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This Tax Makes All Other Taxes Redundant (Part II)

In the Netherlands, the government is trying to combat the housing crisis with more subsidies for first time house buyers. But this will only make prices go up even more. There is a better solution, which would make housing cheaper for everyone: a land value tax. But as long as homeowners are in the majority, no politician dares to burn its fingers on this idea. 

This article appeared originally on the Dutch online journalism forum De Correspondent ( ben-starters-en-de-samenleving-wel-iets/2176696310250-0e7cb9f6)

I recently spoke to some old acquaintances at a wedding (let’s call them Carla and Rogier here). As we sat in the evening sun with a glass of white wine, they talked about their plan to sell their house and move to Spain. 

They had bought that house six years ago for about two hundred thousand euros. Now incredibly cheap for a spacious apartment in Amsterdam, but even then already inexpensive. By having a building developed under their own management with a group of people, they had managed to reduce costs. 

My boyfriend and I were also interested in this project at the time. We had lived in the countryside for a while, but considered returning to Amsterdam. The bank almost laughed at us. As freelancers with an uncertain and fluctuating income, we had no chance of a mortgage. 

We have now missed that boat forever. Since then, our income has only increased a little, while house prices have skyrocketed. And so, at 45 years old, we find ourselves on the wrong side of the housing market.

Now the financial situation of Carla and Rogier looks a lot rosier. After selling their house, they can live in Spain for ten years without having to work. They also feel a little uncomfortable about that. Yet you can hardly blame them for putting those four tons of surplus value in their pockets.

Electoral Suicide

But the American journalist and economist Henry George (1839-1897) thought very differently. Already in the nineteenth century, George saw landowners becoming wealthy thanks to, and at the expense of, the rest of the community. 

It’s actually quite simple: in places where the government invests in roads, schools, hospitals and other public facilities, the surrounding land and with the homes on it increase in value. The presence of cozy restaurants, nice shops and wealthy neighbors does the rest. Without having to do anything to improve or develop the land- as the home owner, you get receive the benefit of surplus value. 

According to George, it would be fairer if this unearned income was returned to the community, which created this value. In his book Progress and Poverty, he came up with a solution that is as simple as it is effective: levy taxes on land. In this way, the government would earn back its investments and land prices would increase less rapidly. 

During his lifetime George managed to get a lot of people to support his idea of a land value tax, but after his death the popularity of the movement he led quickly waned. Nevertheless, Georgist organizations are still active all over the world. In the Netherlands, my grandfather, Wim Costerus, made an attempt to realize the ideals of Henry George. In 1971 he founded the Grondvest organization for this purpose. 

Economists are almost unanimously enthusiastic about the land value tax. In my previous article about this, I listed one many economics professors and even Nobel Prize winners, all of whom are of the opinion that a land value tax is efficient and fair. 

But the land value tax has never gained ground in Dutch politics. Even now there is not a single politician who advocates this tax. Why not? 

“That could be electoral suicide,” says economics professor Bas Jacobs. At the minimum, he says, every time an economist brings up the idea now, there is a wave of angry reactions. 

After the publication of my previous piece on land value tax, the negative reactions were not that bad. However, many readers wanted to know: what does this land value tax mean for my own wallet? ‘According to my article, someone with 800 m2 of land in the rural area Twente wondered ‘would I then have to pay more tax than Prince Bernhard on a small house in the heart of Amsterdam? 

This directly touches on another frequently asked question: who is getting richer from a land value tax and who poorer? According to Henry George, land taxes could make all other taxes obsolete, but will big corporations and the superrich then pay more or less taxes? In other words: how fair is this tax really?

Victim Of Its Own Success

Let’s see how a land tax works in practice. Although this tax was never introduced in the Netherlands, experiments have been done in other countries. 

For example in Canada. It was there that supporters of Henry George in the province of British Columbia recorded their first victory in 1890. Taxes on homes and buildings went down and taxes on land went up. In 1910, Vancouver was the first city in the province to completely abolish taxes on buildings and raise only tax on the land. 

The measure was popular among the population. The idea that profits on land should not benefit individuals was widely shared at the time. Just like the belief that the land tax enhanced economic prosperity, which benefited everyone. However, there was one group that was less happy with it: landowners. 

Landowners didn’t like the fact that leaving land fallow became unaffordable because the land yielded nothing, but it did cost money, thus forcing them to use or sell it. Hence the land value tax led to the construction of too many new houses, they complained, causing rents to fall and houses even to remain empty. 

The biggest problem landowners had with the land value tax was that it did what it promised to do: make housing affordable. “The most compelling arguments in favor of the land value tax came from its opponents,” concludes historian Christopher England, who conducts research on Henry George and the Georgian movement at Stanford University in California. 

At the time, homeowners in Vancouver were a small but powerful group. Partly thanks to the land value tax, this group gradually grew larger. “Lower house prices and the more supply have enabled more people to buy their own house,” says England. Then, of course, they preferred to see the value of that house increase. But the land value tax got in the way there, because it kept prices low. 

Because land was decreasing in value, the rate of the land tax had to rise further and further in order to generate enough government revenue. Landowners did not accept that. Therefore, after a few years, the tax on buildings and improvements was reintroduced in Vancouver, and then increased little by little. The experiment with the land tax finally came to an end in 1984: from that year on, buildings were once again taxed as high as the land. 

“When a policy is successful, we often forget why it was ever introduced,” says England. The land value tax thus perished due to its own success.

