Economists have agreed for more than a hundred years: levy taxes on land not on labor. This is how you can fight inequality and make housing affordable.
NOTE: This article appeared originally on the Dutch online journalism forum De Correspondent (https://decorrespondent.nl/13454/deze-belasting-maakt-alle-andere-belastingen-overbodi g/2146541974500-212c74a2)
On a lazy Sunday morning I managed to get my son Miran (9) and his friend Tinus (10), who lives next door to us, to play a game of Monopoly. They were not very enthusiastic at first; they find the game boring and predictable. The player who can build houses first quickly gets ahead in the game. Especially if he reinvests the money he earns in new houses. For the others, it’s hard to catch up. The winner accumulates piles of money, the other players are broke and frustrated. There’s hardly any strategy involved. It’s just a matter of being lucky or unlucky.
The current housing market in the Netherlands looks a lot like a Monopoly game. If you bought a house at the right time, your wealth is growing. If you don’t own a house yet, it is almost impossible to get in on this wealth growth.
This resemblance is no coincidence: the game was invented in 1903 to demonstrate exactly this economic law. The original version however, called The Landlord’s Game, also offered a way out. During the game you could at any time decide to change the rules, if the majority agreed upon it. Then all the land would become common property and all players would benefit from the profits on it. With this set of rules you could turn Monopoly into a cooperative game, without winners and losers. In short, prosperity for all instead of profit for only one player.
What would happen if we applied those alternative rules to the housing market?
This is what my grandfather has advocated all his life. He was still young, about thirty years old, when he became acquainted with the work of the American economist and journalist Henry George (1839-1897). And just like the creator of The Landlord’s Game, my grandpa was captivated by George’s ideas.
Land Ownership As The Main Cause Of Inequality
The seeds of Henry George’s thinking were sown in 1868 when he visited New York for the first time. He was astonished that in the economic center of the United States, where millions of immigrants from all over the world arrived in search of a better future, so many people lived in poverty. ‘The shocking contrast between monstrous wealth and debasing want’ struck him deeply.
How could all the progress during the industrial revolution have not led to the eradication of poverty, George wondered. In his book Progress and Poverty (1879) he pointed to land ownership as the main cause of inequality. Because it is through land ownership that the rich are becoming increasingly richer and the poor poorer. And this, according to George, makes the possibility of private land ownership a big mistake.
George argued that the earth belongs to everyone. Everyone has the right to use of a piece of land to live on and to provide for one’s livelihood. In other words, land is a basic provision just like water and air. With this idea, George won over many followers.
I inherited George’s book from my grandfather along with a box full of letters, magazines and newspaper clippings about ‘the land issue.’ For my grandfather, Wim Costerus, it was a matter of principal. In his eyes. land ownership was as wrong as slavery. ‘That fortunately has come to an end now. In the same way we will also have to get rid of ground slavery,” he said in an interview with Elsevier’s Weekly. For my grandfather, it was worth a complete revolution to achieve this. It was just a matter of setting the right priorities.
After his retirement as a jurist, he founded an organization in 1971 to realize these ideals. As chairman of Grondvest, he intended to devote himself to “big, important and difficult tasks that will take years,” he wrote in the first issue of the Grondvest Bulletin. Together with co-directors Wim Born and Daan Reiche, he wanted to put an end to “the enrichment of private landowners” and abolish the “insanely unjust tax system.”
What If We Change The Rules?
- How I wish I could have talked to my grandfather about this. But I was only eighteen when he died in 1995. I was at the time a first-year political science student in Amsterdam, and protested against housing shortage and inequality. For me, this seemed a lot more exciting than the theoretical expositions of my grandfather on fundamental rights and land property.
But somehow I’ve always felt that our struggle was the same. I must have inherited this from him, this striving for an equal and just society, right? To find out what his struggle was exactly about, I now have to make do with his letters, articles and interviews. And that, alas, turns out to be tough task.
Fortunately, the rules of The Landlord’s Game are easier to understand. While playing Monopoly with my son and the neighbor kid, I happen to throw an eight which lands me on the Kalverstraat. This is the point where our game would normally end. Miran already owns four houses on it, and I can’t possibly afford to pay the rent.
But what if we can reverse the rules? For Tinus and Miran it’s an exciting idea: finally something unexpected will happen in this game! From now on we will play with the prosperity rules of The Landlord’s Game:
Rule 1: General taxes no longer have to be paid.
Rule 2: If you land on a street, you don’t pay the rent for vacant land to its owner but to the community treasury. If there are houses, you pay double: the rent for the houses goes to the owner, the rent for the land to the community treasury.
