Short Form Brochure: Land Rights and Land Value Capture
Securing Opportunity and Basic Services for All
The failure to adopt, at all levels, appropriate rural and urban land policies and land management practices remains a primary cause of inequity and poverty. – Section B.55, UN Habitat II Action Agenda (Section B.55)
1. Justice: People’s Right to the Value They Create
The UN Habitat Action Agenda adopted at the Istanbul conference in 1996 states:
The failure to adopt, at all levels, appropriate rural and urban land policies and land management practices remains a primary cause of inequity and poverty. It is also the cause of increased living costs, the occupation of hazard-prone land, environmental degradation and the increased vulnerability of urban and rural habitats, affecting all people, especially disadvantaged and vulnerable groups, people living in poverty and low-income people.
Land is the birthright of all, not just a few. It includes farmland and city sites, oil, minerals and forests—indeed, all natural resources. Land enables labor to produce wealth and is thus the ultimate recourse of the unemployed. Those denied their rights to land lack the right even to space to exist in as well as to opportunity to sustain their existence.
Society gives land economic value, not private owners. Even fertility and a favorable climate only confer value on farmland because many people compete for those advantages. Society also makes certain land more valuable through investments in infrastructure, education, health care and other basic services. When private landowners receive this publicly created value, land becomes a means of speculation and exploitation rather than a resource that provides opportunity to all.
Land value capture recovers the value that public spending on services and infrastructure gives to land, distributing it to all citizens equitably. When robustly implemented, land value capture eliminates incentives for land speculation and hoarding. This reduces and stabilizes land prices, keeping land accessible and affordable for those who need it. By replacing harmful, unfair taxes on production, exchange and wage labor, land value capture increases wealth production while ensuring a fairer distribution of wealth – both essential in order to dramatically reduce poverty. Moreover, justice in possession and use of land can prevent destructive conflicts over land that arise between and within nations.
The UN Habitat Global Land Tool Network advocates public recovery of land values as a fair and effective way to meet the Millennium Development Goal of significantly improving living conditions for at least 100 million slum dwellers by 2020. This method of public finance also offers many additional benefits to almost all people in all countries.
The Vancouver Action Plan – the 1976 founding document for UN Habitat – states: Social justice, urban renewal and development, the provision of decent dwellings and healthy conditions for the people can only be achieved if land is used in the interests of society as a whole…. Excessive profits resulting from the increase in land value due to development and change in use are one of the principal causes of the concentration of wealth in private hands. Taxation should not be seen only as a source of revenue for the community but also a powerful tool to encourage development of desirable locations, to exercise a controlling effect on the land market and to redistribute to the public at large the benefits of the unearned increase in land values… The unearned increment resulting from the rise in land values resulting from change in use of land, from public investment or decision or due to the general growth of the community must be subject to appropriate recapture by public bodies [the community].
2. Clarifying Private and Public Land Rights
A just, peaceful and prosperous society requires secure land-use rights. Land value capture secures land users' rights by ensuring they get exclusive possession and beneficial use of the land (and the improvements they make to it) in return for just compensation to the community of those excluded from that land. In this way, both the landholders' and the community's rights are respected. Both give fair value for the value they receive.
When publicly created land value is given away to private landowners, rising land values enrich them at the expense of taxpayers and wage earners. Worse, landowners often keep land idle in hope of speculative gain, denying others the opportunity to use that land for shelter, food production and other basic needs, as well as for commercial use in production and trade. Land value capture discourages land hoarding and speculation by removing the potential to profit from these unproductive activities. This public finance policy smoothly and naturally achieves the goal of Habitat II Action Agenda Section B 56(e) to "promote the efficient functioning of the market for vacant land, ensuring the supply of housing and land for shelter development."
Economists demonstrated long ago that land value capture—also called land value taxation—is an equitable, efficient way to obtain public revenue. The more governments rely on land value capture for revenue, the lighter need be the tax burden on productive industry and wage earners. Land value taxation achieves the UN Habitat Action Agenda Section B. 56(h) to which all UN member states agreed: "Consider the adoption of innovative instruments that capture gains in land value and recover public investments."
