David Chester: The Ethical Taxation of Land Values and its Effect on “Corporate Rule”


This essay is not only about Corporate Rule, although the effect of introducing LVT will considerably modify the extent by which this Rule applies and the LVT will allow it to exist in a more ethical manner. So in order to properly explain this matter of “Rule”, we should first examine how LVT works in general and then review its results on the corporations.

Our civilizations are remarkably restricted when it comes to claiming the rights and sharing of the earth’s territory and its bounty, between its various peoples, tribes and citizens. Except for some religious intolerance and genocide, the wars between nations have largely concerned political boundaries and the control of the captured regions by military, colonial or installed governmental. It is the power that the land gives to the national administrators, about which our all too human struggle for dominion has been largely based.

The same applies to the distribution of land ownership within smaller regions and the freedom that this power provides. Ownership and control of the land in a community is often in the hands of a relatively small proportion of the population, having no interest in properly sharing its benefits. Consequently there is a lack of equality of opportunity for its citizens to earn a decent living and to dwell in a suitable location in comfort. This inability to properly share the land, as a vital factor of productive force and residential ease, greatly influences our civilizations today. It is about time that we faced-up its challenge both socially and ethically.

The measure of these natural resources is in the land values. They depend on the potential use to which the various sites may be put, when employed in the most effective way. This greatly depends on the location of the site in question. Farm land is far less productive than the same area located within a city, due to the latter’s higher population density. The city has a well developed infrastructure-considerable ease of communication is possible when people live and work within close reach of each other. They do this for sociable reasons and for the efficient production and distribution of the wealth that their work creates. This proximity allows the urban labor to be divided into a myriad of parts, each activity of which can be performed far more effectively than a relatively few people, within a rural setting, having to manage it by themselves.

However, due to the way landlords and their supporting banks monopolize the rights for access to and use of the land, there is a dearth of social justice in providing any equality of opportunity to perform this work. The land is treated as if it were an investment item like the man-made durable capital goods as represented by the shares of a manufacturing company. Land that is waiting to be developed is relative cheep, so those who would speculate in its value seize the chance to purchase it and then to hold onto it until the price rises. This applies particularly to the outskirts of expanding towns and regions where the population is growing, and the infrastructure is being developed by the local and national governments, using public money of course.

Speculating in land values is a sure thing. With population and town growth, the demand for useful sites must rise, but it is unjust that the landlord and his loan-supplying bank should benefit due to what the government, courtesy of the tax-payer, is investing. Worse, when this land is deliberately held unused the cost of the surrounding land rises making its price of access more expensive and the resulting locally produced goods more costly. This causes the demand for them to fall, production to slow and unemployment inevitably follows along with poverty for those who can manage the least well. From this analysis we see that it is the speculation in land values which is one of the reasons for the failure of nations to prosper. It results in poverty and the widening gap between the rich and the poor. Even when those who gain from this speculation re-invest their money, the loss of general efficiency in the land use inhibits the progress that otherwise would flourish.

This process is inevitable whenever land is freely sold and speculation in its value is permitted without constraint. The early history of land ownership within a country is when the monarch or powerful war-lord distributes it to his leading soldiers, in return for their participation and victories in past wars. It is a world-wide phenomena-this motivation follows from the culture of war-making between nations over the land. What governments fail to appreciate is that with the development of cities, the value of the land becomes so great that the restriction in its access has a very adverse effect on the working population for opportunities to work, due to the power contained and constrained within the land.

This landed right and power should be better spread. The ability of a land owner to immorally exploit his fellow citizens should be eliminated. Then the social just equality of opportunity for access to land will become a founding principle for any really civilized country. However, it is impractical for an existing and well-established nation to change its method of land tenure by directly redistributing its land to different owners. Buildings would have to be torn down and roads and communications restructured to an impossible degree. Fortunately there is an alternative method of better sharing this opportunity, because what is actually significant is not the land itself but its ability to produce wealth when it is used properly and efficiently in the production process.

Adam Smith in his book of 1776 (Wealth of Nations) has shown that the inevitable return on this factor of production is the ground-rent. (Smith also showed that the other two factors, namely the labor and durable capital also have their returns in the form of wages and interest, respectively.) This rent is potentially there, even when a site is not being used. Its magnitude has no connection with the additional return on the capital investment, when a building is located on that space. By confiding this ground-rent a land owner benefits from the value and usefulness of the site in question, but what he/she collects is actually the benefit created by the density of the community in that region. Ethically this money belongs to the people; ideally this benefit represents the opportunity for production that is created, by their very presence.

A wise government should appreciate this fact, which so often is deliberately obscured by the limited knowledge available within the educational institutions that deal with macroeconomics. This is not by chance-the wealthy corporations, who largely support these centers of learning in economics, control of much of the material being taught there. The significance of land economics is kept out of sight (and out of mind) by these captains of industry and commerce, whose interests include the potential and actual ground-rent that their exploitation of the many site values provides.

