PROGRESS AND POVERTY
VT LAW SCHOOL
JULY 16, 2004
Gary Flomenhoft, Research Associate
Gund Institute
Burlington, VT
“There is nothing more difficult to carry out,
more doubtful of success, nor more dangerous
to handle, than to initiate a new order of
things. For those who would institute change
have enemies in all those who profit by the old
order, and they have only lukewarm defenders
in all those who would profit by the new
order.”
---Nicolo Machiavelli, 1490
ECONOMIC BACKGROUND
Polanyi-Great Transformation
“Fictitious commodities”
Sold in markets for the first time
LAND:
Commons or feudal to markets
LABOR:
Humans sold on labor market
MONEY:
means of exchange to commodity
C-C
C-M-C
M-C-M*
M-M* (95%)
CLASSICAL ECONOMICS ~1650-1890
FACTORS OF PRODUCTION:
LAND=R (natural resources)
LABOR=L
CAPITAL=K
Initially: Labor transforms land (raw materials)
into capital
Then: Labor and capital applied to land makes
more capital
CLASSICAL ECONOMICS
RETURNS TO FACTORS:
LAND (R) = RENT
LABOR (L) = WAGES
CAPITAL (K) = INTEREST
CLASSICAL ECONOMICS
HISTORICAL FIGURES
CAPITAL (K) = Adam Smith
LABOR (L) = Karl Marx
LAND (R) = Henry George
CLASSICAL ECONOMICS
Land (Ingredients)
+
=
Labor
(Chef )
+
Bread
Capital (oven)
Capital (Mixing bowl)
NEO-CLASSICAL ECONOMICS 1890No Ingredients, only labor and capital
P = f(L,K)= ALa . BKb
(Cobb-Douglas multiplication)
Labor
(Chef )
=
x
X
Capital (Mixing bowl)
Capital (oven)
Bread?
NEO-CLASSICAL ECONOMICS
INFINITE SUBSTITUTABILITY:
2P = f(L,K)= 2ALa . 2BKb
More Chefs
x
or Bigger Mixing bowl
=
More
Bread?
HISTORICAL BACKGROUND
CLASSICAL ECONOMISTS ON LAND
Physiocrats
Quesnay; agricultural basis of
economy: L’impot unique = land tax
David RicardoLaw of Rent=Difference in
production (return) over the worst
land=Rent
Unearned increment=unearned
profit from land inflation
CLASSICAL ECONOMISTS ON LAND
Adam Smith:
“Ground rents are a species of revenue which the
owner, in many cases, enjoys without any care of attention of
his own. Ground rents are therefore, perhaps a species of
revenue which can best bear to have a peculiar tax imposed
upon them.”
John Stuart Mill:
“Landlords grow richer in their sleep without working,
risking, or economizing. The increase in the value of land,
arising as it does from the efforts of an entire community,
should belong to the community and not to the individual who
might hold title.”
CLASSICAL ECONOMISTS ON LAND
Alaska Oil
Dividend
21 years of
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
dividends
$1,540.76
$1,850.28
$1,963.86
$1,769.84
$1,540.88
$1,296.54
$1,130.68
$990.30
$983.90
$949.46
$915.84
$931.34
$952.63
$873.16
$826.93
$708.19
$556.26
$404.00
$331.29
$386.15
$1,000.00
Thomas Paine, Agrarian Justice 1797
“Men did not make the earth...it is the value of the
improvements only, and not the earth itself, that is individual
property...Every proprietor owes to the community a ground
rent for the land which he holds.;...from this ground
rent...I...propose to create a national fund, out of which there
shall be paid to every person...a sum.”
RENT DIVIDENDS-BASIC INCOME
Alaska Oil
Dividend
21 years of
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
dividends
$1,540.76
$1,850.28
$1,963.86
$1,769.84
$1,540.88
$1,296.54
$1,130.68
$990.30
$983.90
$949.46
$915.84
$931.34
$952.63
$873.16
$826.93
$708.19
$556.26
$404.00
$331.29
$386.15
$1,000.00
HISTORY OF LAND VALUE TAX
Henry George: Progress and Poverty 1879.
“To abolish all taxation save that upon land values”
“The taking by the community, for the use of the
community, of that value which is the creation of
the community.”
“Poverty deepens as wealth increases, and wages
are forced down while productive power grows,
because land, which is the source of all wealth and
the field of all labor, is monopolized.”
