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GEONOMICS BOOTSTRAP DEVELOPMENT; by Jeff Smith
Jeffery J. SMITH, president of the Geonomy Society, publishes The Geonomist and organizes events in and tours to places considering reform of taxes and subsidies. firstname.lastname@example.org; www.progress.org/geonomy c/o Ambassador Pavlov, 10731 SE Center St, Portland OR 97266; 503/760-4932
Copyright, July 2002, All Rights Reserved by the McKeever Institute of Economic Policy Analysis (MIEPA). Contact MIEPA for permission to reprint at: email@example.com
SHARING RENT WORKS
Occasionally, the people of a small political entity pulled themselves up economically by their own bootstraps, without relying overly on trade with or aid from outsiders, in a way that borders on sustainable. What these self-developers did was to use "geonomics"; they collected more of their local "ground rents" and diminished their taxes upon production, a method proposed by the UN Commission for Human settlements in their Habitat Agenda (1966, pgh 76h). Technically, most of these self-starters shifted their property tax from buildings to the underlying land, a reform more cautiously cited by the UN Preparatory Committee for the Monterrey Conference on Financing for Development (2002 March) Technical Note No. 3. Instead of taxing private land for public benefit, a few bootstrap jurisdictions leased public land to private builders.
Ground rents, or natural rents, are a social surplus. They're the monies people spend on the nature they use, the money paid periodically or in a lump sum to own or use sites, resources, the broadcast spectrum, and the environment as a sink for pollutants. Collecting such rents, in lieu of taxing effort, empowers people to prosper, in a way potentially sustainable, for two reasons. As in the old story of the donkey and its driver with the carrot and the whip, collecting rent spurs people to produce while zeroing out taxes lures people to produce. And produce they have, the record shows.
As informed observers keep reminding anyone who'll listen, widespread ownership of land is a basic prerequisite to development. During the short time this paper was written, the 2000/2001 Annual Report of the Church Development Service, the Earth Negotiations Bulletin of the IISD (2002 Jan 31), and the Forum Declaration by the Norwegian delegation to the World Summit (later this year in Johannesburg) all called for land reform to make possible the eradication of poverty. Three times in history, the people of an area did receive their own land, without bloodshed, following the adoption of geonomics (rent-sharing).
In Denmark in the 1840s, an idealist king was finally able to persuade nobles to accept a tax on land value (the only levy left after shifting the property tax off buildings). Denmark achieved the highest percentage of family owned farms in Europe and a reputation for their dairy products. In California in the 1890s, an idealist schoolteacher was able to persuade the state legislator to permit localities to levy a land-value tax (LVT). While the reform lasted, enormous ranches were converted into tens of thousands family farms. California became known as the "breadbasket of America". In these cases and in Taiwan in the 1940s, when big landowners had to pay more rent via the higher tax, they found it no longer worth their while to be a middleman, so they sold off their excess holdings to their former tenants at prices the farmers could afford.
The poster child for development is Taiwan, which set the world record for rapid and continuous growth. When the Nationalists took refuge on the island, they implemented the land reform that they had merely promised on the mainland. Working for themselves on their own land changed farmers; they worked harder and smarter, producing a surplus that enabled them to buy goods manufactured in the city, made in factories by sons no longer needed on the more efficient farms. Taiwan's development has not been sustainable; the ruling party, which made itself into the richest one on earth, also made a huge mess of the environment. While in power, they failed to uphold one's right to Earth in a healthy condition and did not charge polluters for the costs they imposed.
With Taiwan, the other well-known success story is Costa Rica. This Central American nation enjoys widespread ownership of land not due to agrarian reform or a tax on extensive holdings but merely to historical accident; the indigenous population refused enslavement to the colonizing Spaniards and the topography is largely mountainous, both factors militating against the establishment of latifundia. Costa Rica shows the power of widespread ownership of land. Today, tho' it has slid backwards since the late 80s Contra War waged on its western border drove millions of poor to take refuge in Costa Rica, the country still has proportionally the biggest middleclass (the source of many environmental activists) and the lowest crime rate in Latin America. A stable democracy, Costa Rica was the first to abolish its army (followed by neighboring Panama).
Other regions that developed by utilizing a tax on land values include towns in western Canada, South Africa, Australia, and New Zealand. Towns that thus collect rent tend to have moreowner occupants, paved streets, parks, higher voter turnouts, even town hall meetings to set policy. None of them have the slums that afflict US cities.