Those two rules beautifully summarize the central idea in Henry George’s work. What he proposed, was a tax on the possession of ground. A kind of rent actually, which the owner pays every year to the government for the right to use the land.
The Tax That Makes Other Taxes Superfluous
The tax George proposed is a bit like the real estate property tax (OZB) that homeowners pay in the Netherlands. But there is an important difference: the property tax is not only levied on the value of the land, but also on the buildings on it. More on why this matters later.
And where the property tax is on average a few hundred euros per year, the land value tax should be, according to George, high enough that from owning land no one would have any financial benefit. It is only by putting the land to use––to live or work on it, or to rent it out, that someone could benefit from it.
The land value tax could collect the government so much revenue that, according to George, all other taxes would become redundant. There would even be enough money left for a kind of basic income for every citizen. This is how the inequality arising from private ownership of land could be countered.
Since the nineteenth century, the land value tax has been implemented in (parts of) different countries like Denmark, Canada, Australia, Estonia and Kenya, although nowhere for such a high rate as George had suggested. And to my surprise, there still turns out to be an active worldwide movement of so-called Georgists who argue in favor of the land value tax. The most recent success occurred in Germany, where in the federal state of Baden-Württemberg the Bodenwertsteuer (the German term for land value tax) was passed in 2020.
I’m curious: could we find in George’s book, which has been gathering dust on my bookshelves for so long, an answer for some urgent problems of our time, such as the housing crisis and the increasing economic inequality?
Back To The Beginning
To be able to answer this question, Bas Jacobs, professor in economics and public finance at Vrije Universiteit Amsterdam, sends me back to the beginning. We should be talking about taxes much more often, Jacobs said. “On Budget Day, the newspapers are full of what the government plans to spend money on. But nobody talks about how they want to raise that money. And that choice is just as political.”
Meanwhile, we pay taxes all the time. We pay an income tax on our salary, VAT on the food we buy in the supermarket, on movie tickets and on new clothes. With all this tax money, the government pays for public services, such as roads, schools, social security, and health care.
Some taxes are meant to influence our behavior: like extra taxes on tobacco and alcohol to make people consume less of it. The government can also lower tax rates to encourage desirable behavior, such as a lower VAT on vegetables and fruits.
But taxes can also have unintended or unwanted effects, Jacobs explains. Because of the harmful effects on the economy, he calls taxation a necessary evil. “Take for instance the income tax. It makes it less profitable for people to work, invest and do business. So the more tax you have to pay, the lesser you are inclined to develop meaningful economic activities.” And this fact is a thorn in the side of economists.
Economists' Favorite Tax
A land value tax does not have this disadvantage because of the unique character of land: the amount is fixed, you can’t make more off it. This means that if demand increases, supply will not follow. For the same reason, the levying of a tax has no effect whatsoever on the supply: you cannot produce less land to be taxed less. Neither can you move your land to a tax haven.
That is why even Milton Friedman, champion of free market capitalism and not exactly a fan of taxes, called the land value tax “the least bad tax.”
A tax on land is much more efficient than the real estate property tax (OZB), which also taxes the value of the house. The reason is that, unlike with land, you can build more or less houses. Now, if you have your house renovated or you build a new house on an undeveloped piece of land, you are going to pay higher taxes. That’s a perverse incentive, because the government wants more houses to be built. So why would they tax this?
And there is more to be said in favor of a land value tax. “As an economist you learn that you always have to make a choice between either efficient or fair,” says Professor of Economics at the Rijksuniversiteit Groningen, Maarten Allers. “A tax on land is the only exception to this: it is both. And that’s why it’s very popular with economists.”
Landowners Get Rich While Sleeping
What makes a land value tax fair? It prevents landowners from getting rich while they sleep, explains Allers. Whoever owns a house knows how quickly its value can rise. Or actually, the value of the land on which the house stands, because this provides for most of the increase. This is partly due to scarcity. As I already explained, extra land cannot be produced; so as long as the population grows, scarcity increases.
But what mainly determines the value of the land on which a house stands is its location. The more facilities and economic possibilities in the area, the more expensive the land. This is demonstrated in the big price difference between a comparable homes in Appingedam or Amsterdam. The key question is: who creates this value? Not the landowner, but the society. In Maastricht, for example, part of the highway got tunneled, which cost the government about 725 million euros. The tunneling improved the quality of life in the immediate area, as a result of which house prices have risen by about 220 million euros in total, according to a conservative estimate by Statistics Netherlands. This profit did not go back to the government which had made the investment. It went straight to the homeowners. A nice present, paid for with our tax money.