The “single tax”. Forerunner to modern day Green
tax shift: “tax bads, not goods.”
Basis of modern assessments.
HISTORY OF LAND VALUE TAX
NY Mayoral election of 1886:
Abraham Hewitt (D)-stolen by Tammany hall
Theodore Roosevelt (R)-3rd
Henry George (Labor)-won
Attacks from left and right:
“Capitalists last ditch.” ---Karl Marx
“If George wins landowners should go out on their
vacant land and hang themselves.” --- “Boss” Croker
NY Mayoral election of 1897: George died 4 days
before.
SINGLE TAX ADVOCATES
TOLSTOY
SUN YAT SEN
HELEN KELLER
ALBERT EINSTEIN
CHANG KAI SHEK
TEDDY ROOSEVELT
MARK TWAIN
Modern Economists
Right: “Land tax is the least bad tax”
---Milton Friedman
Left: “Usurious rent is the cause of worldwide
poverty”
---Joseph Stiglitz
Green: “Taxation of value added by labor and
capital is certainly legitimate. But it is both more
legitimate and less necessary after we have, as much
as possible, captured natural resource rents for public
revenue.”
---Herman Daly
TAX ON BUILDINGS - production cost
P
S1
CS
p1
PS
D
q1
Q
TAX ON BUILDINGS - production cost
S2
P
S1
CS
p2
p1
Deadweight
loss
PS
tax
tax
D
q2
q1
Q
TAX ON LAND - no production cost
S
P
“Buy land, they ain’t
making any more.”
-Will Rogers
P*
P1
tax
tax?
tax
D
Q*
Q1
Q
LAND SPECULATION
Q: Why is speculation bad?
A:
Drives up price of land
Creates Sprawl
Produces nothing
Withholds land from market
Creates slums
“Flipping”
VT anti-speculation tax: only applies to >25 acre
industrial and forest land
PROP 13: corporations avoid through selling shares
LAND SPECULATION
Q: What good or service does a land speculator
provide to the market?
A: Nothing.
“The land speculator profits in direct proportion
to the damage done to society”
-Winston Churchill
LAND SPECULATION
Q: How does speculation create sprawl?
A: By withholding land from the market, and holding
for gain, price is driven up, and people have to move
further out from center city to find available
affordable land. (30% vacant land-Brookings)
“The most comfortable, but also the most unproductive way for a
capitalist to increase his fortune, is to put all monies in sites and
await that point in time when a society, hungering for land, has to pay
his price.”
---Andrew Carnegie
LAND SPECULATION
Q: What is the formula for return on speculation?
A: ROI = Annual return - holding cost
Return = annual land inflation + annual income
Holding cost = property tax(land + improvements)
+ bank interest on loan + maintenance
MAXIMIZE RETURN
Annual Return = annual land inflation + annual income
=
YEAR
BURL MEDIAN
HOME PRICE
6.1%
+
Total
increase
?
Annual increase
since 1970
1970
$21,500
2000
2004
$127,600
$226,000
493.5%
951.1%
6.1%
7.1%
2005
$242,000
1025.6%
7.2%
MINIMIZE EXPENSES
Holding cost =
property tax (land + improvements) + bank interest
on loan + maintenance
= land tax + improvement tax + int + maint
2004
(1.7% x land) + (1.7% x blds) + int (5%?) + maint.
Incentives:
Minimize land assessment
Minimize building improvements = slums
Low interest rate
Minimize maintenance=slums
Return on speculation
What makes housing expensive?
70% homeowners are passive speculators: zero sum game
Land value
PAINE:
RECYCLE
LAND RENT?
RENT COSTS
“Whether it is the man or the earth I own, the bird or its
food, it is essentially the same thing.
---Arthur Schopenhauer
RENT COSTS
VT FAMILY INCOME
FROM:
HOUSING&WAGES
IN VERMONT
VT HOUSING
COUNCIL
RENT COSTS - CLT
Community Land Trust (CLT) creates perpetually
affordable land by taking land off the market.
Created by Swann and Borsodi - Georgists
CLT
“Land is not the only monopoly, but it’s the mother of all
monopolies.”
---Winston Churchill
Land costs
According to Georgist theory taxing land at its full
“Rental value” would reduce the price to zero.