South Africa's Johannesburg, which began as a mining town, was rapidly becoming a ghost town when the ore was played out early last century. To avoid such a fate, the city fathers shifted their property tax from buildings to land, rescuing their town. Johannesburg grew to become the financial capital of the nation, eclipsing Cape Town, a port situated on one of the most strategic points on the planet, which taxed land and buildings equally, a victory similar to Albany, New York, outpacing New York City, a victory which should never have happened.
In Australia around Melbourne, about half the suburban towns tax only land, half tax both buildings and land. Ken Lusht of Penn State found those towns taxing only land enjoy about 50% more built value per acre. During the recession of the second half of the 70s, early 80s, the towns taxing buildings lost business while the land-taxing towns gained new businesses.
Most of these examples have a land tax in lieu of other, punitive taxes not for reasons of ideology or foresight but of simple common sense. At the beginning, when a colony is founded, very little else but land exists liable to taxation; there's not much in the way of sales or incomes or buildings. An alternative to the government selling off its newly claimed land is to retain it and lease it, as did Singapore and still does Hong Kong. The latter is the wealthiest city in the world per capita, often voted the world's best city for business by FORTUNE magazine. A mere rock in the sea lacking every resource but a harbor, Hong Kong nevertheless outperforms every other city on China's coast. By collecting so much site rent, it keeps taxes low. Low taxes translate into low prices, high investments, and high incomes.
BOOTSTRAP DEVELOPMENT IN THE U.S.
A bit more than a century ago in America, a reformer named Henry George earned a huge following by arguing for a single tax on land value. After his death, his followers founded three colonies: Free Acres, New Jersey; Arden, Delaware; and Fairhope, Alabama - all on land held in common with parcels leased to individual homeowners. Today, all are more prosperous than neighboring towns levying the conventional property tax. Fairhope was one of only four towns on the Gulf Coast recommended for retirement by Consumers Report. Back in the 1950s, some Quaker Georgist residents of Fairhope fled the military draft during the Korean War, resettling in Costa Rica where they began what became that nation's first national park at Monte Verde.
When Henry George's followers were numerous, speculators persuaded most state legislators to amend their constitutions to require any property tax to fall on buildings and land equally. The one exception was Pennsylvania, the home state of Henry George (coincidentally, William Penn was an early proponent of the geonomic method of public finance, as also was the founder of the Massachusetts colony, William Bradford). While the Georgist movementhas faded, it did leave behind a few other examples of success.
In Pennsylvania, about 20 jurisdictions (cities, counties, and school districts), almost all of them in the poorest region of the country, Appalachia, levy a tax rate on sites higher than on structures. Profs. Tideman and Plassmann at Virginia Polytechnic Institute looked at the greater construction in those towns that do not tax structures so much as land; they calculated that such jurisdictions enjoy 16% more output each year compared to their neighbors. Also, these two economists in The Losses of Nations (1998) looked at results in areas that tax sales and income differently and found most economies could yield about one fifth more goods and services without such punitive taxes.
Harrisburg, the state capital, was ranked by Rand-McNally at the bottom of US cities, 198 out of 200. Then the city council shifted their property tax. The number of arsons dropped, formerly abandoned areas were developed, and outlying farmlands were spared the bulldozer; quickly the city jumped into the top fifth of American cities. Their mayor Steven Reed credited success to their Property Tax Shift (PTS) (Andelson, 1997).
Succumbing to pressure applied by speculators, Pittsburgh returned to the conventional property tax in 2001. Before then, the Steel City enjoyed the most affordable housing and by far the lowest crime rate of any major US city. A couple decades ago, when a major corporation closed a steel mill, they still had to keep paying taxes on the underlying land, so they sold the mill to others who re-opened it, keeping the local economy alive.
NASCENT EXAMPLES OF GEONOMICS
Recently around the world, areas in all stages of development have turned to the PTS, even all the way to LVT. In the "Third World", the mayor of Mexicali, Mexico, persuaded the local elite to replace their conventional property with a land-value tax. In the former "Second World", Estonia levied a tax on agricultural land, receiving a favorable review in The Economist (2000 April ?) for its results. In the "First World", Philadelphia, Pennsylvania, is now debating and about to adopt a PTS. The real estate lobby in Philly, a city suffering from block after block of blight, is helping promote the PTS.
Thru-out the developed world, the environmental movement promotes shifting taxes off goods, onto bads, in general, and shifting subsidies in the opposite direction, from bads to goods. These "greens" are also gathering stream behind the PTS. In the US, they have lobbied state legislators in Vermont, Oregon, and Minnesota. What appeals to them is the fact that landowners, when required to pay an annual rent or fee or tax, choose to quit speculating in land and instead put it to good use. Utilizing the central sites of higher value spares the outlying sites of lower value; using urban locations more intensely means not using some rural sites at all.
