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Theoretical Basis of Land Value Taxation

Chapter 1
Theoretical Basis of Land Value
Willian J. McClucksey with guest authors Owiti A. K’akumu and
Washington H.A. Olima
Tax is a compulsory payment, usually of monetary form, made by the
general body of subjects or citizens to a sovereign or government authority.
It has the following special characteristics:
it is paid without quid pro quo;
it is enforceable in law;
it may be levied against persons (natural or corporate); and
it may also be levied against property.
Our primary concern here focuses on the last aspect i.e. taxes levied against
property and in particular landed property. Indeed, we are not concerned with
landed property per se. The scope here is limited to tax operations that are
meant to capture land value. But taxes that are levied against property are not
the only taxes that would capture land value. Even taxes levied against persons
would at times capture land value as will be discussed later in this chapter.
Some requirements for a good tax structure
Adam Smith (1776) and Musgrave (1989) have identified some
prerequisites for a good tax system. The following broad requirements are
generally associated with a good tax:
the distribution of the tax should be equitable, in other words every
taxpayer should be expected to pay a fair share of the tax (i.e. the
Canon of Equity);
Land Value Taxation
the tax structure should endeavour for fair and non-arbitrary
administration. It should also be understandable to the taxpayer (i.e.
the Canon of Fairness);
when compared to the revenue collected, the administration and
compliance cost of a tax should be as low as possible – in other
words it must be economical to collect (i.e. the Canon of Economy);
tax obligations should be based on benefits receivable from the
enjoyment of public services (i.e. the Benefit Principle);
tax should be levied at the time, or in the manner which is most
likely to be convenient for the taxpayer (i.e. the Canon of
taxation should as much as possible avoid creating ‘excess burdens’
that would interfere with the efficient functioning of the host market.
The above conditions for a good tax system were meant to apply to taxes in
general and therefore also with regard to property and land taxes.
Although taxes could also be used as instruments of socio-economic
leverage, or for achieving various other non-fiscal goals, due care should be
taken not to deviate from the above-stated principles for a good tax. In this
context it is noteworthy that land taxes are quite often suggested as useful
instruments to assist with land redistribution and/or land reform
The historical concept of land value taxation
Put at its simplest the concept of land value taxation rests upon the premise
that only land should be taxed. As Youngman (1993) puts it, even this
simple idea can create major difficulties in political acceptability and
administrative limitations. In any society, there are three classical factors of
production, land, labour and capital. The latter two have their costs and
therefore their prices in terms of wages and interest. On the other hand,
land has no cost of production, and if land was in unlimited supply people
would pay little or indeed nothing for its use. However, land is not
unlimited in supply, it is quite the opposite being fixed in supply. This fact
creates demand for land in particular locations and therefore a value of
land. Whilst land is generally accepted to be fixed in supply, the concept of
alternative uses can create a supply shift, in that, supply for one kind of use
rather than other kinds follows its own supply versus rent curve to the point
where supply and demand equalise. The rent for land is said to constitute
two components, firstly, its transfer or opportunity cost, which is the rent of
Theoretical Basis of Land Value Taxation
the land in its next best use. Secondly, an amount attributable to scarcity or
inelasticity of supply for a use in a particular location. It has been
recognised that land was a free good as opposed to labour and capital that
are never free. Therefore the market price of the products of land is
determined by the cost of labour used in their production and capital
equipment. On this basis the amount remaining for distribution as land rent
is an excess (Lindholm, 1965; Douglas, 1961)
The history and economic foundations of land taxation are firmly
rooted in the early 18
and 19
centuries. The Physiocrats argued that a
particularly unique way to raise revenue was through the taxing of land
(Quesnay, 1963 (1756)). Their belief in the sterility doctrine gave rise to
the theory of ‘impost unique’. Taxation of land was justified because of the
productivity of land. From a social standpoint, therefore, the taxation of
land had positive benefits. This group of economists tended to the view that
since all taxes had to be paid out of rent, it would be sensible to replace all
other taxes by a single tax on rent. In many respects the work of the
Physiocrats laid the theoretical foundations that subsequent economists
would construct their theories of land taxation. Smith (1776) famous for his
canons of taxation made a number of important contributions to the land
tax debate differentiating the land tax between a tax on agricultural land
and a tax on ground rent to cover developed land. He found land to be
suitable for taxation, since the tax would fall on the economic surplus and
as such could not be passed onto consumers in the price of goods.
Ricardo (1817) suggested that the rent for land be the residual after
paying for the costs of variable factors of production. His theory was
largely based on the premise that a tax on land rents would not have
harmful effects of the economy as such a tax would not inhibit production.