By reducing and stabilizing land prices, land value capture also reduces the burden of interest payments that land buyers must assume when they borrow to purchase land.
3. Bridging the Gap Between Rich and Poor
Shortsighted economic development programs often increase inequality, aggravating poverty as a cost of progress. Securing safe and reliable water supplies, introducing better farming methods, etc. increases the land users' advantage, but also the rents they must pay to landowners. Poor people consequently gain little or no enduring benefit from these programs. Fair land tenure is essential for successful, equitable development.
Freedom, justice and prosperity can be attained through equal rights to access land. People who can work on their own landholdings can better negotiate fair wages and need not bid against each other for scarce jobs. Removing taxes from wages, a corollary of land value capture, increases purchasing capacity and thus the ability of workers and landless people to secure land for housing and productive activities. Opening opportunities for all to produce food, rear animals, start businesses and build homes bridges the wealth gap.
4. Gender Rights Attainable Through Equitable Land Access
Women hold a small fraction of land compared to men. Their roles in child rearing and the community often make them less mobile than men. When women migrate to cities where jobs are scarce, they sometimes become targets for exploitation at subsistence wages and may resort, along with their children, to prostitution, beggary and crime just to survive.
Land value capture strengthens the economic status and security of women and reduces gender-based inequities stemming from inequitable land tenure systems. Access to land enables women to secure sites for housing, food production or small businesses. Women's job opportunities and purchasing power increase as taxes are lifted from family earnings and placed on land values. Women and men are both better off, enhancing social stability.
Inclusion of women in decision-making concerning implementation of this land tool is essential. Reforms must respect women’s equal rights to land and account for land value capture's effect on customary land tenure arrangements.
5. Public Services and Facilities Can Pay for Themselves
Wherever local, regional or national governments bring public order, safe water, sanitation, parks, schools, roads, mass transit or health facilities, landowners immediately get higher rents and prices. These increased land values—which often exceed the related public costs—are the natural earnings of the community, region or nation, yet few governments currently recover more than a small fraction of the land value they create. Jurisdictions that use land value capture possess a vital key to distributive justice: the benefits given by society are reflected in land value which is returned back to society in order to fund the public benefits. This is a virtuous cycle that sustains a self-financing, self-renewing city and furthers economic opportunity for all.
Recovered land value can be used to 1) operate, maintain and extend existing services and infrastructure; 2) fund revolving loans for low-cost housing and micro enterprises; 3) repay bonds issued to provide other public facilities; and many other public uses. A more decentralized system of public finance fosters participatory democracy, as communities with adequate local revenue are empowered to decide how that revenue will be spent.
6. Decent, Affordable Shelter for All
Worldwide, programs to house poor people flounder, not recognizing that high housing prices are the result of rising land values more than the costs of construction. Land value capture reduces and stabilizes the costs of sites, thus enabling low-income families to more easily secure decent shelter at prices they can afford. The amount of funds that can be recovered as public revenue via land value capture is substantial. Thus, to further ensure that suitable, affordable housing and land are accessible to all, a portion of recovered land value can be distributed as a cash dividend to each resident citizen. An added bonus is that citizen dividend payments have been shown to increase the attention that citizens pay to public finance and accountability, thus building a culture of democratic governance and transparency.
7. Rational and Balanced Development
Land value capture also secures another important social and environmental benefit: rational, balanced development. Growth radiates smoothly from more intensive use in the urban centers to rural areas without pockets of vacant or poorly utilized land in between. Urban sprawl is curtailed and rural land is more readily retained in its natural state, available for parks and nature preserves. There is also less pressure to build on agricultural land near urban areas. Rational and balanced development decreases costs for transportation, utilities, fire and police protection and other public services, all of which further results in increased social cohesion and an interesting, safe, “walkable” city. Land value capture can thus be viewed as an essential component of good urban planning.