This would create “leasehold” vs. “freehold ownership
Tax essentially becomes a lease payment for land.
Leashold Examples
Hong Kong - 99 yr leases
Canberra, Australia - municipal leasehold
(backtracking)
3 Ways to control land prices
1) Community land trust
2) Municipal leasehold
3) Tax land at rental value
What makes land valuable? Publicly created
Population
demand
natural features
public improvements
public services: fire, police, schools, waste
private investment in the area
business activity
limited supply
zoning
growth restrictions (Santa Cruz)
growth boundaries
Not due to private effort
What makes land valuable? Publicly created
“Takings”- private compensation when
government action reduces property value
“Givings” - public compensation when
government action increases property value
“Value Recapture” of public investments
Wright Act 1889: Tulare, CA Irrigation District
Financed by tax on land value. Trees, vines,
structures, etc. on the land were exempt
CA Central Valley Irrigation Districts
San Juacquin Valley Agriculture
80% produce in US
“Value Recapture” of public investments
Crossrail – the London rail project now under
consideration to fund by land tax.
Studies say public transit could pay for itself
through capture of increase in land values around
transit stops.
What makes buildings valuable-Privately created
Work
Investment
Materials
Architecture
Etc.
Value created through private effort
LAND TAX IS PART OF GREEN TAX SHIFT
“Pay for what you take, not for what you make”
Tax “bads” not “goods”
“Tax waste not work”
NW Green Tax shift includes LVT
WORK
INCOME
SALES
SOURCES
SITES
SINKS
SUMMARY OF INCENTIVES
HISTORICAL APPLICATIONS
Denmark: 1790’s, 1950’s, 1960’s
California: 1890’s irrigation districts
Australia: 1930’s-present, Sydney, Canberra-leashold
New Zealand: 1930’s-present 80% site only
South Africa: Jo-berg
Hong Kong: leasehold
Singapore: rent collection
Taiwan: 1940’s-land to the tiller
NY city 1920’s: 10 yr. abatement of improvements
Pennsylvania: 1913-present
MODERN APPLICATIONS
Australia, New Zealand
Pennsylvania, date adopted
Aliquippa Schools '93
Aliquippa '88
Clairton '89
Coatesville '91
Connellsville '92
DuBois '91
Duquesne '85
Harrisburg '75
Lock Haven '91
McKeesport '80
New Castle '82
Oil City '89
Pittsburgh '13+
Scranton '13+
Titusville '90
Washington '85
MODERN APPLICATIONS
City
Pittsburgh
Scranton
Harrisburg
McKeesport
New Castle
Washington
Duquesne
Aliquippa
Clairton
Oil City
Titusville
Ratio
5.61 to 1
3.90 to 1
4.00 to 1
4.00 to 1
1.75 to 1
4.35 to 1
5.61 to 1
16.20 to 1
4.76 to 1
1.23 to 1
8.68 to 1
MODERN APPLICATIONS
Philadelphia
City Controller-Saidel
Tax Reform Commission
Board of Realtors
10,000 Friends of Pennsylvania
Harrisburg-Poster Child for LVT
1983 listed as 2nd most distressed city in US.
* The number of vacant structures, over 4200 in 1982, is today less
than 500 (1994) = 80% reduction in vacancy.
* With a resident population of 53,000, today there are 4,700 more
city residents employed than in 1982.
* The crime rate has dropped 22.5% since 1981.
* The fire rate has dropped 51% since 1982.
* Number of businesses tripled to 3000
* 3.5B invested in projects
These results are especially noteworthy when one considers the fact
that 41% of the land and buildings of Harrisburg cannot be taxed by
the city because it is owned by the state or non-profit bodies.
