QUOTE OF THE WEEK
"To find a friend one must close one eye. To keep him two."
  -- Norman Douglas

Mauritius Times is right to examine the land question

-- Dave Wetzel, President of the UK’s Labour Land Campaign

I met the Hon Ramakrishna Sithanen – Deputy Prime Minister and Minister of Finance and Economic Development in the London High Commission in March last year for a one to one discussion. We discussed the land question and the opportunities for improving the Mauritius economy.

It is encouraging that the Mauritius Times has opened up the debate and drawn attention to this important subject.

The first concept we need to understand is that although we buy and sell, rent or lease a property (land and buildings), land is totally different from buildings. Buildings are man-made, they cost labour and materials, but the land has been provided by Mother Nature or a Deity with no cost of production.

Percy Mistry expressed his views in the Mauritius Times in June last year that windfall gains from land converted from agriculture to urban use should be taxed – such a tax is known as a development land tax (DLT).

In the UK we have had experience of development land taxes and have found that they act as an additional barrier to the use of idle land in the towns and cities of the UK and encourage even more development on greenfield sites in our countryside.

If a government goes ahead and taxes landowners for developing their land, then the landowners can, and will, simply avoid the tax by NOT developing.

Landowners who have inherited land will be able to avoid the new tax simply by refusing to sell their land to developers.

The effect of this will be to encourage land to stay idle, increase its price and to push development onto more marginal land farther from urban areas, causing urban sprawl and all the unnecessary costs that arise with the demand for new infrastructure (schools, hospitals, water, energy, etc.) and new transport links. Workers will spend longer time commuting, less time with their families and emit more Co2, adding to climate change.

We don’t need a crystal ball to witness this effect. In the UK, Labour governments made three attempts to tax development -- in 1947, 1967 and 1976. These Labour governments attempted to tax “planning gain”, they could see that agricultural land worth a modest sum became worth a fortune with planning permission for housing, hotels, shopping malls, offices or other urban use. To tax this gain at the time of development seemed a simple way of capturing this “unearned” value – and yet it failed on each occasion because it was so easy to avoid the tax.

The question has to be asked why only tax a piece of land once in the lifetime of a building? There are many factors that give land its value, the landowners are the lucky recipients. Buildings deteriorate over time, they need repairing and maintenance – over time they depreciate in value. Whereas land never rusts nor decays, as society progresses there is more demand for land and this causes land values to rise. This rise in land value is a free gift to landowners. It is right that it should be taxed on an annual basis so that the community shares in this good fortune. The good fortune that the community, by its own actions, creates!

The effect of development land taxes in the UK was to create an artificial shortage of land, increasing its price and making it more expensive to buy or rent a home or premises for a company. It may be just a coincidence but within a couple of years from when these new taxes began to bite, Labour lost each of the subsequent general elections!

The questions that have to be asked are:

1. Why tax only development sites when it would be fair and legitimate to tax all sites?

2. Why only tax development sites, when all land values arise from natural conditions or the investment and activity of the whole community (public and private)?

3. Why tax development land when that tax can be easily avoided by not developing or by not seeking planning consent?

4. Why not apply a Land Value Tax to ALL sites, (valued for their optimum, permitted use), which cannot be avoided?

5. Why introduce DLT which produces one tax receipt in the life of a building when the alternative of the Land Value Tax will produce an annual income?

6. Why introduce DLT which fails to collect a rightful share of future increases in land values arising from activities which today we are not even aware of, when a Land Value Tax with annual revaluations of land, ensures that all future land value increases are shared by all?

7. Why introduce DLT which is expensive to collect when the Land Value Tax is unavoidable, cheap to collect and could be used to reduce other economically harmful taxes such as income tax, sales tax or property taxes?

8. Why have DLT which charges landowners less for small developments, when the Land Value Tax will encourage the best use of each site?