Economists call this unearned income or economic rent. The British Conservative politician Winston Churchill already pointed out the injustice of it in 1909. While streets and railways are being constructed, the landlord sits still, he said to the House of Commons. “To not one of those improvements does the land monopolist, as a land monopolist, contribute, and yet by every one of them the value of his land is sensibly enhanced.”
According to professor Bas Jacobs, an increasing proportion of all income is unearned. As a result, inequality is increasing. He himself has “earned” more over the past ten years with the increase in the value of his house then with his work as a professor. And for this, he didn’t have to do any work or put in any effort. And the craziest thing is: unlike with his university salary, he also does not have to pay any taxes on it. “This would be the least harmful tax: on income that you did not have to work for.”
Land Tax Can Benefit Everyone
With a land tax, not only can the government (partly) recoup investment, such in the case of the tunneling in Maastricht shows, but it can also invest the proceeds in new facilities. For example, it could make public transport profitable, instead of having to subsidize it annually from the state coffers, says British researcher Andrew Purves. Purves analyzed the economic success of Hong Kong and Singapore, and concluded that it can largely be explained by the fact that both derive a substantial amount of income from the value of land. In Hong Kong it amounts to nearly 30 percent of total government revenue, thus keeping other taxes low.
“In other countries, private landowners have been able to make a lot of profit when the railroads were built, because adjacent land suddenly became much more valuable. But because in Hong Kong the land is owned by the state, they are able to use that increased value to finance the railways.’ The operation of the railways today is still, almost fifty years after its construction, profitable for the government, says Purves. And as Henry George already knew in the nineteenth century, you don’t need to expropriate all land to achieve the same effect,” explains Purves. “You can also achieve this with a land value tax.”
It’s rule number 6 of The Landlord’s Game:
- As soon as there is enough money in the community treasury, the water and electricity companies and the rail stations are bought up. Henceforth, they are free to land on. Just like the university, which replaces the “Go To Jail” squre. The prison is abolished.
Which Rules Lead To Real Equality?
Still, during our game of Monopoly, according to the alternative rules, Miran and Tinus remain extremely rich, while I can barely keep my head above water. It turns out I overlooked a rule: that you can never go bankrupt. If your throw takes you to a property you can’t afford, you just go back to the nearest corner square. For your next turn, you roll the dice until you land on a square that you can afford.
With this rule the very last bit of excitement has disappeared from the game. The Landlord’s Game might be more equal, but turns out to be even more boring than Monopoly.
Still, I think it’s an interesting question: which game rules lead to equality? Not only in Monopoly, but also in the “real world.” Because that is in fact what taxes are: the rules of the game that we agree upon with each other.
The chance that we will change the rules of the game in the Netherlands is not that big, professor Maarten Allers thinks. He’s been arguing for a long time for the introduction of a land value tax, but has no illusions. “It will cause a lot of resistance. Politicians don’t dare to burn their fingers on this idea.”
Why Is The Land Value Tax Not Yet A Reality?
In Baden-Württemberg, Germany, Dirk Löhr (professor of Taxes at the Trier University of Applied Sciences) campaigned more than ten years for the recently introduced Bodenwertsteuer. Despite his many years of dedication, he realizes that the practical effects of the measure will be negligible. “The tax rate is far too low for that,” he says.
Yet its symbolic significance to him is enormous because it does ensure that at least a small part of the investment by the community comes back to the community, rather than ending up in the pockets of the landowner.
It wouldn’t have been enough for my grandfather, I’m afraid. He was very principaled and therefore also somewhat stubborn. When a reporter from the Dagblad for Noord-Limburg asked him in 1975
if he really believed that his theory could become a reality, my grandfather answered in the affirmative: “It took a while before slavery was abolished. To this end, the people had to be first educated to see slavery as an injustice. This should also happen now with our ideas.” As far as he was concerned, there was no arguing about the correctness of his ideas. “I have never met anyone who could say anything against it,” he said in another interview.
And it is indeed strange, says economics professor Dirk Bezemer, that the land value tax has not already been introduced all over the world. “A tax on land can make a significant contribution to solving the problem of the housing shortage and tackling wealth inequality.
This makes it as urgent as it was in the time of Henry George. Moreover, it is simple to realize.”
Are there actually economists who think a land value tax is a bad idea, I ask him. “I do not know any. But if you find one do let me know.”
The only question that remains is: how is it possible that no politician in The Netherlands is in favor of land tax?
The author received financial support to write this article from the Dutch Support Fund for Freelance journalists.