Could The Introduction of Land Value Tax Help to Reduce Inequality?
What exactly is Land Value Tax?
Land Value Tax (LVT) is a tax imposed on the value of land, irrespective of any buildings, improvements or any usage of the land. Developed and popularised by Henry George in the late 19th century, it has since been the topic of many tax policy debates worldwide. George believed that the value of land is dictated by the development surrounding it rather than the development on the land itself. For example, a plain, undeveloped piece of land in the Central Business District (CBD) surrounded by booming economic activity, from shops to financial towers, would be a lot more valuable than an apartment building in a rural area. This belief led him to develop LVT, it works by having the government value a piece of land and add a fix tax rate on the value of that land. He believes that by implementing this tax policy, it stops the situation where landlord having many pieces of land, not developing it, leaving it idle for its value to rise; the policy allows for the constant improvement of land to cover the tax impose.
The Implementation of LVT
Singapore, a densely populated city, with 6 million people living on the 719km square island, competition for land is vigorous. To manage the scarce land effectively, Singaporean government has introduced land use taxation in 1967 to promote the responsible use of the scarce land and generate sustainable tax revenue for public usage. Although they don't necessarily use LVT, they employ a hybrid system that is very similar. The system used by the Singaporean government effectively achieves a similar goal through different of public land ownership, leasehold systems, and targeted taxation. The Singaporean government owned around 90% of the land and leased to users, allowing the government to capture a lot of the land’s market value upfront through lease premiums. Additionally, when land is re-zoned or granted higher development rights, a Land Betterment Charge is imposed to reclaim a portion of the increased land value. Annual property taxes are also applied based on the rental value of properties, including vacant land. All these things together discourage land speculation, promote efficient land use, and channel land-derived wealth into public infrastructure and housing, aligning closely with the principles behind Henry George’s LVT.
However, there are certain differences with George's model. For one, George's LVT model is to imposed taxes on privately own property, however with Singapore, the state retains the ownership of most land (90%) and leases it out on a deal of 99 years. The government collect a large upfront lease premium but still apply taxes like Land Betterment Charge (fee paid to the government when a property owner or developer benefits from an increase in land value due to government actions, such as: re-zoning, change land use, planning approvals,) and property tax. Despite this, the hybrid model the Singaporean government uses still ultimately tries to achieve the same goal as LVT, to discourage speculation and encourage land to be use in a way that benefit the public.
LVT vs Property Tax
Most countries in the world, however, do not apply LVT, countries such as the USA or UK all the way to Vietnam impose another form of land tax called property tax. Unlike LVT, property tax is a form of tax that taxed on both the value of the building and land. As the tax is levy on the value of all real estate, the development of a country or a place often dictate the tax revenue of that place, and as property value don't often vary much within a year, it is easy for the government to value and plan their tax revenue to finance other public spendings.
Despite this, the current property tax system has several flaws, and especially in a well-developed, high income, capitalist country it could create lots of inequality. For one, property tax focused more on the development of the buildings on top of a piece of land, this then leads to investors and developers' unwillingness to develop a property due to fear of higher tax. On the contrary, LVT only taxed property owners on the piece of land they are building on. For example, if I owned a rental property in the middle of district 4 in Ho Chi Minh city from before they year 2000, where it is un-developed, and quite generally in poor condition. Subsequently District 1 (next to District 4) became the financial hub of the city, the CBD (Central Business District), district 4 then experience gentrification. With that same piece of rental property I owned, without having to do anything to it, its value has triple or even quadruple over the course of just a decade. As Vietnam uses the property tax system where the development does account for a higher weighting in tax than as for the value of land itself, although my tax does increase however not much. The value of my piece of land risen due to the development surrounding it, not what I do with it.
LVT and Reducing Inequality
LVT can reduce inequality by ensuring landowners pay for the unearned value they gain from community investments and growth, which can fund public services and lower other taxes, incentivize development and prevent speculation
Since LVT focuses on land value, those who hold land must develop it productively to cover the tax. This then creates a development race, and especially when we look at different urban models such as Burgess or Hoyt, and apply Alonso’s Bid-rent theory, land in the center (CBD) is only presume for the development of high-density usage due to its high footfall. A landlord who is hoarding land will be forced to develop it if they do not want to go bankrupt, and with that development comes innovation, and job opportunities for the people. By developing land, there would also be more housing supply in the city, reducing the affordable housing crisis that many countries currently facing.
Historically, when upward development is restricted, settlement expansion tends to move outward, leading to urban sprawl. The same goes for the current system of property tax whereby developing vertically tend to cost a lot, this led to development projects to start developing outward. Urban sprawl comes with lots of consequence, people have to drive further to get to work, green spaces lost and that lead to a lot of environmental impacts. With the use of LVT that would be reduce as people develop upward rather than outward as land will be taxed base on the area regardless of if it is developed or undeveloped. This especially make the use of greenbelt in London more efficient due to development being stop and the UK’s government can still develop the nation without having to cause any environmental harm.
However, as any tax system out there, transitioning to LVT does hold a few problems. For one, the valuation of land can be very difficult, which may lead to inaccurate tax levy on to developers and investors. This further causes unfairness and inequality, going against the principle of LVT as its aim is to reach fairness and equality. It is also that individuals who own land through inheritance or is considered ‘land rich’ but is cash poor might be also difficult to pay tax. Although they could sell the property, it is not a liquid asset, and during economic recessions, finding a buyer can be difficult. However, that will go with any tax at all, and it is up to the government to adjust the fiscal policy to their country economy favour.
Conclusion
Land Value Tax (LVT) would be one of the most effective taxes to be levy on to land. If implemented correctly, LVT would discourages speculation of land, reduce urban sprawl, give more accessible housing to the people and overall encourages development of a place. As long as upon the implementation of LVT, the governing body of that place must be able to have the specialty to evaluate and value land correctly and have a well thought fiscal policy that would benefit the society.
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