Ricardo’s theory was taken further by Mill (1824) who explained that a tax
on the rent of land would not affect the industry of a country. In this regard
he contended that as the cultivation of land was dependent upon the
investment of capital, the capitalist was to some extent indifferent as to
whether he paid the surplus, in the form of rent to an individual, or a tax to
the government. Following on from his father’s work Mill (J.S.) (1848)
suggested that if the rent of land increases as a result of society, the owners
of the land should have no claim to this ‘windfall’ increase in land value.
The difficulty with this approach is based on the issue of clearly linking the
increase in value to some identifiable societal improvement.
Henry George (1879) set out his views on the taxing of land (the
‘single tax’) in some detail in his book, Progress and Poverty. George was
influenced by the state of the economy of the time and in particular, how
development and progress in society was accompanied by high levels of
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poverty. His explanation of this phenomenon centred around the scarcity
of land which was as a result of land speculation. The solution proffered by
George was to replace all taxes with a single tax on land. This would have
the desired result of making land more accessible to a greater number of
people, raise wages, lower prices and in consequence raise the living
standards of workers. In this regard, an increase in land values would be
due to increased productivity which was closely related to increases in
population and wealth. This rental income gave land its value and as such
could be collected in taxes without decreasing the incentives for efficient
production (Lindholm, 1965).
Proponents of land value taxation have cited a number of appealing
properties, one of the main ones being its neutrality with respect to land use
(Bentick, 1979; Tideman, 1982; Wildasin, 1982, Tideman, 1999). As
Netzer (1966) argues, location rents constitute a surplus, and taxing these
rents will not reduce the supply of sites offered, provided that landowners
have been optimally using the land prior to the imposition of the tax.
Economic theory also shows that under the assumption of perfect markets,
a tax on any good with perfectly inelastic supply and non-zero elasticity of
demand will be borne entirely by the supplier of the good; it cannot be
shifted to its user because any increase in the price would lead to an excess
supply of the good (in a competitive market the demand for units that are
offered at a price above market price will drop to zero). Therefore, a tax on
land has to be paid by the owner of the land (Skaburskis, 1995). Given that
the supply of land is fixed, the tax does not have any substitution effect and
therefore no deadweight loss, which makes it an ideal tax from an
efficiency point of view. It is also argued that the real property tax (a tax
on both land and improvements) has a number of negative economic effects
on investment decisions (Mathis and Zech, 1982). It is alleged to
discourage improvements to a site by reducing the economic return from
such improvements. This reduction, in turn, results in a disincentive to
maintain and improve buildings, the substitution of land for capital, causing
urban sprawl, the utilization of buildings beyond the point at which they
should be replaced and the speculation in land by holding it off the market.
Advocates of land taxation argue that removing the tax on improvements
and taxing only the value of the land would result in a restoration of the
incentive to develop land to its fullest potential.
Ever since the publication of George’s Progress and Poverty in
1879, the possibility of using land value taxation as a source of government
revenue has intrigued economists and other tax specialists. The impact of
George’s ideas, whilst not widespread in a geographical context did effect
the politicians of the day in New Zealand, Australia, South Africa, Jamaica
Theoretical Basis of Land Value Taxation
and Kenya to introduce such a tax. Indeed, graded property tax systems,
where land is taxed at a higher rate than improvements have been used in
several Canadian provinces as well as several cities in the United States
(Oates and Schwab, 1995; Brueckner, 1986; Wuensch et al, 2000).
The concept of land value
Classical economists have identified land, labour and capital as the three
factors of production (Vickrey, 1999). Under ‘capital’ was implied all
means of production that have been created through human effort while
‘land’ was primarily used to describe natural resources that were not
created through human effort.
Land value in turn refers to the earnings accruing to land in the
process of production. Where land is not put into productive use, the value
will be based on the opportunity cost of not putting land in the production
process. ‘Opportunity cost’ here refers to the next best alternative use that
land could be put to. These earnings may be realized in loose form and
expressed as rental income/value, for example annual, quarterly, monthly,
weekly or daily rent. The earnings may also be realized in compact or
discounted form and expressed as capital value. The capital value is the
basis upon which the exchange price of the land will be considered. Land
value therefore refers to a stream of income from land as a factor of
production considered under a certain or definite period of time. Value in
this case is tied to the income generating advantage of land. However, even
land that is not put in the income generating process will still have its value
derived on this basis by relying on the concept of opportunity cost.
