by Jeffery Smith, Portland, OR
This paper was presented to UN Conference in Monterrey,
Mexico, 2002, on Financing for Development, NGO Forum,
March 14 - 16; Official UN proceedings with ministers,
March 18 - 22. The essay is a winner in the McKeever Essay
Contest on Self-Development, 2002. Copyrighted July 2002;
reprinted with permission, of the McKeever Institute of
Economic Policy Analysis and of the author. Essay is
posted at http://www.mkeever.com/smith.html
Introduction: Prosperity On Land
Occasionally, people pulled themselves up
economically by their own bootstraps, without relying
overly on trade with or aid from outsiders, in a way that
borders on sustainable. What these self-developers did was
to use "geonomics"; they recovered more of their local
"ground rents" and diminished their taxes upon production,
a method proposed by a UN body (COMMISSION, 1996).
Technically, most of these self-starters taxed land (rather
than buildings, business, or income), a reform more
cautiously cited elsewhere by the UN (PREPARATORY, 2002).
A few bootstrap jurisdictions leased public land to private
builders, instead of taxing private land for public
benefit, leased public land to private builders.
Ground rents, or natural rents, are a social
surplus. They're the monies people spend on the nature
they use, the money paid periodically or in a lump sum, to
a private owner or lender or a public agency or lender, to
own or use sites, resources, the broadcast spectrum, or the
environment as a sink for pollutants. Recovering such
rents (measurable by Ricardo's Law), in lieu of taxing
effort, empowers people to prosper for two reasons. As in
the old story of the donkey and its driver with the carrot
and the whip, recovering rent spurs people to produce while
zeroing out taxes lures people to produce. People who
produce sufficiently are more ready, willing, and able to
produce sustainably.
As informed observers keep reminding anyone who'll
listen, widespread ownership of land is a basic
prerequisite to development. During the short time this
paper was written (2002 February), the 2000/2001 Annual
Report of the Church Development Service, the Earth
Negotiations Bulletin of the International Institute of
Sustainable Development (2002 Jan 31), and the Forum
Declaration by the Norwegian delegation to the World Summit
(in Johannesburg in 2002 September) all called for land
reform to make possible the eradication of poverty. At
least four times in history, the people of an area did
receive greater shares of their own land, without
bloodshed, following the adoption of geonomics
(rent-sharing). While these four jurisdictions did more to
help tenants become owners than just tax land value, this
recovery of rent did play a key, yet often overlooked,
role.
Self-Development Worldwide
In Denmark in the 1840s, an idealist king,
Frederick, was finally able to persuade nobles to accept a
tax on land value. Denmark achieved the highest percentage
of family owned farms in Europe and a reputation for their
dairy products (Silagi, 1994). In California in the 1890s,
an idealist schoolteacher was able to persuade the state
legislator to permit localities to levy a land-value tax
(LVT). While the reform lasted, enormous ranches were
converted into tens of thousands of family farms. California became known as the "breadbasket
of America". In these cases and in Taiwan in the 1940s and
1950S, when big landowners had to pay more rent via the
higher tax, they found it no longer worth their while to
be a middleman, so they sold off their excess holdings to
their former tenants at prices the farmers could afford.
The poster child for development is Taiwan, which
set the world record for rapid and continuous growth. When
the Nationalists took refuge on the island, they
implemented the land reform that they had merely promised
on the mainland. Working for themselves on their own land
changed farmers; they worked harder and smarter, producing
a surplus that enabled them to buy goods manufactured in
the city, made in factories by sons no longer needed on the
more efficient farms (Harrison, 1983). Taiwan's
development has not been sustainable; the ruling party,
which made itself into the richest one on earth, also made
a huge mess of the environment. While in power, they
failed to uphold one's right to Earth in a healthy
condition and did not charge polluters (their own
factories) for the costs they imposed.
With Taiwan, the other well-known success story is
Costa Rica. This Central American nation enjoys widespread
ownership of land not due to agrarian reform or a tax on
extensive holdings but merely to historical accident; the
indigenous population refused enslavement to the colonizing
Spaniards and the topography is largely mountainous, both
factors militating against the establishment of latifundia.
Costa Rica shows the power of widespread ownership of land.
