3.4.1-9: Land Value Capture is a Sufficient Source of Public Finance

Module 3, Section 4.1-9

Land Value Capture is a Sufficient Source of Public Finance

 

Most often, the taxable capacity of land is such that land value capture can yield more than local government needs to fulfill its basic responsibilities for the provisioning of basic services for all. – Joshua Vincent, Director, Center for the Study of Economics

 

4.1 Economists who have an inadequate understanding of land rent sometimes state their opinion that it is an insufficient base for public finance. They say that land rent cannot provide the required funds needed to finance social necessities. This mistaken perception can usually be traced to the lack of up-to-date and correct land value assessment records. Economists with expertise in land value capture policy have determined that land rent is in fact a substantial amount of the GDP of most countries, ranging anywhere from 20% to 30% and even more.

4.2 For example, please carefully study this graph compiled by land value capture economists with Land Values Research Group in Australia:

4.3 You will note that in 1974, resource rent was only 12% of GDP while net incomes of labour and productive capital was 63%. Taxes amounted to 25% of GDP. By 2004, as the overall economy grew steadily during the twenty year time period, we see the workings of the Law of Land Rent. Resource rent has increased to 31%, or nearly one third of GDP. The tax burden increased 6% during that period while incomes of labour and capital took a big hit, going down to just 38% of GDP, a loss equal to 25% of GDP.

4.4 Taxes currently fall mostly on labour and productive capital. Still using the Australia diagram as our model, removing the 31% of GDP of taxes and adding it to the return to labor and capital increases that percentage to 69%, which is 6% higher than in 1974. The 31% of GDP which is resource rent would be captured back for the benefit of society as a whole. It would adequately provide the funding base for education, transportation and other public infrastructure, police and fire protection, good urban and regional planning, etc. With incentives for investing in the “bads” of profiteering in the gifts of nature eliminated, both public and private funds would be directed to the “goods” that people need and want.

LVRG graph: Earned and unearned incomes, 'Classical' distribution of GDP 1911-2005

4.5 The following diagram is another way of representing the information based on the Australian data. “As Is” shows the three way division of wealth among:

  1. Rent
  2. Taxes
  3. Net Income of Labor and Productive Capital

 

4.6 The second diagram - “If We Captured Land Values”- is an ideal model which has eliminated taxes on work and production with full rent captured for the benefit of society as a whole.

4.7

How much revenue can land yield by itself?" I assure you it can yield more than local governments need. The taxable capacity of land is camouflaged in our times by a consistent modern tendency to underassess it, relative to buildings. - Mason Gaffney, The Taxable Capacity of Land

 

4.8 In his recent book Double Cross, Ron Banks has estimated that if the UK were to raise its revenues from natural resources rather than use existing taxes, each man, woman and child would be better off by an astonishing £15,000 per head, per annum. If Banks is only half-right, this would mean that a family of four could be £30k a year better off!

4.9 Optional Reading: Who Says Cities are Poor? They Just Don't Know How to Tax Their Wealth!