Opportunity cost would be subject to the prevailing land market conditions.
As a factor of production, land like any other commodity, is traded in
the market. This means that the price (value) of land will be subject to the
economics of demand and supply. In this respect, land becomes a unique
commodity since it has unique demand and supply descriptions. Indeed, as
a discipline, land economics is based on two basic concepts, namely:
that the supply curve of land – as a commodity – is perfectly
inelastic; and
that the demand for land is derived demand.
Land is fixed in terms of geographical location. For that matter, all
economic advantages provided by land must be utilized on site. Location is
therefore crucial in determining land values because shortage in supply at
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one place cannot be made up for by surplus at another place. The value of
land will be influenced by those economic factors pertaining to the area in
which it is situated.
The immobility of land in turn influences its economic
characteristics. Just as the land is fixed in geographical location, its supply
too is generally considered as fixed. Because the supply of land is fixed, in
theory, its supply curve is perfectly inelastic. This means that increases in
the price of land from P1-P2 (as shown in Figure 1.1) arising from a shift in
the demand curve from D1-D2 will not stimulate an increase in supply. The
supply will remain the same no matter what the price increase is. This
particular fact applies for land as a gift of nature that cannot be created by
efforts of man. It also applies for land that has undergone capital
investment by man. Some lands are uniquely developed to the extent that
their supply is inelastic. For example, no matter what prices are offered for
Fort Jesus in Mombasa, Kenya or the Pyramids in Giza, Egypt, there would
be no increase in the physical supply of such lands. In theory, at least, this
applies to all lands with only limited variation.
P1 D1
Quantity of Land
Figure 1.1 Demand and supply of land
The supply characteristics of land, as discussed above, have a significant
impact on the levying of land value taxes. These taxes are levied on the
assumption that they would not interfere with the supply of land and hence
cause no disruption of the economic equilibrium. In practice, however, the
supply of land for a particular use in a given area may change in the long
Theoretical Basis of Land Value Taxation
run as more land is brought into that use. Even in the short run, land can be
transferred within limits from one use to another, for example, through
rezoning (e.g. converting a residential house to office space).
The demand for land, as such, is purely derived demand. Land is not
demanded for its own sake, but virtually as a factor that is used for the
production of goods and services. The demand for land will therefore
depend on the demand for goods and services. For example, increases in
the demand for housing will occasion an increased demand for residential
land. Therefore, the demand of goods and services is what will determine
the demand for land of a particular use. Since use is interchangeable, this
will affect supply for that use and hence price. Demand for other goods and
services and revenue from them will therefore determine the income
accruing to the land for a particular use and hence its value.
Bases of land value taxation
There has been considerable debate as to whether the imposition of a land
tax would have side effects or not. On the one hand there are those who
hold the view that land taxation would not have any effects on the
productive nature of land. On the other, there are those who hold the view
that land taxation will indeed have an impact on the productive nature of
the land. The introduction of a land tax may have foreseen and possible
unforeseen consequences. It is therefore necessary to provide a brief
theoretical basis for land taxation as such.
The view that taxation of land would not have any effect on the
production characteristics of land is supported by two well-developed
theories, respectively the theory of economic rent and the tax capitalisation
Theory of economic rent
In micro-economic theory, economic rent simply refers to any payment
accruing to a factor of production over and above payment that is necessary
to keep it in production. The payment that is needed to keep the factor in
production is known as ‘transfer earnings’ (Foldvary, 1999). Transfer
earnings are payments that would remunerate all the factors involved in the
production process at market rates. However, due to increase in demand a
factor may earn more than transfer earnings. Depending on the nature of
supply for that particular factor, payments over and above transfer earnings
may be realised in the short run or in the long run.
Land Value Taxation
If the supply curve of the factor is relatively elastic (i.e. the supply is
responsive to increased demand), more factors will be attracted into the
market to meet the increased demand and the surplus payment over and
above transfer earnings would be eliminated in the long run. In this case
the surplus earnings would be referred to as quasi-rent. Machinery and
equipment, for example, would earn quasi-rent in the event of increased
demand because they cannot be manufactured, assembled and delivered
immediately to meet the increased demand.
On the other hand, if the supply curve of the factor is relatively
inelastic (i.e, the supply would not relatively respond to increased demand),
more factors would not be attracted into the market to meet the increased
demand and the surplus payment over and above transfer earnings would
persist in the long run. This is economic rent.