Today, though it has slid backwards since the late 1980s
Contra War waged on its western border drove millions of
poor Nicaraguans to take refuge in Costa Rica, the country
still has proportionally the biggest middleclass (the
source of many environmental activists) (Busey, 1992) and
the lowest crime rate in Latin America (Pan American,
1997). A stable democracy, Costa Rica was the first to
abolish its army (followed by neighboring Panama), which is
a huge drain on the public purse.
Other regions that developed by utilizing a tax on
land values (the levy left after shifting the property tax
off buildings) include towns in western Canada, South
Africa, Australia, and New Zealand. Towns that thus
recover Rent tend to have more owner occupants, paved
streets, parks, higher voter turnouts, even town hall
meetings to set policy. None of them have the slums that
afflict US cities. (Andelson, 2000)
South Africa's Johannesburg, which began as a
mining town, was rapidly becoming a ghost town when the ore
was played out early last century. To avoid such a fate,
the city fathers shifted their property tax from buildings
to land, rescuing their town. Johannesburg grew to become
the financial capital of the nation, eclipsing Cape Town, a
port situated on one of the most strategic points on the
planet, which taxed land and buildings equally. It was as
if Canberra had out-developed Melbourne or Sydney.
(Dunkley, 1990)
In Australia around Melbourne, about half the
suburban towns tax only land, half tax both buildings and
land. Those towns taxing only land enjoy about 50% more
built value per acre (Lusht, 1992). During the recession
of the second half of the 1970s, early 1980s, the towns
taxing buildings lost business while the land-taxing towns
gained new businesses (Bennett, 1996)
Most of these examples have a land tax in lieu of
other, punitive taxes not for reasons of ideology or
foresight but of simple common sense. At the beginning,
when a colony is founded, very little else but land exists
liable to taxation; there's not much in the way of sales
or incomes or buildings. An alternative to the government
selling off its newly claimed land is to retain it and
lease it, as did Hong Kong (since the land was the Crown's
for only 99 years). A mere rock in the sea lacking every
resource but a harbor, Hong Kong nevertheless grows much of
its own food and outperforms every other city on China's
coast. By recovering so much site rent, it keeps taxes
low. Low taxes translate into low prices, high
investments, and high incomes. Hong Kong, whose metro
operates profitably sans subsidy, often ranks as the
wealthiest city in the world per capita, the freest by
libertarians, and has often been voted the world's best
city for business by FORTUNE magazine. (Fitch, 1993)
Bootstrap Development In the U.S.
A bit more than a century ago in America, a
reformer named Henry George earned a huge following by
arguing for a single tax on land value. After his death,
his followers founded three colonies: Free Acres, New
Jersey; Arden, Delaware; and Fairhope, Alabama - all on
land held in common with parcels leased to individual
homeowners. Although no longer recovering only rent today,
all are more prosperous than neighboring towns levying the
conventional property tax. Fairhope was one of only four
towns on the Gulf Coast recommended for retirement by
Consumers Report. Back in the 1950s, some Quaker Georgist
residents of Fairhope fled the military draft during the
Korean War, resettling in Costa Rica where they began what
became that nation's first national park at Monte Verde.
(Rybeck, 2000) Recently, this wealthy village pledged a
half million dollars to the local private hospital.
When Henry George's followers were numerous enough
to threaten to upset the established order, speculators
persuaded most American state legislators to amend their
constitutions to require any property tax to fall on
buildings and land equally. A rare exception was
Pennsylvania, the home state of Henry George.
(Coincidentally, William Penn was an early proponent of the
geonomic method of public finance, as also was the founder
of the Massachusetts colony, William Bradford). In
Pennsylvania, about 20 jurisdictions (cities, counties, and
school districts), almost all of them in the poorest region
of the country, Appalachia, levy a tax rate on sites higher
than on structures. Those towns thereby recovering ground
rent enjoy 16% more output each year compared to their
neighbors (Tideman, 1998).
Harrisburg, the state capital, was ranked by
Rand-McNally at the bottom of US cities, 199 out of 200.
Then the city council shifted their property tax. The number of arsons dropped, formerlyabandoned areas were developed, and outlying farmlands were
spared the bulldozer; quickly the city jumped into the top
fifth of American cities. Their mayor Steven Reed credited
success to their Property Tax Shift (PTS). (Rybeck, 1991).
