The dangers of a Basic Income without Land Value Taxation

By Charles Bazlinton, blogger, surveyor and author of The Free Lunch.This paper was presented at the 10th Congress of the Basic Income Earth Network at Barcelona in 2004.

One reason why many people are in poverty and why heavy taxation is needed to help them  is the cost of housing. From  time  to time, because of fluctuations in real estate markets, poverty touches more people than usual. For example in the United Kingdom  in the early 1990’s about 250,000 families had their homes taken from  them  following a housing price crash and the associated unemployment. That was 1 in every 90 families.

There are few investments as good in the long term  as land-based property, that is real estate, but  the accompanying speculation exacerbates poverty. In Japan from  1955 to 1990 residential land prices  multiplied by 200 times whilst wages rose only 21 times making it impossible for most young families to buy a home.  These things need to be taken into account by  all advocates of Basic Income if the poorest among us are to be permanently helped.

It surely is obvious that land holds  a vital place for human life. There  is pressure to use land that is readily accessible to existing population centres and that is where it  fetches particularly good prices. As we say in England the three most important  factors when assessing the value of a house are: ‘location, location, location’. So what  gives land in a particular place  its value?  It is partly what a government will permit to be done there, but this itself has always been driven historically by one factor – the success of the society in which the land is situated.  Let us look first at an extreme case of an unsuccessful society – one where law and order have broken down, say in a war zone. There is no  incentive to settle there, either  generally or for business reasons. In such a place you will have great difficulty selling land – there are few buyers around and you will get little money for it, the low land values being an  outcome  of the disorder and failure of that society at that time.  But look at a successful city or  town or region, where basic utilities are present: water and electricity flows, rubbish is collected, streets are safe, banks are open, businesses can be run profitably, there are schools for children, good laws are enforced, the media is  free, and so on. People want to live in such places. There is a high demand for houses since there are jobs, and for offices, shops and factories because business opportunities abound. Even unimproved buildings rise in value because their land values are increasing. The successful society is what generates the demand which brings high land values.

We will now closely examine the human mechanism  behind the success which gives rise to land value. How does it occur?  Who creates it?   Why does it happen?  Clearly every society is the product of the success of its forebears and we build on their achievements in our generation. But it is not one of us alone who creates the success. You  may be a doctor or a farmer;  a bus driver or a government minister; a banker or a teacher; or  a parent at home with the children. But you alone do not create the success. It is you together with all of us,  and myriads of others, who contribute our small part to the whole successful society of people who  live there.   Thus it is that the wealth seen in land  values is a by-product of everyone’s contribution.  This contribution is partly through people’s ordinary work and partly as they display the characteristics of good citizenship such as  being law abiding, respectful of other’s rights and so on.

Let us now examine the contribution  from  each individual to the whole success. One outcome  of each person’s contribution of work is already paid to them  as their  wages or salary. Let us call this the ‘primary’ wealth from  their work.  Another outcome  of  their work is the  wealth within land values. This is a ‘secondary’ wealth from  work.  To repeat:  there is one work and there are two benefits from it. Benefit number one is your wages or salary.  Benefit number two is the  land values, generated by you indeed, but only as you are part  of the whole community.

It is  because the secondary wealth effect in land is usually so  certain that many people purchase real property beyond their own personal needs as an investment. One of their hopes is to take some  of the gain from the secondary wealth flowing from everyone’s work and good citizenship.  These extra, speculative  buyers, by increasing demand, raise land prices even higher.   If you buy real estate property, you alone cannot add to the value of the land that comes with it.  You can add value on the land by building a house on it,  or by extending an existing house, but you cannot add to the value of  the land itself.  This is particularly  clear in the case of the owner of an empty plot of land who after buying it, keeps it for a while and then  sells it at a profit. Value has been added but not by the owner – they spent no money beyond buying it, they added nothing. The value arose from  the dynamic community that made the land desirable.

When income arises from  work done it is seen as elementary justice. It is an aspect of  the work ethic – wages are a natural and proper outcome  of work. But for people who  have no part in land ownership there will be no ‘secondary’ benefit  of land value. The work ethic  does not function for them, even though they have contributed to it  through their work and displayed good  citizenship just as much as the real estate owners have.