Land, being a gift of nature cannot be reproduced in greater
quantities to meet increased demand (Foldvary, 1999). It is therefore,
scarce by nature and fixed in supply. Any payment to land over and above
the transfer earnings, is thus a surplus. As indicated above, transfer
earnings essentially refer to payments made to maintain the current use of a
factor (i.e. to ensure that its productive advantage would not be transferred
to another use). Given that payment to land is in the form of a surplus, it is
better to tax land – as such a tax will not affect the transfer earnings and
thus will not cause distortions in the economy. By taxing only the surplus
earnings (in respect of the land) that can be taxed without causing any
interference in the market, a land tax conforms with at least one of the
requirements of a good tax system: It minimises interference in economic
decisions in otherwise efficient markets.
Tax capitalisation theory
The tax capitalisation theory is based on the assumption that whenever a
tax is imposed on land as an asset, the capital value of the land is
diminished by an amount equivalent to the capitalised value of the tax at
the prevailing rate of interest. In essence it is assumed that subsequent land
owners/buyers would first capitalise the annual tax then deduct it from the
sale price. Hence the subsequent land owner/buyer would only pay a
diminished price for the value of the land. The returns from such land
would also be discounted net of tax; for example, capital value of land
would be derived from rent less tax as an expense. In this way it is
assumed that only the original landowner would bear the tax burden and
that the tax cannot be shifted otherwise the burden would fall where it is
not intended and cause disruption in the economy.
Theoretical Basis of Land Value Taxation
According to this theory the purchaser, or an investor in land would
not be discouraged by mere imposition of tax. In this way, investors would
not shift their capital to other sectors by way of tax consideration.
However, the capitalisation theory presupposes the existence of the
following conditions:
an active land market so that values will reflect market forces rather
than non-economic influences;
the supply of land is inelastic with respect to changes in the returns
on land, otherwise at least part of the tax would be shifted rather than
the pattern of future tax liabilities is foreseeable and fully
the government does not spend the tax revenue in a way that affects
the value of services to the land
the tax does not affect the rate at which returns to land are
Tax as instrument of economic leverage
Various arguments have been put forward to discredit the proposition that a
tax on land will not cause disruption of the economy as suggested by both the
economic rent theory and the tax capitalisation theory. It has been argued that
although the supply of land is generally fixed or completely inelastic to
changes in price, supply for a particular use in a given area may change in the
long run as more land is brought into use. Even in the short run land can be
transferred – within limits – from one use to another (for example, converting
residential use to office space or agricultural to residential) in a process
known as occupational mobility of land. Although fixed in supply, land is
capable of assuming alternative uses and although the physical limitation of
land supply tends to have no or negligible economic significance, changes in
its use may indeed be economically significant.
Many of the arguments against land taxation focus only on the
negative aspects of the effects of a tax on land use as a fiscal tool.
However, there is a further aspect to look at that could benefit the discourse
on land taxation theory. Instead of limiting discussions to the merit of a
land tax as a means of raising revenue, the scope of discussion on land
taxation could generally be broadened to also include the non-fiscal aspects
of land tax, i.e. its possible use as an instrument of economic leverage.
There should be increased realisation that land as a primary factor of
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production and a land tax may therefore have potential as a strategic policy
instrument for overall economic management. This would be especially so
in developing countries where land constitutes a large proportion of factor
input. Land therefore maintains a significant influence in economic
production hence by mere fiscal control of land use (factor input) the policy
maker can directly influence the trend of economic performance for better
results. However, the principles to which a good tax should adhere – as
stated above – should not be forgotten in the process of attempting to attain
non-fiscal goals.
Classification of property and land taxes
Taxes on property (including land) can be classified in three main
categories depending on the choice of tax base. These categories are the
taxes based on the income derived from property ;
taxes based on area (i.e. property size); and
taxes based on rental or capital value (i.e. ad valorem).
According to this classification, there are taxes that are specifically levied
in relation to land (e.g. annual land tax or a real property transfer tax).
There are taxes that are generally levied on wealth/property and fall on land
where land forms part of the property/wealth base of the taxable person
(e.g. estate taxes or death duties). Furthermore, there are those taxes that
are generally levied on income or expenditure and capture land (value) only
indirectly in so far as land forms more or less important part of the income
of the taxable person (e.g. income tax on rental income or value-
added tax (VAT) on the acquisition of a house from a property developer).
Income tax can generally not be equated to a land-based tax. An income tax
targets income from whatever source. Where income is derived from real property,
the tax will to some extent fall on the property and hence land could be an
important object within the tax base. Land-based income is called rent. Rent and
land value on the other hand are directly related since rent forms the basis of
capital value. Taxing rent as a form of income therefore entails taxing land value.