9. Why introduce DLT which will reduce GDP, when the Land Value Tax will maximise GDP?

10. Why introduce DLT which will sterilise brownfield sites in towns and cities, and encourage urban sprawl, when the Land Value Tax will encourage development

However, if the Mauritius government was to put an annual charge on all land (not just development sites) – then this would work in exactly the opposite direction, and holding land idle would not be an economic choice for landowners.

ALL sites would need to be valued for their optimum permitted use and an annual levy, rate or poundage applied. Such a tax is known as annual Land Value Tax (LVT) and has been successfully introduced in Denmark, Taiwan, Hong Kong and cities in Australia and the USA.

There is a strong economic argument for shifting taxes from production to natural resources. Almost all economists, from Adam Smith and David Ricardo to modern Nobel Prize winners like the US economist William Vickrey, agree that land value is a surplus arising from production. By taxing this surplus a government does not distort the economy, unlike taxes such as income tax and sales taxes that lead to higher prices and lower levels of production.

It is important, that unlike the proposed National Residential Property Tax (NRPT), the VALUE of the land is taxed, NOT its area. For example, a site with a home that enjoys good transport and a view of the ocean could be smaller in area than another similar site inland, but under NRPT the larger, less valuable site would pay the highest tax. This can’t be right.

With LVT, owners of brownfield sites would put their land to good use themselves or sell it to others. Either way, the land would be available for homes and jobs in towns and cities where people most want them. All premises would become more affordable. The countryside would be freed from the threat of urban sprawl. Transport would operate more efficiently.

If an annual Land VALUE Tax was to be introduced other taxes on trade and incomes could be reduced.

Workers would have more disposable incomes, trade would flourish and more jobs created. Taxing non-producers (landowners) benefits all those who do produce.

The moral case for taxing land values is irrefutable. Imagine you are on a cruise ship which sinks a short swim from an island with all the necessities for life, food, water and natural materials to provide shelter. 200 people survive the sinking and successfully swim to the island. How would you decide which of your number would be the half dozen or so landowners of the island to whom the remaining 194 would have to pay rent? You could do what the British aristocracy and colonial governments have done -- fight for it, cheat for it, steal it and even kill for it. Presumably you could draw lots. Or maybe, just maybe, you might take a more mature approach and all 200 decide to pay the land rent into a common pool and use this fund to provide for health, education and other collective services.

This is exactly how a land value tax works. It is a sharing of natural resources that have been provided by Mother Nature to our generation living on this planet with no cost of production. Mother Nature does not charge us for the fertile fields, the town centre sites, the sites for homes looking over rivers, lakes or oceans or indeed the minerals and oil in the ground.

Prime Minister Navin Ramgoolam is right to draw attention to the correct use of state lands. These must be valued and recorded, and the full rental value charged on the occupiers. But only charged for the land value – not the buildings.

A land register for the whole of Mauritius should not take five years to compile, I and estate management experts could conduct this exercise, together with a record of owners/occupiers, in two years at the most.

Dave Wetzel

President of the UK’s Labour Land Campaign

dave.wetzel@LabourLand.org

Web: www.LabourLand.org

* * *

About the Labour Land Campaign

The Labour Land Campaign was started in 1983 by a group of people concerned with the future of our planet. They brought together a mixture of skills: architecture, land economics, farming, town/urban/community/city farms, workers, trade unionists, academics, researchers, smallholders, town planning and protesters.
The Campaign has advised governments and others on the correct use of land. They have objected to unsuitable legislation and unsightly, ecologically damaging developments and encouraged developers to consider the needs of the whole community and not just those with a financial vested interest.

The Campaign has helped promote parliamentary legislation, lobbied politicians and policy-makers, advised landowners, business and property companies, supported national and international campaigns on poverty, unemployment, equality, green issues and justice.
Members of the Campaign are members of an NGO recognised by the UN, have conducted research for radio and TV programmes, written articles and been invited to share their experiences by speaking at international conferences around the world.