Land Value Taxes

Have you ever paid tax for the land that you use? Sounds unique? This is what we call Land value tax. It's a levy we pay for the land we use, excluding the personal properties, buildings, etc. The tax is sometimes referred to as location value tax, site value rating, etc.

Let's trace its history to know more about it.

‘Land’ comes under limited resources, and its importance is created by the public and communities work. It began after the introduction of agriculture. It was initially based on crop yield. This early version of the tax required simply sharing the yield at the time of the harvest every year.

Rishis of ancient India believed, “The earth …is common to all beings enjoying the fruit of their labor; it belongs…to all alike”; therefore, “there should be left some for everyone.”

At one period, physiocrats supported the vanishing of all types of taxes and paid only one tax, i.e., land tax. Doesn’t it sound crazy if we will have to pay only pay one tax?

GEORGISM

Many people led the movements supporting a Single tax based on land. Among them, Henry George was one. He was perhaps the most famous advocate of recovering land rents for public purposes. In his best-selling, Progress and Poverty (1879), George argued that because the value of land depends on natural qualities combined with the economic activity of communities, including public investments, the economic rate of land was the best source of tax revenue. His movement was named Georgism (or Geoism).

Georgism is concerned with the distribution of economic rent caused by land ownership, pollution rights, and control of the commons, including the title of ownership for natural resources and other contrived privileges (e.g.intellectual property).

Does this advantage us? Let's dip into these thoughts more.

A vital property of the land value tax excludes the personal properties, buildings, etc., built on top of the land. What benefit does this create? Why not just rely on property taxes? What are the advantages of levying a land value tax?

Efficiency: Since additional improvements built on top of the land aren’t taxed, a land value tax promotes efficient land use. Since a developer has to pay the same amount of tax on an undeveloped and developed plot of land, he/she is incentivized to develop that land as soon as possible.

Discourages speculative land holding: Landowners of land plots located in high-demand regions are encouraged to develop or sell off undeveloped land in prime locations. Since they have to continue paying land value tax even on undeveloped land, they cannot just hold onto land that doesn’t generate economic value and sell it off later when the land value rises.

Reduces urban sprawl: Since a land value tax promotes efficient land use, it will lead to more compact and dense cities. Compact cities reduce costs and increase the efficiency of public transport and other utilities.

Minimizes deadweight loss: Since the quantity of land is fixed and the land value tax promotes the most efficient possible land use, the deadweight loss generated by levying a land value tax is minimal.

Progressive tax: Since wealthy people tend to own more land, a land value tax is progressive. It helps in creating a more equal society. On top of that, since rent depends on what the tenant is willing to pay instead of the landlord's expenses, it is impossible for the landlord to pass the burden of the land value tax onto his/her tenants.

Prevents Tax Evasion: Land is impossible to be concealed or moved overseas. Titles are registered with the public. This makes it very difficult to evade a land value tax.

A just and moral tax: Land value primarily depends on the facilities around the land like roads, drainage, public transport, good schools, etc., a large part of which is funded by taxpayer money. Therefore, unlike other taxes, land value tax doesn’t take away the wealth earned by a person’s hard work and skill but returns to society its contributions to land development.

Now that we have looked at the advantages of levying a land value tax, it is also essential to look at a few disadvantages of the land value tax. After all, there is no such thing as a “perfect” economic policy:

Calculating land value: Calculating the land value of a plot of land is difficult. Having government-employed assessors has the risk of bureaucratic complexities and corruption. Economists like Murray Rothbard claim that it is impossible for the government to value land correctly. That can only be achieved through the free market.

Land Abandonment: Levying a land value tax that is higher than the rent generated from it will lead to land abandonment.

Implementation difficulties: A land value tax may be impractical in regions where land ownership is ambiguous. For example, land that is communally owned by a village or tribe.

HOW LAND VALUE TAX WILL AFFECT THE INDIAN REAL ESTATE MARKET IF APPLIED?

In ancient India, the land was considered to be of great value, but in today’s scenario, a large share of it is being misused to benefit a specific social group.

According to the statistics provided by multiple reports, a significant share of investment in the Indian real estate market is in undeveloped land which is not funded by banks, which indicates that this sector is being used very intelligently by the upper class of society to evade taxes by bending the tax laws issued by the government.

Many such reasons make this overheated sector immune to a meltdown, but it's a considerable concern that these are also the factors that are bleeding our economy.

Black money is regularly used in shady property deals that provide assured returns and anonymity. This results in a significant price hike of land for its end users and a mushrooming of irregular colonies with nonexistent infrastructure like sewerage and water lines.

The overdeveloped real estate sector is useless for India’s trade balance, as construction projects, even if world-class, cannot be exported. Even if the real estate bubble does not burst, capital is still being destroyed, and nothing new is created.

Modern tax laws give us a clear image of taxing only private wealth while overlooking public wealth. LAND VALUE TAX gives a logical solution to this situation as it taxes only the value of the land. It might be of more use when applied to agricultural land. The owners of the undeveloped land will now have to pay taxes on such lands, forcing them to either develop or sell it. This will also result in a decrease in price for the end users.

A large amount of undeveloped land near the cities would be free, and the same can be developed by the state or private players into residential properties, which could even help us solve the housing problem.

Currently, mining companies find it more profitable to squat on natural reserves as prices of minerals are on a hike. But this tax will also make the mining firms pay annual taxes according to the amount of land they own, resulting in a decrease in land wastage.

This tax might not be able to replace all of the property taxes but may be a one-stop solution for the Indian real estate sector.

Written By-

Aaryesh Baleri — IIT Guwahati

Anand Mangal — IIT Guwahati

Ankit — IIT Guwahati