8. Implementation: Requirements for Land Value Capture
A successful land value capture system requires the following:
- A cadastre (land register), transparent and freely available to the public, documenting the location, boundaries and physical qualities of each land parcel. Today's high-resolution satellite imaging, GPS technology and computerized surveying make assembling a cadastre much easier and considerably less expensive than in the past.
- Descriptions of private and communal rights to possession and use of each parcel, including the landholder's identity, the nature and terms of tenure, designated uses (zoning), easements, and usage restrictions for the purpose of environmental or resource conservation.
- Accurate assessments of the annual rental value of each parcel, and capital value where applicable. Again, computerized calculation of land value allows assessment of most sites quickly and at little cost.
- Methodology for determining the percentage of land rent to be captured from each land parcel through a five to ten year period.
- Means of collecting the funds from landholders.
- Method of democratic, participatory citizen input regarding the utilization and allocation of these public funds.
All such information must be accurate, current, and readily accessible. To keep the system free of favoritism and corruption, citizens must be able to challenge erroneous information and anomalous assessments. The recorded information should be freely available to citizens, preferably both on paper in public offices as well as on the internet.
What Is Land Rent?
Classical political economists (Adam Smith, John Locke, David Ricardo) observed that no rent could be commanded for land as long as comparable land was available for free. However, when the best land is used up or enclosed by particular individuals or groups, then the next best quality of land is utilized (although at a higher cost of production) and then the next best (at a still higher cost of production) and so forth. As a result, “land rent” was defined as the difference in the cost of production on the poorest or least favorable tract of “no rent” land being used and the cost of production on areas of land with better soil or more favorable locations.
The uniqueness of land as an Economic asset stems from its fixed supply and immobility. It is an indispensable part of all kinds of Economic activities i.e., Agrarian, Industrial or Service. Land rent is the price annually paid for the exclusive right to use a certain location, piece of land or other natural resources.
The market value of any particular parcel of land is a product of the locational advantages enjoyed by it which in turn are facilitated by nature and the benefits and services provided by the community. Land value can be considered as the relationship between a desired location and a potential user. The ingredients that constitute land value are utility, scarcity and desirability. 'Land Rental Value' is the annual fee individuals are willing to pay for the exclusive right to use a land site for a period of time.
Whatever is not collected as Land Rent for the benefit of all members of a community, town, city or nation will be capitalized into the Market Value of land. Exorbitant rates of market value of land are impediments to emerging entrepreneurial activities involving land. Landowners sell the Capitalized Land Rent, i.e., Land Value which is uncollected by the community even though it is unearned income. This widens the disparity between landowners and non land owners and is the root cause of the widening of the gap between rich and poor.
Because of the type of property-in-land system in place in much of our world, there is profit to be made from simply holding (owning, claiming) valuable land sites or large tracts of land. As development intensifies cost of land further increases due to land speculation and hoarding. The landless and coming generations must pay a steadily rising amount land access. Eventually, increasing numbers of people who could otherwise be productive and well able to meet their basic needs are driven to subsistence levels and worse because they cannot pay the inflated land costs.
The rental value of land sites comprises at least about 20% of gross domestic product (GDP) in most countries, an amount that in poorer countries is sometimes greater than all government spending combined. The land value capture capacity of land is an even larger fraction of GDP where population is densest and competition for good land consequently most intense. Where extraction of oil or minerals is the major industry of a country or region, total natural resource rents can even exceed 50% of GDP. Economists call private pursuit of this publicly created value “rent seeking.” Many now view this as a method of obtaining unearned gains at society's expense and thus a root cause of the worldwide grossly inequitable distribution of wealth.
Justice requires that land values, which are created by society and nature, be made available for public improvements. This is the responsibility of good government.
Note: The What is Land Rent? section draws from Land Rent Structure an article by Sanjeeb Mishra, a member of the Indian Administrative Service, and District Magistrate and Collector, Ganjam (Orissa, India).