The main difference between annual rental value tax and income tax is that the
former falls on hypothetical income while the latter falls on actual income.
Secondly, annual rental value tax is a tax that is specifically designed to fall on rent
while income tax is a general tax designed to fall on income and captures rent only
where rent forms the basis of a specific income.
Theoretical Basis of Land Value Taxation
In some jurisdictions, mainly in developing countries, property taxes
(be they on land only, or on land and improvements) are levied in relation
to the size of the property. In some instances location and use will also be
used to determine the tax payable.
For purposes of the discussion that follows, the focus will only be on
those taxes levied with reference to the value of immovable property, and
more specifically ad valorem property taxes.
Taxes based on rental or capital value
These are also known as ad valorem taxes. An ad valorem tax can be
levied on an annual basis with reference to the rental or capital value of the
property (e.g. a property tax), or it can be levied every time the taxable
object (e.g. real property) is transferred by way of a transaction or
otherwise (e.g. transfer tax). Capital value taxes could be based on a
variety of bases, namely: capital improved value, unimproved land or ‘site’
value, improvement value only, improvement value plus site value,
incremental value, etc. From these bases the following taxes can be
Rental value
Rental value taxes are usually based on the net annual rent. In this case, a
yearly rent that the property would most probably generate is determined.
This we may call the gross annual rental value. From this statutory
deductions or out-goings for maintenance, insurance, management costs
etc. are made, resulting in a net annual value that is subject to tax.
It is important to note that the rental value tax is applicable whether
the rent is realised or not in any one particular year. Even if the property
remains unlet for a whole year, the tax is still levied because it is based on a
hypothetical other than actual rent. This is its main difference from
income-based taxes. The latter would consider the actual rent paid as the
basis of taxation.
This tax has two main advantages. As it is levied on a broader tax
base that includes land and buildings, it could, given the same or even a
lower tax rate, yield more revenue than a tax on the value of land only.
Secondly, it involves ease of assessment, as rents in one locality are
comparable in a market situation. Its disadvantage on the other hand is that
it has allocational defects. It may discourage investment in real property
Land Value Taxation
with investors preferring to invest in untaxed land uses or in the capital
Capital improved value
Most jurisdictions presently levying a property tax uses the capital value
(i.e. market value) of the property for assessing tax liability. If the property
consists of land and improvements, it is the single, combined value which
has to be determined.
Unimproved land value
Unimproved land value tax or unimproved site value tax (USV) is levied on
the capital value of the land assuming it is vacant. Any improvement on
site is generally disregarded in the assessment of capital value. USV tax
has several advantages:
it encourages physical development in urban centres;
it discourages ownership of land for speculative purposes;
it is a simple tax to levy without many technical and administrative
challenges; and
the amounts to be raised can be determined in advance and therefore
used for purposes of certainty in budgeting.
USV has been subject to certain criticisms especially regarding its
regressive nature:
it is difficult to determine how much of the land value is derived
from the site or location value and how much from the reproducible
assets and entrepreneurial expertise;
related to the question of value is the contention that for the tax to be
equitable it should be applied when land is first acquired; otherwise
unearned increment is diffused through the purchase and sale of the
it is regressive in terms of residential development because taxpayers
with a lower income spend a higher percentage of their income on
housing than do those on higher incomes. Subjecting them both to ad
valorem tax therefore does not conform to the principle of equity;
it is also regressive in terms of methods of assessment that tend to
favour the rich against the poor; lower priced properties are many
and change hands more frequently; assessors therefore may be
Theoretical Basis of Land Value Taxation
inclined to assess high-priced properties more conservatively than
low-priced properties because sales comparables are scarce for high-
priced properties that are owned by high-income earners;
it favours large-scale development against small-scale development
(such as owner-occupier home developers), who receive no income
from the subject properties that they can in turn use to pay the tax;
it may involve allocational defects through a ‘substitution effect’; the
tax burden can be considered as ‘qualitative’ i.e. involving the choice
of different types of uses, or ‘quantitative’ i.e. involving intensity of
use. A qualitative choice is likely to deny other uses, which are
equally important in the urban economy, their due share of land (e.g.
when commercial use pushes out residential use); whereas
quantitative choices on the other hand involve, as one example, cases
where single-storey buildings are pulled down to facilitate the
development of high-rise buildings under the same land-use
category, a process that requires large capital outlay and may lead to
unnecessary commitment of capital to real estate vis-a-vis
development in other productive sectors lsuch as industry or
Improvement value only
Taxes based on improvements, in contrast to USV, leaves out the site value
and apply to the value of improvements only. This is appropriate in the
case of the benefit principle. For example, if local taxes were being levied
to finance and sustain services like waste collection, street lighting, road
maintenance and so forth it would not be equitable to charge a site value
tax. In this case, a vacant site adjacent to a site with a high-rise
improvement on it would be paying the same amount of tax (assuming that
both sites are similar in all other respects) yet the landowner of the vacant
site would not have equal enjoyment of all these services. The level of
development is an important consideration. A property with low-level
development generally generates a lower demand for services than a
property with high-level development.