So how can this value in land, produced by all, be  captured for all?  Through the taxation of land values for the purpose of funding a Basic Income. These two are a logical and fair combination which will return the gain to its rightful source, that is, to all citizens equally. It is justifiable and morally compelling. It can be seen as a clear outworking of the work ethic,  which in this case is that individuals be rewarded for their contribution to the success of the whole.  Land value taxation can be implemented by any nation on the planet to pay a Basic Income  to its citizens. It is a simple, non-bureaucratic and  unavoidable form of tax. Land is always there and it is  rare for a plot to have no value to tax. Owners would not be taxed on the value of their buildings – only on the assessed value of the land of the plot. Typically for a house in the United Kingdom  this could be one third of the total  value, but the proportion will depend on the stage of the current land price cycle. Let us note here, that there is another way to solve the disparity of secondary wealth between land owners and non-landowners and that is nationalization.

But to take all land wealth into state ownership, in my view, would be a quite unnecessary and a retrograde  step. Land value taxation funding a Basic Income would achieve all that the draconian measure of  land nationalization attempts, whilst respecting every citizen and leaving those who own land to do as they wish with it. It will always be their land.

Having demonstrated the justification of  linking land  value tax and Basic Income, we will now turn  to the danger of not so linking them. If  Basic Income is to be sufficient to  bring a significant difference to the poorest citizens, I suggest it will  be large enough to raise land prices. This is because some  of the new cash in the hands of higher earners will go into  real estate. Thus could the Basic Income  be the very means of negating some  of its own good effects for the poor.  Do we really want to give the poor a Basic Income  which, whilst appearing to bring hope, might actually undercut  their new benefit and yet again restrict their property choices?

Basic Income  funded by land value taxation is a simple and satisfactory solution. The land value tax would cut the speculative attraction of  real estate property, and this would reduce, or at least steady land prices, and with them housing costs for everyone. Low income  renters would gain in two ways.  Firstly by adding to their household income  directly and secondly through moderated rents. Low income  homeowners, would be protected from  further impoverishment due to the new tax by their Basic Income. The need for government housing subsidies in both cases would be reduced. By taxing land value and funding a Basic Income  from  it, a virtuous circle would be generated in the cause of poverty reduction.

But what will voters with higher incomes who own their homes say about the new tax?  What of  their question: ‘What is in it for me?’  Currently their long term  plan might  be to cash in some  of the gain from  their home’s land value. But they might never actually obtain cash profit from it due to the timing of the real estate cycle, or  a personal disinclination to sell up when  faced with it. The answer for the majority of  these voters I suggest, will be  in the cash benefit of the Basic Income  every month. There would be prizes for politicians who ensured  that the total Basic  Income  for  most  home-owning households exceeded their land value tax liability!

There is a satisfactory symmetry, a  balance, in the funding of a significant Basic Income  with an effective land value taxation. There  is the justice of rewarding people as individuals for the secondary wealth that they collectively produce. There is the  security of knowing that speculative forces will be restrained from  inflating the cost of such a basic human need as a house or apartment. This is a compelling rationale that should appeal to any nation and across a broad political spectrum.   I would be very concerned for the effectiveness and long term success of a significant  Basic Income introduced without consideration of  its effect on  land values. I commend a land value funded Basic Income for reasons of logic, justice, simplicity and permanent effectiveness in reducing poverty.

Stiglitz on Land, Rent and George

Presenting at the INET conference in Paris earlier this month Nobel prize winning economist and former head of the World Bank Joseph Stiglitz drew heavily on Georgist insights into the fundamental root cause of inequality. Appearing on the podium together with Thomas Piketty, Stiglitz critiqued the failure of his colleague to correctly distinguish between “wealth”, “capital” (man-made wealth used to further production) and sources of economic rent, chief of which is “land”. At the end of his talk he mentioned Henry George by name, essentially concluding that the great 19th century political economist was right all along.

