Land Value Taxation: Solving the Efficient Tax Problem

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Dr Terence Dwyer

 – B.A. (Hons) B.Ec. (Hons) (Syd.) M.A. Ph.D. (Harvard), Dip. Law (Syd.), FTIA, Visiting Fellow, Crawford School of Economics and Management, Australian National University.

Dr Dwyer’s Submission to the Henry Tax Review

Executive Summary

  • The Treasury tax paper acknowledges the three factors of production but needs to follow through on the logic of its’ analysis.
  • All taxes resolve themselves into taxes on the incomes of the three factors of production, land, labour and capital.
  • All taxes are distorting, save a tax on economic rent. Taxes on capital and labour are both distorting – they suppress factor supplies to the economy.
  • Land value taxation has long been endorsed by economists as a perfectly efficient tax. It also has long roots in Australian history.
  • A basic argument for land value tax is that it is the one and only tax base that cannot flee in response to a tax. Capital and labour can emigrate – land cannot.
  • Nor can a land value tax be shifted as an extra cost to business. Ultimately, a land value tax must be borne by the landholder at the time of introduction.
  • Once a land value tax has been established, any purchaser of land discounts the price to allow for the tax and, in that sense, it is not a burden on anyone other than the owner at the time of introduction.
  • Land value taxation is not distorting because it is capitalized – it cannot be avoided. A land value tax becomes a burden-less tax and has a zero marginal tax rate.
  • Because it is a ‘lump sum’ tax, a land value tax has a marginal tax rate of zero. It does not deter marginal work effort or the net return from saving and investment in productive physical capital.
  • The reason for the efficiency of a land value tax is that, in a deep sense, it is not really a tax at all but a part of a market-determined rent which accrues to the Crown on its resources.
  • A shift from income and consumption taxes to land value taxation is welfare enhancing. The elimination of deadweight loss can create a social dividend.
  • Land values reflect all spatial externalities, for good or ill. Land value taxation is thus a uniquely efficient way of recapturing the benefits that Government services or infrastructure may confer on land values.
  • Similarly, financing fixed costs of network spatial infrastructure from land value taxes (such as rates) is superior to seeking full cost recovery by charging users alone. It enables infrastructure to be made available to users at the economic optimum of short-run marginal costs (SRMC).
  • A land value tax can raise can raise large amounts of revenue to replace inefficient taxation of labour and capital.
  • A land value tax can embrace all natural resources (site values, mineral and oil lands, fisheries, forests and the electromagnetic spectrum).
  • Depletable resources can taxed efficiently on their unimproved value plus a depletion charge based on the change in value caused by extraction.
  • A land value tax squeezes out harmful speculation and helps prevent real estate bubbles from forming. This is because it provides a spur to put land to its highest and best use and not to withhold land from the market.
  • As well as promoting full employment by ensuring resources are accessible to producers wanting to use them, a land value tax, when replacing a labour tax, reduces unemployment by increasing net wages received by workers and allowing gross wages paid by employers to fall. The labour tax wedge is diminished.
  • It appears that a land value tax may also alleviate distortions whereby income and consumption taxes create a bias towards excessive metropolitanization of industry and population. Land value taxation appears favourable to encouraging a natural regional decentralization of industry and population.
  • A land value tax also promotes competitive neutrality and prevents monopoly abuses sourced in control of superior natural resources.
  • Several taxing jurisdictions have historically shown how to improve their economic progress by using land revenues and land taxation to keep other taxes down. Many countries have relied on resource revenues, notably from oil, to be competitive as havens for investment. International tax competition is becoming ever more significant and the need to use a tax base that cannot run, ever more important.
  • Where a land tax is used to cut other taxes on mobile bases such as capital or labour, it is even possible that landholders may gain from the tax. Not only do they benefit as workers or capital owners, the reduction of other taxes can entice capital and labour into the jurisdiction, bidding up land values. A ‘win-win’ situation or ‘free lunch’ is possible when an efficient tax replaces less efficient taxes.
  • Further, where a land value tax is used to fund a social dividend, there is no deadweight loss associated with the relevant distribution of revenue. A land value tax, rather than a payroll tax, is therefore to be preferred as the means to finance a universal benefit such as child endowment or family payments.
  • A land value tax base can be shared between levels of government without complex source rules and leaving each jurisdiction free to set its own tax rate.
  • Public support for land value taxation reform may be encouraged by legislating to ensure that the land revenue can only be used to finance public infrastructure and reductions in other taxes. In particular, cuts to company and personal income tax rates and removal of stamp duty on land conveyances should be financed out of a co-operative Federal State land value tax.

Download the full report (1.2MB PDF)

5 Comments

  1. Ashley06-11-2009

    Land value tax sounds very efficient at first look. However if it is so good why is it not widely used? Where can I find discussions to the down sides to this approach.

  2. Karl Fitzgerald
    Karl Fitzgerald09-11-2009

    HI Ashley,
    check the FAQ page on our site to see some of the controversies. Basically its our little NGO with 2.5 full timers versus the world’s most highly funded lobby – the property lobby. I have counted up at least 12 different property lobby fronts just here in Victoria. We’d love your help ;)

    One day this will become so undeniable that no level of lobbyocracy will divert the people from the truth.

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