Vermont Property Land Tax-shift Study
Application to Burlington
Vermont Property Tax-shift Study Criteria
1) Revenue neutral
2) 50% or 100% shift to land value tax statewide
3) Total revenue divided by total land assessment
=land value tax rate
Vermont Property Tax-shift Study Limitations
1) Single rate statewide & city by city
2) No separation of school district from municipal
tax district
3) No adjustment for common level appraisal
Burlington Current System yr-2000 by GPC
Current combined Tax
Yield is 100% from total assessment
Land Yield from total assessment = 33.18%
Current Single Rate = $24.65 per $1000
Gross
Property
class
#
Building
Parcels Value
Land
Value
Total
Value
bld/
land
Total
% total
Ratio revenue Yield
0.27
$10K
0.00%
Agricultural
Commercial/
Industrial
5
$114.9M
$419.5K
$408.0K
1,130
$377.4M
$153.4M
$519.7M
2.46
$12.8M
32.6%
Residential
8,925
$699.2M
$375.0M
$1073.5M
1.86
$26.4M
67.40%
10,060
$1,076.7M
$528.8M
$1,593.6M
2.04
$39.3M
Total
Burlington 100% of tax from land
Example of Tax on 100% Land
Increasing the yield from land to 100%
Reducing the yield from improvements to 0%
Land Rate = $74.27 per $1,000
Improvement Rate = $0.00 per $1,000
Total
Diff w/
% Diff w/ Ave diff
100% land 100% land 100%L
per parc
% Total
Yield
Agricultural
Commercial/
Industrial
$31.1K
$21.1K
210%
$4,220
0.1%
$11.4M
-$1.4M
-11%
-$1,252
29.00%
Residential
$27.9M
$1.4M
5%
$156
70.90%
Total
$39.3M
ASSESSMENTS-2000
2000
BLD
State $12.2B
68.8%
Burlington $1.1B
LAND
$5.4B
30.4%
$.53B
TOTAL
$17.8B
100%
1.59$B
(8.9% of state)
67.6%
33.2%
100%
-13.5%/yr
5 YR SHIFT-1
2
3
4
5
54.1%
40.6%
27.1%
13.6%
0%
45.9%
54.4%
72.9%
86.1%
100%
100%
100%
100%
100%
100%
RATIO
2.26%
2.04%
Statewide WINNERS and LOSERS BY GPC
GrossPropertyClass
LOSERS
Agricultural
1319
$8,916
Commercial/Industrial
3082
$8,283
5
$6,528
Residential
68916
$3,144
Total
73322
$3,464
Not Av ailable
GrossPropertyClass
WINNERS
Number_of_ AvgParcelDiff
Parcels
FromCurrent
Number_of_ AvgParcelDiff
Parcels
FromCurrent
Agricultural
324
-$6,714
Commercial/Industrial
5794
-$10,927
Not Av ailable
5610
-$6
Residential
87837
-$2,198
Total
99565
-$2,597
Burlington WINNERS and LOSERS BY GPC
GrossPropertyClass
LOSERS
WINNERS
Agricultural
Number_of_ AvgParcelDiff
Parcels
FromCurrent
4
$11,443
605
$11,088
Residential
6,437
$2,617
Total
7,046
$3,350
Commercial/Industrial
GrossPropertyClass
Agricultural
Number_of_ AvgParcelDiff
Parcels
FromCurrent
1
-$1,256
Commercial/Industrial
525
-$14,080
Residential
Total
2488
3014
-$3,820
-$5,606
Burlington BIGGEST LOSERS
Acres
Prp Cl
Owner Name
Street Name
MCAULEY SQUARE HOUSE
123 ST PAUL STREET
$534,736
FLYNN EST J J TRUSTEE
ATTN PRISCILLA S
$324,133
2.16 C
DONOHOE O'BRIEN
BOX 119
$237,471
4.89 C
LAKE CHAMPLAIN
KING STREET
$200,695
2.06 CL
PAM-RADISSON
60 BATTERY STREET
$198,870
1.21 CL
DONOHOE O'BRIEN
BOX 119
$152,246
3.3 CL
UNIVERSITY OF VERMONT
C/O LAND
$147,935
1 CL
CODY CHEVROLET INC ET
LCT
$126,370
1.79 C
HOWARD BANK N A
111 MAIN STREET
$110,327
0.31 CL
CHITTENDEN COUNTY OF
LCT
$95,316
0.85 C
CHITTENDEN TRUST CO
P O BOX 820
$90,503
6.21 CL
16.72 RL
$ Dif f