This is important because Stiglitz is an influential economist at the forefront of efforts to find workable responses to the problem of ever growing extreme inequality. In particular his endorsement of Georgism is an encouragement to young thinkers and economists both within and outside of academia to explore George’s thesis themselves. Is a taboo in the process of being lifted? The ideas of Henry George, seemingly off-limits for so long, are now getting the attention they have been crying out for:

Stiglitz’ talk follows that of Piketty, beginning at 1 hour 50 minutes and 20 seconds. It is very much worth watching from the start but I have linked here to the second half of the talk when he addresses more directly the subject of this post.

In the talk Stigltz says:  “Driving the growth of inequality. You have to conclude that minor tweaks in the economic system are not going to solve the problem” 

“The underlying problem is the whole structure of our economy which has been oriented more at increasing rents [economic rent] than increasing productivity – [rather] than real economic growth that will be widely shared with our society”

“A tax on land, rents, will address some of the underlying problems. This is an idea that Henry George had more than 100 years ago. The analysis I have done goes beyond a land tax. Henry George argued for a Land Tax because it was non-distortionary. The analysis I have done goes beyond step beyond Henry George. This analysis improves the productivity of the economy because you encourage people to invest in productive capital rather than into rent generation.”

One quibble is Stiglitz’ claim that his analysis goes one step beyond Henry George in showing how a tax on the rent generating value of land would not only be non-distortionary but would actually promote or unburden productivity. Henry George fully understood this very point. Stronger still, it was a central part of his thesis which he made clear in many of his writings and speeches.

Work hard, buy land – whats the problem?

In the interview posted at the bottom of this article Jonty Williams and Tal Lesham of the HGSD shoot the breeze with Carl Munson of the Access All Aerials Hannah Time Radio Show about land fundamentals and the Land Conference being held in Totnes this Saturday. Carl makes a very good point when he says that to many peoples ears the concept of sharing land value sounds like communism. After centuries of conditioning, the idea of private land ownership is so deeply ingrained in our culture that to question it is anathema. The notion that one owes a duty to society for the privelege of exclusive title sounds very alien indeed. Read the full post »

THE NOBLE ART – Graham Burgess on Independents for Frome

Originally posted on A Land Conference:

something wonderfulWe can all dream of a more equitable world; a world where a sense of fairness determines access to land for cultivation or for providing a place to live; a sense of proportion in respecting the needs of other people and other beings normally outside our sphere of awareness, a sense of a more general participation in the society of power and influence.

These fields of social justice, land-use, property, power and distribution of wealth are all profoundly Political concerns, yet common wisdom currently has it that politics is a dirty business steeped in self-interest and remote ideological squabbles. I, too, share the hope that we might, as Shelley`s “Unacknowledged Legislature”, effect a cultural shift through cultural endeavour – and this is a necessary, if long-term, project. Yet sooner or later the actual shift will need to be endorsed by Political institutions if they are to have real material influence…

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Why the German Republic Fell

“The private appropriation of the rent of land is the deadly enemy of mankind” The following article was written by Bruno Heilig in 1938. He describes the circumstances that led to Hitler’s rise to power, offering a narrative that differs markedly to the simplistic one set out in secondary school textbooks. The prescience of Henry George’s Progress and Poverty is highlighted, a prescience that echoes eerily in the Europe of today.Nazis Read the full post »

How can we grow a proper relationship between people and place?

A one-day Land Conference will take place in the Totnes Civic Hall on Saturday March 21st 2015. Its purpose is to give those who care about a proper relationship between people and the land (rural and urban) the opportuLandConferencenity to come together and share their understandings and passions on the topic.

The Conference was conceived and organised by a group of people committed to raising awareness of land issues, including several members of the Henry George Society of Devon. The desire is to facilitate opportunities for practical engagement with the firm belief that this will then convert into concrete action for change. Read the full post »

Share the Land, Keep the Fruits of Labour

This article is by Erich Jacoby-Hawkins, Canadian blogger, director of Living Green and the Robert Schalkenbach Foundation. We thank him for allowing us to reproduce it here.