Tax Gifts

In the Netherlands, too, the percentage of the population who owns a home has increased significantly over the past century. After the Second World War, less than 30 percent of the population owned their own house, now that number is 58 percent. 

But unlike in Canada, where the land value tax provided government revenue, stimulating home ownership has cost the Dutch government a lot of money. And where the land value tax caused land prices to fall in Canada, they shot up in the Netherlands.

To make buying a house financially attractive, Dutch homeowners are pampered with all kinds of tax measures. With the mortgage interest deduction, but also by taxing home ownership with low rates only – in contrast to the assets of tenants who also want to save money for later. 

In recent years this was no longer enough. Due to the high house prices, the housing market became less and less accessible to first-time buyers, which meant that home ownership no longer increased. So the government came to the rescue with even more fiscal gifts. Such as the ‘jubelton’, which allows parents to give their children hundred thousand euro tax-free, a reduction in the transfer tax and an exemption from the transfer tax for young starters on the housing market. 

Due to all these tax benefits, the government loses billions of euros in tax revenue every year, city geographer Cody Hochstenbach calculates in his book Uitgewoond. The mortgage interest deduction alone costs the government 9 billion euros annually. 

Contrary to what you might think, these billions in subsidies do not make living more affordable at all. On the contrary: they cause house prices to rise even further.

Falling House Prices

The more money you pump into the housing market, the more expensive the houses become. That makes sense, explains journalist Hans de Geus in his book Why I became a slum landlord: whoever receives a ton from his parents can offer a ton more for the same house. The same applies to the lower transfer tax: the amount that you save as a buyer can be added directly to the purchase price. “Only now the money no longer goes to the government, but to the seller. And he can use it to bid more on his next home. This is how house prices are being pushed up further.” 

A tax on land can break this pattern. 

It has exactly the opposite effect. That calculation is just as simple: the tax that you as a land owner have to pay annually, is deducted from the amount you can pay for a house. As a result, house prices fall. 

As economics professor Bas Jacobs sums it up: “In a market in which supply does not respond to rising or falling prices – as is largely the case in the Dutch housing market – every subsidy translates one-to-one into higher house prices, every tax into lower prices.” 

That sounds like good news for anyone looking to buy a home. But it’s bad news for those who already have a home. 

“The moment you introduce the land value tax, the value of land decreases,” says Maarten Allers, professor of economics, and advocate of the introduction of a land value tax in the Netherlands. “So everyone who owns land loses a lot of money at once.” 

That makes implementation difficult, he admits. Although you can of course ease the pain through compensation measures for affected owners, or a gradual introduction of the land value tax.

Homeowners Vote More Conservative

Politicians are hesitant to introduce a measure that seems to go against the interests of homeowners. It is not without reason that in Canada it was mainly scientists and policymakers who mentioned the benefits of land value tax. Interest group representatives and elected politicians were much less enthusiastic. 

In 1974, for example, the director of an association of livestock farmers thought it was crazy that farmers had to contribute to public education and public swimming pools through the land value tax. After all, the chance that they would use these public services themselves was quite small, he judged. The mayor of Victoria said it even more firmly. Make homeowners pay more taxes to cover the cost of public education? “Well, that’s like asking me if I’m in favor of a genocide.” 

In Vancouver, too, the private interests of homeowners eventually trumped the public interest. And that’s how it usually goes, according to Christopher England. “Homeowners are better organized than tenants and have greater financial interests.” 

By subsidizing home ownership, right-wing parties have created their own electorate, says Cody Hochstenbach. He refers to scientific research from different countries that shows that homeowners vote more right-wing and more conservative than tenants. They don’t feel like paying for public services, because they are less dependent on them. “Particularly among buyers who see their homes increase in value, support for redistribution and social policy is eroding.” 

As long as homeowners are in the majority, a land value tax therefore seems unlikely to be implemented. 

But in the end everyone benefits from an affordable and accessible housing market, the main effect of the land value tax. Even if you are living comfortably in your own house, if your children’s teacher, the nurse of your elderly parents and the garbage man who keeps your street clean can no longer afford a house, it affects you too, warns Hochstenbach. 

A last remark about the wealth inequality, which readers were concerned about after reading my previous piece. When we talk about that, we usually focus on the richest 1 percent: the big corporations and the super-rich. But we often forget the wealth gap that cuts across our own circle of friends, colleagues and family: the one between renters and homeowners. 

And that gap will only widen if policy remains unchanged.

Collective Assets

Can we imagine a society in which the increase in the value of land and homes no longer ends up with homeowners, but flows back to society? In which we no longer have to see our home as an investment and part of our pension? But just, like a roof over our heads? 

I myself have been living in a housing association for fourteen years that has this as its starting point.

My boyfriend and I live on the countryside, together with seventeen other households, on an old estate of more than 7 hectares of land. Ownership of the land and buildings is placed in a foundation, which we manage together as residents. 

You will therefore not see the value of the estate on our personal bank account. And yet, when I look around me, at our vegetable gardens and fruit orchard, the sauna and canoes on the bank of the river, the large park, the football field and the playground, I can hardly feel myself poor. 

We would never have been able to pay for all this collective property by ourselves. It is the accumulated wealth that everyone who has lived here for the past thirty years has contributed to. And if we ever leave, we won’t be given a bag of money, like Carla and Rogier, who leave their Amsterdam housing project. Instead, the next inhabitants will enjoy this joint prosperity. As an example, our housing association shows on a small scale how a land tax at municipal or national level could work. 

And believe it or not, Carla and Rogier are now in Spain looking for just such a way of living together. Perhaps the money they bring with them will still be put to good use.

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