In the fields of urban public finance and international development, the concept of land value sharing (also commonly referred to as land value capture) has become a standard argument for implementing or reforming taxes based on land.
Often the value of privately held land increases as a result of public investments in infrastructure, publicly approved changes in land use, or broader changes in the community, such as population growth. Proponents of land value sharing argue that governments should use taxes and fees to collect some share of this increase in value for public purposes, including funding infrastructure and service improvements. The concept of land value sharing has been in circulation at least since 1776 when Adam Smith wrote The Wealth of Nations. Smith considered the topic of taxes on agricultural land (which he called “the ordinary rent of land”), houses (“house-rents”), and residential land values (“ground-rents”) and concluded:
“Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign, which, by protecting the industry either of the whole people, or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon. … Nothing can be more reasonable than that a fund, which owes its existence to the good government of the state should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.”
Whether or not one agrees that increased land value is due to the quality of governance, it is clear that in most instances increases in land value are not due to actions taken or investments by the land holder. This led John Stuart Mill to write in 1848:
“Suppose that there is a kind of income which constantly tends to increase, without any exertion or sacrifice on the part of the owners: … In such a case it would be no violation of the principles on which private property is grounded, if the state should appropriate this increase of wealth, or part of it, as it arises. This would not properly be taking anything from anybody; it would merely be applying an accession of wealth, created by circumstances, to the benefit of society, instead of allowing it to become an unearned appendage to the riches of a particular class.
“Now this is actually the case with rent. The ordinary progress of a society which increases in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches?”
The strongest historical proponent of a tax on land value was 19th century political economist Henry George, who believed that society should abolish all taxes except the tax on land values. He viewed this tax as a remedy for the unequal distribution of wealth and argued that it could be used to prevent speculation and support productivity. In his immensely popular 1879 book Progress and Poverty, he wrote:
“The tax upon land values is, therefore, the most just and equal of all taxes. It falls only upon those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive. It is the taking by the community, for the use of the community, of that value which is the creation of the community….
“And to shift the burden of taxation from production and exchange to the value or rent of land would not merely be to give new stimulus to the production of wealth; it would be to open new opportunities. For under this system no one would care to hold land unless to use it, and land now withheld from use would everywhere be thrown open to improvement.”
Contemporary economists favor land taxes for another reason: Land taxes are economically efficient. Normally taxes reduce the supply of goods produced and/or raise prices, which detracts from the welfare of producers and consumers. However, a land value tax does not reduce the supply of land, which is fixed. When supply of a good is completely inelastic, economic theory predicts that the full price of the tax will be borne by the seller—i.e., the price of land will be reduced by the amount of the tax. This is an efficient outcome since the seller did not exert any effort to create the value of the land itself. In fact, counterintuitively, a value-based tax on land can actually decrease the price of residential and non-residential units. This is because it can deter speculation and incentivize landholders to put their land into use, adding to the supply of units in the market.
Several modern noted economists have comment-ed on the theoretical strength of land taxes. Nobel laureate William Vickery observed:
“The property tax is, economically speaking, a combination of one of the worst taxes—the part that is assessed on real estate improvement … and one of the best taxes—the tax on land or site value.”
Even conservative economist Milton Friedman grudgingly acknowledged the merits of land taxes:
“There’s a sense in which all taxes are antagonistic to free enterprise – and yet we need taxes. ... So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.”
Thus, the current view on the use of land value sharing reflects a substantial consensus that “unearned increments” in land value can and should be recaptured, at least in part, by the community. Few disagree with the Vancouver Action Plan—the founding document of UN-Habitat—which states:
“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).”
Most experts agree with economists H. James Brown and Martim O. Smolka, who conclude that in theory (1) publicly created value should be captured, (2) substituting land-based taxes for other taxes to pay for investments is economically efficient, (3) land-based taxes tend to lower prices and reduce speculation, and (4) land-based taxes could cover a major part of public infrastructure improvements. Given this consensus it is reasonable to ask why the instruments are not more widely used.