We all depend on this earth for our basic needs: food, water, and a place to live, work, and play. Luckily, our world has locations and resources enough to provide for all, if we share well and conserve rather than waste. But what is the fairest way to share?

I’ve been reading the new Mason Gaffney Reader: Essays on Solving the “Unsolvable”. This economics professor’s work comes highly recommended by intellects such as former World Bank Nobel economist Joseph Stiglitz, and shows how land tax reform is the key to addressing unemployment and poverty and revitalizing our cities and economy. But how?

Read the full post »

Housing crisis? What housing crisis?

Mark Wadsworth works as a tax advisor and is interested in tax, welfare and land reform, as well as being the treasurer of the Young People’s Party UK. Here, he gives his take on how a land value tax could help solve Britain’s housing crisis

Mark Wadsworth Headshot

It would be foolish to describe the current situation in the UK housing market as a “crisis,” as this suggests some unforeseen events which suddenly come to a head and which the government has to deal with urgently. Far from it, the state of the housing market is the inevitable result of quite deliberate changes in UK government policy over the last thirty years or so, which we are feeling the full impact of now.

Government policies

If we go back to the period between 1945 and the 1980s, what is remarkable is the rate at which owner-occupation levels increased. The share of owner-occupier households rose from 30% to 60%; the proportion of social tenants increased from 20% to 30% and – in a development which has received much less attention – the share of households renting privately fell from 50% to 10%.

The spread of owner-occupation is often perceived to have created a more equitable distribution of wealth, but as we will see, this trend did not happen by accident: it was the direct result of policies which were intended to reduce the concentration of wealth – it was the effect and not the cause.

And although the 18-year boom bust cycle was not completely suppressed, the house price bubbles in the early 1950s and early 1970s and even the late 1980s were relatively short lived affairs and bank lending/mortgage borrowing was never allowed to reach dangerous levels, so none of these earlier bubbles resulted in the massive banking ”crisis” which has persisted since 2008.

So what was the government doing during that earlier period? Why did this lead to a more equitable distribution of wealth? How was the house price and banking boom-bust cycle dampened? Why did the level of owner-occupation grow so rapidly (even before the last short term boost of the 1980s council house sell-offs)?

There was an overall package of policies as follows:

1. Since 1918, the government had been controlling rents through a variety of rent acts. Landlords could not collect all of the location value, so by definition it went to those people actually living and working in an area who could enjoy ‘for free’ the location value they helped create because of the discount from what the unregulated rent would be.

2. If the regulated rent is only half the unregulated rent, then clearly, the amount which landlords are prepared to offer to buy a home is only half what it otherwise would be, making it much easier for first time buyers to compete. Buy-to-let lending was virtually unheard of, and until 2000 or thereabouts, banks required larger deposits from landlords and charged them higher interest rates compared to owner-occupiers.

3. Rent controls are a blunt tool, so the government also increased the stock of social housing, which made it available relatively easily and at very affordable rents. Historically, social housing has always made a slight profit in cash terms for the government; even though the rents were less than private sector rents, the rents collected were more than enough to pay interest and running costs. And until the council house sell-offs, there was no need for Housing Benefit, another huge saving to the taxpayer.

4. To prevent credit bubbles arising and to prevent first-time buyers entering into a borrowing arms race (and bidding land prices back up to their unregulated value), there were mortgage restrictions. Buyers were expected to pay larger deposits and mortgages were effectively capped at twice the main borrower’s income – until the 1980s, the average loan-to-income multiple was only two.

5. Clearly, neither rent controls nor mortgage restrictions would prevent homes in the more expensive areas being sold to the cash rich for their unregulated value, so we had Schedule A taxation of notional rental income (until 1964) and Domestic Rates (until 1989) which were highly progressive – the tax on the most valuable homes was a hundred times as much as on the cheapest.

6. Until the 1970s, we were building 250,000 – 300,000 homes per year. For the reasons explained, these were not snapped up by landlords, they were sold to owner-occupiers who paid much less for them than in today’s unregulated market.

7. Also worth a mention is that rental income was taxed at higher rates than earned income.

There was some watering down of this package even in the 1970s, but Thatcher and then Blair-Brown completely dismantled every bit of it in the 1980s and 1990s.

