Shaping Cities through Tax Reform

There is a growing sense that finding solutions to issues like land, housing and liveable cities requires bold measures. The tax system is often so closely linked with processes of planning and real estate. In our second guest feature, Kevin McShannon of MBT Architects and Project Managers argues that reforms to tax systems from one which encourages encourages speculation in land holdings, towards broad based equity, holds a key.

Can we really change the world? There is a sense today that societal problems are the result of past actions, and what we have is what we deserve, whether good or bad. This applies to individuals and societies alike. Compelled to change the world, we often find that the rules governing us are unchangeable. Yet, there is also a sense that it is within humanity’s powers to do something to ease the burdens.

The biggest burden faced by so many people is landlessness. Many have no inherent right to land. Is this natural, and do we just accept this? Often times the solution offered by governments to this systemic problem is social grants and housing. The right to land is not adequately addressed, especially in cities.

On the other side of the spectrum, speculative investors buy up large sections of urban land, and often the landlord sits pretty; biding his time. ‘What’s a bit of income tax in comparison with the huge unearned and untaxed profit I will make when I sell it one day?’, they argue. ‘Sure there’s capital gains tax and increments to pay, but it’s still well worth holding my land out of use till the time is right!’

Are these trends noticed by governments? Or is it advantageous to turn a blind eye? Many times real estate investments are strongly encouraged by politicians because it makes for good publicity — the big spender will supposedly create wealth, and the trickle-down effect will create jobs.

No matter how you look, empty underdeveloped land, whether in the city or countryside, is owned by somebody. Landownership it is not the issue. Not putting it to its best possible use is. Take this scenario: Government investments such as a new bus route (MyCiti in Cape Town, for example) increases land value. Speculative investors who hold onto land without improving it makes a large profit, as land is a scarce resource, demand is high, and it becomes desirable (to complete the bus route). Who earns the increment of the increase in land value?

The improvements to land values following infrastructure MyCiti infrastructure investments have largely accrued with existing land owners (Source: Warrenski at Flickr)

Traditionally the value of real estate value is determined by market demand and supply forces. The selling price of like for like property in one part of town compared with that in another part of town will give a good indication of value. Now, taking the lead from the previous point, the increment or increase will be due to the perceived attributes of the better site, usually caused by public sector investments. Many argue that this increment needs to be paid back to government, and it can be collected by the existing municipal rating system. This relates to market value of the land only, ignoring the private sector investments into the improvements on the land, such as buildings, landscaping, and so on.

Progressive land taxation could halt the ever increasing selling prices of land driven by speculative investors. Affordability can be achieved by regulation. Moreover, this value can also be captured to compensate other factors attributing to increased value. Labour is a fundamental economic good, and the result of labour on land transfers to capital. Three ingredients remain, therefore: Land, production, and labour.

Real tax reform can change all of this. Gradually phasing in a site value rating or land value taxation, will have major benefits for inclusively building cities. Speculative land holding with no intention to improve land results in patterns of spatial inequality, and erodes the State’s ability to compete for desirable land in building transport systems, housing, service locations, parks and so on. Over accumulation of land holdings in the hands of the wealthy few results in the underuse, misuse, ill-use, of vast quantities of land. Land value tax, in my view, is one key to change this.

About the author:

Kevin McShannon is the co-owner of MBT Architects and Project Managers. Having completed a BSc degree in Construction Management, Kevin went on to work for and start up construction companies. His interest in land tax can be traced back to the School of Economic Science, where he was exposed to The Henry George School of Social Science, Earth Rights Institute and the International Union for Land Value Taxation. Kevin and his family lives in Cape Town. connect with Kevin via Linked-In.


Originally published at www.makingofcities.org on October 21, 2015.

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