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Taxing Land Rents, Now Demonstrable and Feasible, is the Perfect Revenue Source of Government Finance H. William Batt, Ph.D., Board of Directors Robert Schalkenbach Foundation, New York, and International Union for Land Value Taxation, London For Presentation at the 11th Global Conference On Environmental Taxation 3-5 November, 2010, Bangkok, Thailand Thailand Property Tax Proposal • • • • 0.5% commercial land and buildings 0.1% residential land and buildings 0.05 on agricultural land 0.5% undeveloped land, then 1.0%, and then finally 2.0% in yearly steps 30 million parcels to assess nationwide Land Value Taxation A Better Option: All Taxes Come From Land Rent Anyway • Taxes on Capital and Labor are Shifted to the Value of the Land • This Means: Income Tax, Sales Tax, Business Tax, Building Tax My City of Albany, New York The Flow of Ground Rent My City of Albany, New York are needed to see this picture. TIFF (Uncompressed) decompressor QuickTime™ and a Taxing Improvements Violates Principles of Sound Tax Theory • Neutrality, because it influences and alters decisions; • Efficiency: reduces market performance and economies by generating "deadweight loss"; • Equity: those in similar circumstances don't bear comparable obligations; those in different circumstances are not treated in a uniformly commensurate way; • Administrability, management is skewed by external forces, and maintaining adequate and reliable records is costly; • Simplicity, leading to misunderstanding, opaque application, and consequent loss of legitimacy; and • Stability, requiring continually jiggering and modification to provide adequate revenue. Principles of Sound Tax Theory • • • • • • • Neutrality – No Market Distortion Efficiency – No Deadweight Loss Equity – Both Horizontal and Vertical Administrability – Easily Managed Stability – Reliable over Tax Periods Simplicity – Easily Understood by All Certainty – Unavoidable and Assured Taxing Land Value is Ideal • Comports with all the principles of sound tax theory: neutrality, efficiency, equity, administrability, simplicity, stability; • Returns to the community that which it created, and therefore has a moral basis; • Remedies many macro-economic afflictions; • Functions as a user fee as well as a tax. Environmentally Sound rather than Sprawl Development Von Thunen Land Rent Gradient von Thunen’s Land-Rent Curve 10 Salt Lake City Land Value Map, 1969 Portland Oregon LandValueScape High Quality Land Value Map St. Louis & Seattle Skylines 14 Singapore & Toronto Skylines 15 Ground Rents are Capitalized Travel Costs Bangkok 1890 and 2004 QuickTime™ and a decompressor are needed to see this picture. Bangkok History of Sprawl Development Since 1900 QuickTime™ and a decompressor are needed to see this picture. Bangkok, 1932 QuickTime™ and a decompressor are needed to see this picture. QuickTime™ and a decompressor are needed to see this picture. Classical Siam Rent Payments • Corvée Labor — until 20th Century • Proportion of Yield — until 20th Century • Payment in Money —in lieu of Corvée Or Proportion of Yield • Replaced by Fee Simple Ownership w Rent Major Changes in Thai System of Property Rights in Land: 1800-1982 Explaining Home Value Change Property Owners and Renters Now Pay Twice Land Value Taxation Proportions on Vacant and Underused Parcels #1 Land Value Taxation Proportions on Vacant and Underused Parcels #2 Land Prices Compared with Other Housing Costs Japan’s Land Bubble: 1980 - 2004 Adam Smith would Tax Land Rents • QuickTime™ and a decompressor are needed to see this picture. • “Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry.…” “Ground-rents and the ordinary rent of land are . . . the species of revenue which can best bear to have a peculiar tax imposed on them." Adam Smith, 1776 Economic Rent as % of GDP • “The 'bottom line' reinforces the overall conclusion . . . that land-based tax revenues are indeed sufficient to allow total abolition of company and personal income tax. Further, to the extent that some taxes, such as rates, land tax, resource rent taxes and even part of income tax on land rents are already capitalized in lower market values for privately held land, the figures would tend to understate the capacity of land income to replace existing taxes.” – Terry Dwyer, "The Taxable Capacity of Australian Land and Resources," April 1, 2003, p 40. Rent in US GDP in Textbooks ”Rent includes the income earned by households for the use of their real property holdings such as land and buildings of all kinds. It also includes the imputed rent of owner-occupied dwellings, as noted previously.” Roger N. Waud, Economics. Rental income is $7.9 billion of a total GNP of $5,234 billion, or 1.5 percent. Baumol and Blinder. •Rental Income was 4.7 billion, or 0.079 percent of GDP. Table 22.3, p. 559. Case and Fair. Rent is 1 percent of U.S. economy in 2004. Krugman and Wells. Current Distribution Tax 31.0 % Rent 31.0 % Net incomes (L&C) 38.0% If we captured land values Rent 31.0 % Net incomes (L&C) 69.0% You Can’t Get Something For Nothing! • Milton Friedman was the embodiment of NeoClassical Economics! • If you don’t pay, I do – • It’s a Zero-Sum System! In a Rentier Economy, The Landlords Get the Free Lunch! “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.” John Stuart Mill Dividing Fruits of Labor -- 1 • "Left-wing" proposals call for society to achieve equity by redistributing most of the wealth. No distinction is made between the sources of income (land, labor or capital), and individuals control only a small portion of the wealth. In most cases this entails a large measure of social control, and a "planned economy." Dividing the Fruits of Labor -- 2 • "Right-wing" proposals hold that efficiency requires more wealth to remain in private hands (also making no distinction between rent, wages and interest), and that society, or government, should only get the minimum it needs for necessary services, e.g., the role of "traffic cop." This implies leaving the running of the economy to private interests. Dividing the Fruits of Labor -- 3 • "Middle-of-the-road" proposals seek a "balanced system" in the distribution of wealth and power between individuals and society - but make insufficient distinctions between earned and unearned incomes, and do not carefully define the proper spheres of society and the individual. The result is a hodgepodge in which efficiency and equity always appear to be at odds. Dividing the Fruits of Labor -- 4 The Georgist proposal makes a distinction between the unearned income of land (rent) and the earned incomes of labor and capital (wages and interest). Rent to society, wages and interest to the individuals who earned them. The proper spheres of society and the individual are clarified. The Georgist proposal achieves the goal of "left-wingers" for security and social action, but without restrictions on liberty. It achieves the goal of "right-wingers" to attain freedom, but without privilege and monopoly. And it achieves a balanced system sought by "middle-of-the-roaders," but in a just rather than arbitrary way. Rent-Seeking Behavior Land has an Inelastic Supply 1 • All charges on land can total only to the market nexus price. Total charges include both pecuniary charges and other obligations: legal ordinances, service fees, mortgage interest, taxes, and sale price. Controlling Market Price Total Burden of Ownership is Market Price Plus Tax Price per unit S Tax burden Total Market Cost D’ D Quantity Illustration of Land Value Map Based on Arms Length Sales Data