Jurisdictions that rely on natural rents for public revenue, not on private sales or incomes, would be motivated to care about the health of the environment, since a healthy area would have higher value and generate more revenue. To avoid contamination, jurisdictions should also levy four surcharges besides collecting rent: collect an Ecology Security Deposit and require owners to hold Restoration Insurance, with both charges geared to the value of the land. Two other components in a strategy to "internalize externalities" are to require would-be polluters to bid on permits to emit potentially hazardous byproducts and to fine severely and with certainty those who violate health standards. While all four of these protective measures are now used, none are widespread.
Advocates of geonomics offer benefits to major voting blocs. Business likes low taxes. Greens like collecting rents for compact cities. Farmers like collecting rents for affordable land. Citizens in general like living in a prosperous and stable society.
To the casual observer, it seems that poor, undeveloped areas lack much land value, that there's too little to make collecting it worthwhile. Yet Hernando De Soto of Peru likes to point out that their real estate values are actually greater than the amount of aid, loans, and investments received altogether. Even if his estimate is overly optimistic, it is still true that geonomics is self- aggrandizing, like the magical brooms in The Sorcerer's Apprentice that drew ever more water by dumping it. Where government recovers rent, while removing taxes, there government augments rent. The tax shift liberates producers, who then increase their output and income. Where people prosper, there they bid up the values of land. Where society shares these growing land values, there everyone wins.
In almost all cases, shifting taxes onto locations is progressive; i.e., a vast majority would pay land dues (or taxes or fees) that would be smaller than the taxes that they pay now. In most jurisdictions, the ratio of site value from the commercial center to the rural fringe is 2,000 to one per acre. Hence the owners of the downtown locations of much greater value, usually the local elite and outside investors, would pay much more. Yet for their greater investment, they, too, would receive a much healthier city, while the absence of other taxes enables them to profit from investing in new technologies and workforce retraining. Advancing the productivity of both humans and machines means the economy would get more from less, thereby minimizing its impact on the natural world.
Yet to ensure that this geonomic shift is always, invariably progressive, government could return some of the collected rental revenue as a dividend to residents, as Alaska pays an oil dividend to every man, woman, and child in the state, which in 2001 was almost $2000. By paying a share of rent to residents directly, rather than paying taxes to politicians who're supposed to pay funds to bureaucrats who're supposed to serve citizens, a polity avoids some of the waste and corruption inherent in letting government spend public revenue. Proposing a dividend to voters may also make geonomics even easier to advance with the public.
Once enough people and leaders support the reform, the next step is to make sure the cadastre (the land roster) is in usable shape, that its parcels, their owners, and their values are all identified and up to date. If need be, many international agencies would offer to help a jurisdiction to modernize its cadastre. There are NGOs, such as the Instituto Henry George in Managua, Nicaragua, that give presentations on geonomics to specialists and the lay public, showing how it works and benefits society. Others, such as the Lincoln Institute in Boston, Massachusetts, help measure how much rent is available, who'd pay more and who less, and how to go about shifting taxes to collect it.
Next the determined jurisdiction would shift its property tax. It could do so gradually, as Philadelphia contemplates, or immediately, as did Mexicali. David Smiley of Australia's Macquarie University estimates that a jurisdiction which taxes land value would stabilize its economy, polity, and environment in three years, seventeen years, and twenty-two years respectively, whereas the two other major reforms - structural adjustment imposed by world bankers or land redistribution imposed by a national government - would take from twice to four times as long.
After shifting the property tax, a jurisdiction could remove other local taxes and apply to the encompassing state or nation for permission to exempt residents from their taxes, while raising the rate on land, collecting yet more of its annual rental value. As the removal of taxes on sales, salaries, and structures increases economic output, residents would enjoy higher wages but also bigger land dues (or land taxes or land use fees or deed fees - whatever mechanism the jurisdiction chooses). If the dividend were in place, then people's income from the income would grow, too, keeping pace with the dues.
Ironically, while geonomics develops a locality independently of trade or aid from the outside, by generating prosperity, geonomics simultaneously creates an area that enables trade and that attracts investment, not crippling debt, automatically. Thus by adopting first the carrot and stick of zero taxes coupled with land dues, a jurisdiction develops regardless of what the rest of the world does, and inspires the outside world to propose entering into mutually beneficial relationships such as consensual trade and investment. Thereby a geonomic locality could build on its incipient prosperity delivered by sharing the rents of land and resources.
To be presented to the UN Conference on Financing for Development in Monterrey, Mexico NGO Forum, 2002 March 14 - 16; Official UN proceedings with ministers, March 18 - 20
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