While adhering to the PTS, Pittsburgh enjoyed the
most affordable housing and by far the lowest crime rate of
any major US city (Boyer, 1993). Rand-McNally twice named
the Steel City "America's Most Livable". About 15 years
ago, Ling Temco Voight, Inc. closed steel mills in
Pittsburgh, which was taxing land six times higher than
buildings, and in nearby Aliquippa, which still taxes land
16 times higher than buildings. Pittsburgh, which bought
the land beneath the mill, lost this factory. In
Aliquippa, where the city merely taxes land, former
employees bought one mill at a price discounted by the
underlying land's tax liability and re-opened it, while
other investors built a new mill there, keeping the local
economy alive. (Sullivan, 2002) Succumbing to pressure
applied by speculators, Pittsburgh returned to the
conventional property tax in 2001. Already it has seen a
drop in construction starts steeper, 38.1%, than in the
rest of Pennsylvania, 1.5% (Cord, 2002).
Green Support For Geonomics
Throughout the developed world, the environmental
movement promotes shifting taxes off goods, onto bads, in
general, and shifting subsidies in the opposite direction,
from bads to goods. These "greens" are also gathering
stream behind the PTS. In the US, they have lobbied state
legislators in Vermont, Oregon, and Minnesota. What
appeals to them is the fact that landowners, when required
to pay an annual rent or fee or tax, choose to quit
speculating in land and instead put it to good use.
Utilizing the central sites of higher value spares the
outlying sites of lower value; using urban locations more
intensely means not using some rural sites at all. Using
land optimally is a base for developing sustainably.
(Smith, 2002)
Since a healthy area would have higher value and
generate more revenue, jurisdictions that rely on natural
rents for public revenue, not on taxes upon private sales
or incomes, would be motivated to care about the health of
the environment. To avoid contamination, jurisdictions
should also levy four surcharges besides collecting rent:
(i) collect an Ecology Security Deposit and (ii) require
owners to hold Restoration Insurance, with both charges
geared to the value of the land. Two other components in a
strategy to "internalize externalities" are to (iii)
require would-be polluters to bid on permits to emit
potentially hazardous byproducts and to (iv) fine severely
and with certainty those who violate health standards.
While all four of these protective measures are now used,
none are widespread. Once in place, these surcharges would
help preclude the waste of Taiwanesque development, but not
the wealth of Taiwanesque development.
A government aiming for sustainability would also
shift its subsidies from such items as the military,
bureaucracy, "white elephant" dams and other grandiose
infrastructure, to public goods that directly benefit all
citizens in the short term, either services or dividends.
Since an area in good environmental health would have
higher value, it'd generate more public revenue, in turn
funding better public goods. Citizens who'd receive
rent-based public goods would likewise have a financial
incentive to care about the health of their natural
environment.
Sharing Rent, Essence Of Geonomics
The residents of Alaska receive an oil dividend,
which the state pays to every man, woman, and child in the
state. In 2001, it was $1,860. Since rental surplus is
social (a value generated not by the owner or provider of
the site or resource but by her neighbors), recovering and
sharing it rests on firm moral ground. By paying a share
of rent to residents directly - rather than paying taxes to
politicians who're supposed to pay funds to bureaucrats
who're supposed to serve citizens - a polity avoids some of
the waste and/or corruption inherent in letting government
spend public revenue. Redirecting funds from state to
citizen not only primes the pump for development, it also
enables consumers to choose the appropriate technologies
that would make development sustainable.
For most people, shifting taxes onto locations
would save them money. Their land dues (or land taxes or
land-use fees or deed fees - whatever mechanism the
jurisdiction chooses) would be smaller than all the direct
and indirect taxes that they pay now. Yet where people
manage to prosper, land grows more valuable; their land
dues (or taxes or fees) would rise, too. Receiving a rent
dividend, owners of low value land (formerly the poor)
could always afford to pay their land dues. Proposing a
dividend to voters may also make geonomics easier to
advance with the public.