Including the value of improvements in the tax base to finance
provision of related services, may however discourage development.
Secondly, valuing improvements on a regular basis for property tax
purposes implies a more complex and costly process of valuation in
comparison to USV. As improvements keep on changing every year due to
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new construction, extension or demolition, maintaining a capital improved
system is administratively more cumbersome.
Site value plus improvement value
In some cases property taxes may be levied on both site and improvement
values, as separate taxable objects. Although such a tax broadens the tax
base, it necessitates assessed values for both the land and the
improvements. Although some of the benefits of both a land only tax
system as well a capital improved tax system can be gained, it is
administratively costly and cumbersome to have separate values.
Other property-related taxes
Capital gains taxes
Taxes can also be based upon capital gains. In this case, if land forms part
of the subject capital, land value will form the basis of the tax. Capital
gains taxes include taxation of inheritance. This is a softer form of wealth
tax because it is to be paid, not by the person who has worked to generate
the wealth, but instead, by a person who simply stands to benefit from it.
What is more, the payer does not have to find money to pay as it can be
paid using part of the wealth.
Capital transfer taxes
There are taxes that fall upon capital (included) when it is being transferred.
The transfer value would be the basis of the tax. Such taxes include stamp
duty, real property transfer taxes and so forth. As far as these taxes may
pertain to land as a possible or the only taxable object, they are unique in
that they are only levied upon transfer of the land; unlike most of the land
based taxes that are levied on regular basis, usually annually. The tax will
not be levied as long as land does not change hands, irrespective how long
it may take. On the other hand, it would apply as many times as land
changes hands – even if these changes take place in less than a year.
Incremental land value taxes
Land tax can also be levied on the basis of incremental value. Under
normal circumstances, land values tend to increase over time. This is
Theoretical Basis of Land Value Taxation
because population continues to rise against a limited supply of land. Land
resources therefore tend to become scarcer over time. Also, an increasing
population means increased demand for goods and services that will engage
land as a factor of production. The scarcity element or shortage in supply
creates the economic rent. An incremental value tax is therefore a fiscal
tool that is sometimes used for capturing economic rent from the
landowners and redistributing it back to the broad community – especially
in areas where unimproved land is held for speculative purposes.
Value Added Tax (VAT)
VAT is another general tax usually imposed on the process of production or
consumption of goods and services. In some cases the tax base could be
wide enough to capture taxable transactions related to landed property.
Depending on the circumstances, the rental or capital value of land could be
used to determine the tax payable.
Despite the apparent merits and demerits of a land value tax from a
theoretical point of view, the choice of tax base is more often based on the
very specific circumstances faced by the relevant taxing authority. Socio-
political views, historic factors, as well as practical realities seem to be the
deciding factors – as will become evident in the following chapters.
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Sharpe Inc., New York, pp. 184-204.
Land Value Taxation
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... Countries calculate their property tax base using a variety of methods. Typically, it can be calculated from the market value of land or property, land area or property size, or the income derived from the land or property (McCluskey, K'akumu and Olima 2005). A jurisdiction has to pick one or a combination of these methods to determine the property tax base. ...
... Fourth, land value taxation would satisfy the benefit principle (McCluskey et al., 2005). In fact, as we shall see, what is paid as tax would correspond to the benefits obtained: taxpayers (landowners) would pay the land value increment attributable to public goods provided by local and central governments. ...
In ‘Self-organizing’ cities, decisions are based on the unhampered, peaceful, and honest choices of individuals, and governance, aside from penalizing coercive harm, is based on voluntary agreements. Self-organization has become an increasingly important topic in planning theory, as such processes enable urban systems to more effectively adapt to various stimuli and contextual needs over time. Self-organization may lead to emergent spatial configurations that are more in tune with individuals’ values and preferences than the prevailing top-down approaches. The purpose of this article is to analyse how current tax systems impede emergent spatial configurations and, additionally, to explore what kind of fiscal rules and instruments are more supportive of creative (i.e. dynamically productive) processes of self-organization. The main finding is that the use of behavioural rules (such as contractual covenants and easements) and principles of taxation that do not distort the decentralized creation of value, such as user fees, congestion charges, and repayment of rental value received such as land value taxation, are superior to currently dominant approaches.