What is needed firstly is that macroeconomics should be better taught, so as to include the full implications of the simple facts that Adam Smith once began to explain. These matters have not been followed up by the successions of analysts and teachers. Indeed with the reformation of macroeconomics by John Bates Clerk, at the turn of the 19th century, the knowledge of the separation of capital and land was put aside. The sole exception to this trend, namely by Henry George, was an US economist whose seminal book “Progress and Poverty” in 1879 showed the reason why poverty was so wide-spread in that age of massive technical innovation. His reasoning covered the land ownership problem described above and his original proposed solution was not to redistribute the land itself but only to share the ground-rent in the form of a tax on land values. Strictly this is not a tax but simply the returning ground-rent which George claims should be collected (as if it were a tax), for the benefit of the whole community. It would replace the other kinds of taxes, most of which adversely affect the progress of the country due to the limitations they place on the productive processes by reductions in personal purchasing power.

There are actually 14 effects on the social macro-economy when a land value tax (LVT) replaces our present tax regime, in government, with land ownership, for the community and due to ethics.

3 Effects in GOVERNMENT
1. LVT adds to the national income in the same way as do other kinds of taxation.
2. However, the cost of collecting LVT is much less than for income tax and other production-related taxes. Land ownership is obvious to the general public and land ownership maps are common knowledge. Then the army of tax collectors does no longer have to fight against the concealed incoming cooperate gains.
3. With LVT, the national economy stabilizes, eliminating the housing boom-and-bust cycle. The speculators in land values are no longer able to gradually raise land prices, until as previously, the resulting bubble breaks and mortgages cease to be profitable to hold.

6 Effects Associated with LAND OWNERSHIP
4. LVT is progressive. Owners of the most potentially productive sites pay the greatest tax, regardless as to what use these sites are put. Home owners would benefit-LVT replacing all other forms of taxation. The majority of tax payers would find themselves paying less, as an ethical return and compensation for the part of the surroundings that they occupy.
5. The land owner pays his LVT regardless of how the land is used. When the land is leased to tenants, most of the resulting ground-rent is the tax. Consequently “Pride-ownership” of land will cease, even amongst the very wealthy.
6. LVT stops speculation in land prices-withholding land is too costly. This allows for land to be occupied in the best way for practical use.
7. The introduction of LVT initially reduces the sales price of sites, though their value (or potential usefulness) will continue to grow with population increase etc. The fierce competition for the most useful sites is no longer necessary, whilst a most productive site has a most significant tax due to its occupation.
8. With LVT, land owners cannot pass the tax onto their tenants due to the reduced competition for land use. Competition is still the criterion for doing business and it will allow more opportunity in access to sites to be available.
9. With the introduction of LVT, land prices will drop. Speculators in land values will tend to re-invest in company shares and capitalist enterprises. Therefore LVT should be introduced gradually, to allow investors to transfer their money, where its use will meet the increased demand for production (see below).

3 Effects on the COMMUNITY
10. With LVT, there is an incentive to use land for production, rather than have it laying idle. Then there will be no more bare sites and waste dumps within the city.
11. With LVT, greater working opportunities will exist due to cheaper land and a greater number of available sites. Consumer goods cheapen because entrepreneurs have less difficulty in starting-up and running their businesses. Demand grows, unemployment and poverty decrease.
12. As LVT is introduced, investment money is withdrawn from land and placed in durable capital goods. The investors now choose to place their money where it will do the most good. This is a more natural way, for the use of investment to be productive, rather than the past way for banks and capitalists to invest in buildings, before their need for use in business has occurred.

2 Effects due to ETHICS
13. Taking taxes directly from productive effort and commerce is socially unjust and unethical because it takes away purchasing-power, which has been recently earned by personal effort. Whilst there is a need for members of a society to support it financially, this can be done without the need to take away its earnings or limit its purchases by taxation. LVT replaces this extortion by gathering the surplus ground-rental income, which comes without the land owner’s exertion. Consequently LVT is a natural system of money-gathering that has ethical roots.
14. With LVT much bribery and corruption cease, due to past leaking of detailed municipal plans for town growth. The popular and common publicity that will be given to land value maps and to city value contours will make this matter transparent instead of the present method of the need for secrecy of planned municipal developments.

As far as the corporations are concerned there would be firstly a reduction in the amount of land they occupy, particularly when this land is valuable and unused. The way in which earnings would be redistributed due to the LVT replacement of other forms of taxation, would allow consumers more freedom in what they do with their wages and more of this would go for investment in shares of these corporations and presumably that means that the corporations would need to answer these new shareholders and to run their organizations in a more efficient way since the present monopolistic boards of directors would now have less control.

Providing that these corporations could still manage to compete with the newly started entrepreneurs’ recent activation, (which would be stimulated by the initial reduction in land prices and lower production costs coming from smaller ground-rents) these corporations would continue to exist. However due to the greater success of some of the new enterprises that would now be able to exist (due to the lower cost of useful land occupation), generally the cost of the produce would drop, the demand would rise and some of the inefficient corporations would either have to reorganize their production processes or drop out of the affected part of the market, in that particular line of consumer or durable capital goods. The overall effect would be that “Corporate Rule” would be less heavy and control less of the consumer parts of the macro-economy and that as a result the degree of ethical behavior and social justice would rise, whilst the corruption associated with speculation in land values (some of which is presently enjoyed by these corporations) would drop.