At Prosper, we believe our tax system should focus on ever-increasing land values, and reduce taxes on human effort. Land is not just what we build on, but the dimensional space and locations around us. Unlike goods and services, “prime locations” – which determine land values – are not something we can create ourselves.
The value of land and natural resources is created by our whole society. Land increases in scarcity and value as the population grows, and local amenities that are created by the community, such as roads, electricity, transport and town centres also make locations more valuable. Land value is created by all of us including the government, which taxes our effort (work), yet more and more wealth accrues to landowners. Land value increases hijack the gains of growing prosperity, gains in which we should ALL share.
This creates an ethical dilemma – who should be allowed to own the finite, scarce wealth of land? And on what grounds? Is a system of first-come-first-served fair and productive?
Property is another name for Monopoly
Land ‘ownership’ is tantamount to having a monopoly over a finite resource. Because nobody can make more land, if you want some you have to buy (or steal) it from someone else. This is a barrier to entry for many. Furthermore, if you own land in a great location, you can charge rent for people’s use of it. Just by owning land you can take a cut of the earnings and efforts of others.
This is well illustrated by the board game Monopoly. You win by building up a portfolio of properties, charging rent and eventually bankrupting the other players. This is why Adam Smith warned that without corrective action, private property in land was a threat to free market capitalism.
There is a clear link between reward and effort when it comes to goods and services produced by human effort – which is usually subjected to many damaging taxes. However with non-producible land wealth, there is no such link. Once land is monopolised, it retains value irrespective of the actions of its owner. This is why land is so valuable, and its value continues to grow.
Land and housing can generate inequality
Since the industrial revolution, the growing wealth of society has been absorbed by residential land – i.e. housing. This has created the housing affordability problems we see globally, as the value of residential land continues to escalate off the back of cheaper mortgages.
Whether you own land is a critical determinant of how much you benefit from growth and development of the economy. At Prosper, we believe housing is a human right, not a privilege.
Property taxes, such as state land taxes and transfer duties, are not generally passed through to higher rents or house prices. Such taxes are borne by landowners and capitalised into lower land values. To understand how this works, read our briefing note on property taxes, rents and house prices.
A better tax system
Ultimately, our tax system should reward effort, encourage entrepreneurialism, and protect our environment from exploitation. The opportunities go beyond land (location). There are other monopolised natural resources we could capture the public value of, as well as publicly created monopolies in essential infrastructure and intellectual property, where market competition is either infeasible or restricted. If we capture the rising value of land and other scarce resources, we can replace taxes that stymie our prosperity. Taxes on the number of staff you employ, or on transactions and trade have no place in a thriving society. We could also let people keep more of their income and business earnings. A win/win.