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This dissertation assesses the direct links between fiscal decentralisation, economic growth, and multidimensional poverty; and further explores the indirect links between the two variables through the four pro-poor sectoral outcomes, which include, education, healthcare, agricultural productivity, and infrastructure in Kenya. Our thesis, first, reviews literature related to key components of fiscal decentralisation and multidimensional poverty to develop a solid theoretical model that explains the linkage between the two variables. In this first part, the thesis also discusses the political economy of the link between fiscal decentralisation and multidimensional poverty in Kenya with a focus on the approaches, measurements, and trends of these variables. Owing to the inconclusive nature of the empirical literature on the fiscal decentralisation-poverty nexus, this thesis was motivated to empirically analyse whether there is any significant statistical relationship between fiscal decentralisation and multidimensional poverty in Kenya using FE, RE, and GMM-IV estimations. We used cross-county panel data from 2006 to 2019 published by government agencies, United Nation Development Programme, Society for International Development, World Bank, and other publications to carry out these estimations. These empirical estimations intended to find out the effects of revenue decentralisation, vertical fiscal (im)balances, intergovernmental transfers, and expenditure decentralisation on multidimensional poverty – proxied alternatively by FGT indices (headcount poverty, poverty gap and severity of poverty), food poverty incidence, overall child poverty, Human Development Index (HDI), and Multidimensional Poverty Index (MPI). This research also estimated the effect of fiscal decentralisation on subnational economic growth as an initial and instrumental way through which fiscal decentralisation affects multidimensional poverty. Our estimation results reveal that the impact of fiscal decentralisation on multidimensional poverty measures and economic growth depends on the nature and extent of fiscal decentralisation. Our estimation results on the effect of fiscal decentralisation on subnational economic growth showed that all FD indicators are growth-enhancing but highly dependent on the level of fiscal decentralisation. However, for poverty reduction, on the side of money-metric poverty measures, revenue decentralisation and vertical imbalances were found to reduce poverty headcount at low levels below 61.31 per cent and 53.54 per cent respectively while intergovernmental transfers and expenditure decentralisation were found to increase poverty headcount at low levels below 9.92 per cent and 0.801 per cent respectively beyond which they would reduce poverty headcount. Conversely, on the side of the non-money metric poverty, revenue decentralisation and vertical imbalance were found to increase Multidimensional Poverty Index (MPI) at low levels below 51.94 per cent and 0.955 per cent respectively while intergovernmental transfers and expenditure decentralisation were found to reduce MPI at low levels below 9.07 per cent and 0.811 per cent respectively beyond which they would increase multidimensional poverty. However, there are differences in the effects of fiscal decentralization and multidimensional poverty across regions and counties. Additionally, our results show the major role played by the devolution reforms of 2013 in increasing the overall decentralisation that improved subnational growth and poverty reduction through pro-poor expenditures. Lastly, we empirically explored the indirect channels through which fiscal decentralization affects multidimensional poverty through four sectors (education, basic healthcare, agricultural extension, and infrastructure services) as dictated by the reviewed literature. Here, our results revealed different effects of fiscal decentralisation on pro-poor sectoral outcomes due to the nature and extent of decentralisation in these functions. KEY WORDS: Fiscal decentralization, Devolution, Multidimensional poverty, Local development and governance, Counties, Kenya.
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Rant vergisi tartışmaları çok eskilere dayanmaktadır. Rant, bir gider karşılığı olmadığı gibi, beklenilmezlik ve hak edilmemişlik de içermektedir. Arsa ve arazi spekülasyonları, hızlı nüfus artışı, sanayileşme, merkeze yakınlık, yapısal dönüşümler ve kamu hizmetlerinden kaynaklanan rantın vergilendirilmesi amaçlanmaktadır. Ülkemizde, Orta Vadeli Programının açıklanması sonrasında gündeme gelen rant vergisi, imar planı değişiklikleri nedeniyle oluşacak değer artışından kamunun da pay alması düşüncesine dayanmaktadır.