  • Rents have been rising faster than wages since the 1988 Housing Act ended rent controls and reduced security for tenants.
  • Rental income is now taxed at half the rate applying to earned income (no National Insurance).
  • There has also been a cultural shift by banks, which now view buy-to-let landlords as a better credit risk than first-time buyers. So landlords have flooded back into the market, because they can borrow more, pay more and leverage up the equity in the homes they already own. As a result, the number of households renting privately has doubled since the early 1990s – from an all time low of 9% back up to 18%.
  • Broadly speaking, people will take out a mortgage if the monthly cost is not significantly higher than the equivalent rent, but if rents are allowed to double, and then the amount which people are prepared to pay for a home will double. Add to that the interest subsidies which the government offer banks (Funding for lending, Help to buy) and inevitably house prices will double.
  • Banks will lend people as much as they are willing to borrow – the average loan-to-income ratio for new mortgages today is nearly three-and-a-half time, and 15% of borrowers owe four-and-a-half times their income.
  • So not only does the vendor make a big windfall gain compared to what he paid for his home under the old system, the banks are collecting a much larger share of location values (disguised as mortgage interest) than they did until the early 1990s.
  • Domestic Rates was replaced by the short-lived Poll Tax and then the Council Tax, which is basically a Poll Tax but dressed up a bit, so more valuable homes can be sold for much higher prices, because the new Council Tax bill was only a small fraction of the old Domestic Rates bill.
  • For crude political reasons, Thatcher and Blair sold off the nicest third of social housing, much of which is now being rented out again, often to Housing Benefit claimants.
  • NIMBYism is the order of the day, so we now have a larger population, but new construction dropped by half in the 1970s and has stayed low ever since (an average of 150,000 new homes per year).

So it is any surprise that those born in 1970 or later are more or less shut out of owner-occupation; they are doomed to either pay ever rising rents or take out a crippling mortgage which will take them decades to pay off, as against the ten years which was normal thirty or forty years ago?

Most sickening of all is that the Baby Boomers have conveniently forgotten all this;, they genuinely believe that they are somehow morally superior because they ‘rolled up their sleeves and paid off the mortgage’. They are blind to the fact that they could buy their first home for a price that was only half the regulated price, and they did not even pay off their mortgages out of taxed income – their interest payments were subsidized via a scheme called Mortgage Interest Relief at Source (MIRAS), so a large chunk was paid out of untaxed income.

The unearned capital gains they think they have earned are merely the direct result of the abolition of all the old regulations designed to redistribute the location value in an equitable fashion. The wealth that they have accumulated was handed to them on a plate; they bought at a time when the government kept rents and house prices low and are selling at a time when the government has allowed rents and house prices to skyrocket.

Speaking on behalf of the Young People’s Party, reintroducing the old system of rent and mortgage caps, building more social housing etc would be a good step forwards, but in terms of ensuring an even fairer distribution of location values and hence wealth, there is an even better policy – which is to reduce taxes on earnings and output and to increase taxes on location values instead.

Calculations suggest that if we moved half the tax burden off earnings and output and onto land values, young working households would be £10,000 a year better off. Such a tax system could easily be run in conjunction with rent and mortgage caps, so this is not an either-or choice.

Read the full post »

Induced Ignorance

Fred Harrison explores the thorny issue of rent seeking, or as he terms it “cheating”, in this excellent film packed full of deep insight into the problem at the heart of our dysfunctional socio-economic paradigm.

Alternatives to Owning the Earth

Ideas about property rights are so fundamental to the economy and society that we rarely question them. But property rights to the earth are at the heart of millennia of conflict, war, poverty and exploitation. A timid response would be to transfer land from its present owners to a new and, for a while, more equal group of owners. A radical approach would change our ideas about the nature of ownership so that everybody benefits from the wealth of the natural world.

Jonty Williams and Julian Pratt, both of the Henry George Society of Devon, will host this important conversation which will provide everybody an opportunity to share their ideas about proprietorship of land. Read the full post »

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