- land, labor, and capital. But then neoclassical
economics gives short shrift to land - essentially folding
it into the capital category after Chapter One - and most
of the tax burden is borne by labor and capital.
Consider the possibility of improving productivity,
however, if all labor and capital were relieved of taxation
altogether, and that all the tax burden was imposed on land
value - "land" as described earlier. The deadweight loss
lifted from labor by having no tax whatsoever on wages and
salaries would dramatically improve productivity. The
deadweight loss lifted from investment capital would
encourage opportunities for revitalized enterprises of all
sorts, without in any way discouraging the availability and
amount of land. Land, as noted, won't be reduced in volume
by its taxation, and taxing it actually increases its
availability. Studies that compare localities that have
varying distributions of taxes on the three factors of
production show that those with the greatest proportional
burden on land and the lowest proportion on labor and
capital show the greatest economic vitality.
With neither employers and employees any longer
having to bear the burden of taxing, both have more
disposable income, both are thereby wealthier. The only
losers are those who hitherto captured rental surpluses
that played no part in the productivity of the economy, and
was simply "locked up." It is no wonder that societies and
nations that tax land most, and tax labor and capital
least, show the greatest economic vitality. This region
can profit from adopting similar policies, to the extent
that it adopts the following measures:
Recommendations
1. Gradually phasing out the tax on
Improvements and increasing instead the tax on land values
within the framework of the present real property tax
structure.
2. Gradually replacing the tax on sales with a
heavier burden instead on land sites.
3. Employing benefit fees and other land-based
levies to support services at the local level, whether they
be business district services, libraries, schools, etc.
4. Connect the investment in capital
infrastructure supporting transportation services to the
localities where greatest impact is evident. This is done
through "value capture," an approach widely understood by
transportation planners.
5. Employ taxes on landsite value, wherever
possible, when new public levies are being designed.
-----------------
Dr. William Batt is a member of
the Albany, NY Unitarian Church, as well as member of
Common Ground-USA, and also is a member of the Board of
Directors of the Robert Schalkenbach Foundation, NY, NY.
He may be emailed at hwbatt@yahoo.com)