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This research examines equity in local government property taxation in Kenya with Nairobi City as the case study area. Urban areas in Kenya are growing both in population and in physical extent. This rapid urbanisation especially in Nairobi has resulted in increased demand for urban services. Property taxation is a source of local government revenue that if fully exploited can supplement the provision of growing demand for urban services. Equity is one of the tax principles used to evaluate the performance of the property tax system. Though revenue generation is the main objective of property taxation, equity is also an important objective that has an impact on revenue generation. Equity in property taxation is impacted by the property tax base and coverage and valuation of the property tax base. The main objective of this research was to assess equity in property taxation in Nairobi based on property tax base, its coverage and valuation or assessment. The research started with a review on literature on local government taxation and examination of best practices in the world. The literature review came up with the concepts that together with interview of key persons at the NCC, Department of Valuation was used to address the first objective which is to evaluate the property tax base and coverage in Nairobi. Equity in property taxation is evaluated under the principles of ability to pay and benefit received. The value of a property acts as a proxy of the owner’s ability to pay. Properties with higher values should therefore have higher taxes. Under the benefit-received principle, the value of public services provided by the local government in a neighbourhood is capitalized in the value of a property. The properties that benefit more from the public provided urban services enjoy high property values and should therefore pay high taxes. Property taxation should therefore capture the increase in property values that result from public expenditure in infrastructural services. The study looks at the impact of the administrative process of property tax coverage and valuation or assessment on equity. The research evaluates the relationship between property tax and the value of the property which highlight whether there is uniformity in the valuation process. Equity was also assessed based on location of the property. VI Vertical equity and horizontal equity were used to analyse taxation of properties in same location and different neighbourhoods. To examine the impact of property valuation on equity, the research used case study areas in Nairobi to achieve the objectives. The impact of property taxation on equity was evaluated by use of ratios. The population sample comprised of residential properties in Kilimani, Buruburu estate and Riruta areas. These areas varied depending on the density of development as recommended by the planning regulations of the NCC, the level of service provision and consequently, the property values. Riruta area was under area rating while Kilimani and Buruburu areas were under site value rating. The research used ratios to analyse data. It relied on ratio studies as used by International Association of Assessing Officers (IAAO) to evaluate equity in property tax administration. The relationship between value of the property and taxation was analysed by the ratio of assessed value to the market value. Where there is uniformity in valuation, this ratio should be equal to one. Horizontal and vertical equity is used to assess whether there is equity in property tax assessments of valuations of properties based on location. Coefficient of dispersion was used to evaluate horizontal equity while price related differential was used to assess vertical equity. To compare property taxation between site value rating (Buruburu and Kilimani areas) and area rating in Riruta area, effective tax rate was used. Some of the major findings that impact on property tax equity includes use of different regimes as the tax base namely Unimproved Site Value (USV) and area rating, numerous exemptions and omissions from taxation, lack of laid down procedures on updating of the valuation roll and an out-dated valuation roll that has no relation to current market values. On assessment of equity, though there is uniformity in the valuation for the areas under USV rating, there is no vertical equity. High value properties are assessed favourably as compared to low valued properties. The Effective Tax Rate (ETR) is also higher for the lower valued properties. The study has recommended that Nairobi City adopts improvement rating to capture the values of the properties, adopts one regime of taxation and regularly updates the property values to benefit from increase in revenue because of rising property values in the City.
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The same rule which regulates the relative value of commodities in one country does not regulate the relative value of the commodities exchanged between two or more countries. Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labor most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilised world. It is this principle which determines that wine shall be made in France and Portugal, that corn sell be grown in America and Poland, and that hardware and other goods shall be manufactured in England…
The recent conclusions about the non-neutrality of land value taxation are shown not to invalidate the neutrality result for per unit land taxation (or even use-inde-pendent land value taxation, as in Vick-rey's standard state scheme). Also the neutrality of current rental income taxa-tion is shown to depend on time-invariant tax rates; if tax rates change over time, the timing of land development can be dis-torted in a way similar to that which oc-curs under current market value land tax-ation.
The findings and conclusions of this paper are not subject to detailed review and do not necessarily reflect the official views and policies of the Lincoln Institute of Land Policy. After printing your initial complimentary copy, please do not reproduce this paper in any form without permission of the authors. Contact the authors directly with all questions or requests for permission. This report examines the economic and social rationales and century-old experience in Britain for taxing land (as distinct from land and buildings in combination) for the benefit of the community. In practice the experience shows attempts under two distinct kinds of legislation. The first relates to proposals for revenue raising, mainly for local government purposes; and the second to recoupment of community betterment and infrastructure funding as part of development and planning policy. Part I deals with the first theme of land value taxation. Following an introduction relating to the principles of general taxation comes a statement on the current rating and taxation system in Britain relating to landed property. Then follows an exploration of economic theory and principles