Burlington BIGGEST WINNERS
$ Dif f
Owner Name
Street name
0 C
RAD-BURL L L C
PAM-RADISSON
-$268,344.00
0 C
STARR FARM
C/O VENCOR INC
-$241,677.00
NORTHGATE HOUSING
P O BOX 3094
-$225,725.00
0.25 C
BURLINGTON SEVEN
P O BOX 119
-$206,911.00
0.91 C
VERMONT SUBACURE LLC
P O BOX 1103
-$194,112.00
PECOR, RAYMOND C JR
KING STREET
-$189,769.00
THE MAY DEPARTMENT
611 OLIVE STREET
-$156,388.00
0 C
FIRST HEALTHCARE CORP
3300 AEGON CENTER
-$145,538.00
0 C
DONOHOE O'BRIEN
BOX 119
-$140,337.00
0 C
BURLINGTON SQUARE
CURTIS CENTER
-$130,232.00
Acres
Prp Cls
25.93 CA
0 CC
1.77 C
Burlington RESULTS BY PROPERTY CLASS
Prop
Property
Cls
Class
#
Code
Name
Parcels
C
Commercial
368
$184,002,513
$81,786,800
$264,356,721
2.25
$6,515,422
$6,074,324
-$441,099
-7%
CA
Commercial Apartments
350
$101,175,845
$28,664,900
$129,709,145
3.53
$3,196,854
$2,128,948
-$1,067,906
-33%
CC
Commercial Condo
83
$30,107,301
$804,500
$30,858,401
37.42
$760,546
$59,750
-$700,796
-92%
CL
Commercial Land
57
$5,029,400
$15,577,000
$11,573,000
0.32
$285,232
$1,156,907
$871,675
306%
CR
Commercial
212
$30,013,355
$17,267,200
$47,280,555
1.74
$1,165,292
$1,282,439
$117,147
10%
CRC
Commercial
1
$40,600
$119,800
$160,400
0.34
$3,953
$8,898
$4,944
125%
E
Education
11
$2,592,000
$504,600
$3,096,600
5.14
$76,320
$37,477
-$38,843
-51%
EU
Education - Utility
1
$26,500
$43,600
$70,100
0.61
$1,728
$3,238
$1,510
87%
F
Farm
2
$78,900
$237,700
$262,200
0.33
$6,462
$17,654
$11,192
173%
FL
Farm Land
3
$36,000
$181,800
$145,800
0.2
$3,593
$13,502
$9,909
276%
I
Industrial
14
$16,645,107
$4,429,900
$21,075,007
3.76
$519,422
$329,010
-$190,412
-37%
IL
Industrial Land
4
$300,800
$1,300,500
$1,289,700
0.23
$31,786
$96,588
$64,802
204%
MH
Mobile Home
124
$2,493,000
$26,200
$2,519,200
95.15
$62,089
$1,946
-$60,143
-97%
ML
Mobile Home on Land
6
$146,200
$116,700
$262,900
1.25
$6,480
$8,667
$2,188
34%
R1
Residential < 6 Acres
5,098
$372,403,300
$283,223,300
$655,493,000
1.31
$16,155,495
$21,035,057
$4,879,561
30%
R2
Residential >= 6 Acres
1,114
$77,587,300
$50,129,300
$127,716,600
1.55
$3,147,745
$3,723,114
$575,369
18%
R3
Residential
344
$29,072,700
$15,466,100
$44,538,800
1.88
$1,097,718
$1,148,671
$50,953
5%
R4
Residential
239
$22,914,800
$10,950,800
$33,865,600
2.09
$834,663
$813,318
-$21,344
-3%
RC
Residential Condo
1,757
$191,790,100
$931,100
$192,721,200
205.98
$4,749,870
$69,153
-$4,680,717
-99%
RL
Residential Land
199
$853,800
$12,887,100
$13,191,900
0.07
$325,132
$957,128
$631,996
194%
TE
Education
29
$7,503,602
$2,905,600
$10,210,602
2.58
$251,654
$215,800
-$35,854
-14%
V1
Vacation 1
Municipal Totals
Bldg/
Building
Land
Total
Land
Value
Value
Value
Ratio
Total
Total
Current
100% Land
Diff w/
% Diff w/
100% Land
100%L
44
$1,938,400
$1,282,500
$3,220,900
1.51
$79,383
$95,252
$15,868
20%
10,060
$1,076,751,523
$528,837,000
$1,593,618,331
2.04
$39,276,840
$39,276,840
0
$0
LESSONS FROM THE PAST
Get zoning/set-asides in place to protect
environmental/agricultural assets
Get assessments right
Don’t implement at same time as reassessment
(Amsterdam, NY, Pittsburgh, PA)
Implement gradually ie: over 5 years
Alaska dividend-irreversible