Implementing Geonomics
Recently around the world, areas in all stages of
development have turned to the PTS, even all the way to
Land Value Taxation (LVT). In the "Third World", the mayor
of Mexicali, Mexico, persuaded the local elite to replace
their conventional property tax with a land-value tax
(Cohen, 1999). In the former "Second World", Estonia
levied a tax on agricultural land, receiving a favorable
review in business press for its results (The Economist,
1998). In the "First World", Philadelphia, Pennsylvania,
is now debating their city comptroller's proposal to shift
their property tax. The real estate lobby in Philly, a
city suffering from block after block of blight, is helping
promote the PTS, even paying for full-page ads in local
papers. (The Inquirer, 2002)
Advocates of geonomics offer benefits to major
voting blocs. Once they understand how it works, they
consent to it, even promote it in some cases. Business
likes low taxes (as in Philadelphia, above). Greens like
collecting rents for compact cities (e.g., Friends of the
Earth). Farmers like collecting rents for affordable land
(e.g., Denmarks' Justice Party, above). Citizens in general like living in a prosperous and stablesociety.
In most major metro regions, the ratio of site
value from the commercial center to the rural fringe is
2,000 to one per acre (Gwartney, 1995). Hence the owners
of the downtown locations of much greater value, usually
the local elite and outside investors, would pay much more
than would owners of other locations. Yet for their
greater investment, higher payers, too, would receive a
much healthier city, while the absence of other taxes
enables them to profit from investing in new technologies
and workforce retraining. Advancing the productivity of
both humans and machines means the economy would get more
from less, thereby minimizing its impact on the natural
world.
In order to recover ground rent, assessors must
have the cadastre (the land roster) in usable shape:
parcels, their owners, and their values be identified and
up to date. Then the jurisdiction could either shift its
property tax from buildings to land, or repeal its property
tax and levy a land-value tax, or since many jurisdictions
already have an LVT albeit at a very low rate, increase the
rate to recover their land's rental value. The
jurisdiction could do so gradually, as Philadelphia
contemplates, or immediately, as did Mexicali. After
shifting the property tax, a jurisdiction could remove
other local taxes and apply to the encompassing state or
nation for permission to exempt residents from their taxes,
while, if need be, raising the rate on land to recover any
remaining site rent.
Although poor undeveloped lands seem of little
value, their real estate values may actually be greater
than the amount of aid, loans, and investments received
altogether (DeSoto, 2000). Even if this estimate is overly
optimistic, nevertheless, geonomics swells collectible rent
by collecting it; where government recovers rent, while
removing taxes, there people prosper and bid up land
values. Comparing the collateral damage (reduced
investment and employment) from taxes of different rates on
sales and income, one sees that if a jurisdiction were to
forgo such punitive taxes, it would let people produce more
and earn more; output of goods and services would be one
quarter greater. (Tideman, 1998)
Conclusion: Sharing Rent Works
Wanna-be developers still advocate the
quasi-solutions advanced by agrarian reformers and world
bankers, despite repeated failures. Even when working,
land redistribution and structural adjustment would take
from two to four times longer than recovering rent. To
stabilize its economy, polity, and environment, a
jurisdiction which taxes land value would successfully
reach these three goals in three years, seventeen years,
and twenty-two years, respectively. (Smiley, 2000)
Ironically, while geonomics develops a locality
independently of trade or aid from the outside, by
generating prosperity, geonomics simultaneously creates an
area that enables trade and that attracts investment, not
crippling debt, automatically. Thus by adopting first the
carrot and stick of zero taxes coupled with land dues, a
jurisdiction develops regardless of what the rest of the
world does, and inspires the outside world to propose
entering into mutually beneficial relationships such as
consensual trade and investment. Thereby a geonomic
locality could build on its incipient prosperity (Ades,
2000) delivered by sharing the rents of land and resources
while eliminating taxes on human effort.
Expertise in geonomics resides with NGOs such as
the Instituto Henry George in Managua, Nicaragua, that give
presentations to specialists and the lay public. Others,
such as the Center for the Study of Economics in
Philadelphia help measure how much rent is available, who'd
pay more and who less, and how to go about shifting taxes
to recover it. The Lincoln Institute outside Boston,
Massachusetts, and other international agencies help
modernize cadastres. Wanna-be developers can call upon any
of them in order to add the recover-rent option to one's
toolkit.
----------------
Jeffery Smith is an NGO Representative to the United
Nations from the International Union for Land-Value
Taxation and Free Trade. He is also President of the
Geonomy Society. He may be emailed at geonomist@juno.com;
web site is www.progress.org/geonomy