How to Give Back ALL the Land

A Land Value Tax unites labour & capital against rent-seeking, providing a path towards a new social contract

This article was originally published in News24 Business under the title “Land value tax is SAs best chance at land reform”.

Civil instability unseen since Apartheid is ushering in a presumptive coalition government in 2024. The coalition party which brings the ANC over the 50% threshold will decide our future. Without a new and viable social contract, that party may well be populist—the Marxist-Lennist EFF is now the third largest part. As land remains central in South Africa’s political consciousness, an alternative social contract must centre land reparations.

How can all the land be given back? A constitutional amendment is unviable and unmerited. South Africa already has a highly efficient system of expropriation without compensation: taxation. We already have an efficient system of redistribution: grants. A land value tax (LVT), a special form of wealth tax, solves some of the major inefficiencies and inequities of South Africa's land reform and tax systems.

An LVT taxes the value of a property as if there were no improvements on the property: no buildings, no tilled soil, nothing; i.e. the value of the land alone is taxed. At 10% a year, an LVT earmarked for a Land Reparations Dividend would redistribute the value of all the nation’s land in just over 10 years. A guaranteed lifelong Land Reparations Dividend could even be borrowed against to buy secure assets—including land.  

27% of South African infants are in such poor health and so malnourished that they do not grow to proper height. Grants are the lowest-cost bulwark against this tragedy—mothers know what their children need better than bureaucrats. The rage of a parent who cannot feed their children is righteous, with self-evident implications for national stability.

Raising the overall tax burden is unrealistic (currently at 28% of GDP). Yet, efficient and growth-inducing LVT (progressively implemented) could replace failed and costly attempts at reparations, potentially lowering the tax-to-GDP ratio in the long run.

What’s so special about the LVT?

Property tax and transfer duties tax the sum of improvements upon the land (buildings, fertilised soil, shops, etc.) and the land itself (i.e. property tax = improvement tax + LVT). Taxing land at a significantly higher rate through an LVT would replace all property taxes. Taxing the value of the land regardless of how it is used incentivises landowners to use their land productively to offset the LVT, with no tax paid on said improvements.

Removing improvement tax leads to more and cheaper improvements: more crops for consumers, more housing for renters, more wild animal stocks for tourists, more fixed capital for industry, etc. The primary losers would be those not contributing to the nation's improvement, i.e., those hoarding unused and low-productivity land.

When you tax most things, such as fuel, the price goes up. At this higher price, people can afford less of it, and so less is consumed and produced. Economic growth—the only known means of long-run poverty reduction—is produced by the factors of production: land, labour, capital, and technology. If you tax any non-land factor of production, the price of the factor goes up, and less of that factor is supplied, which typically reduces economic growth. There is one miraculous exception to this: land.

This is because the quantity of land is fixed—suppliers (owners) of land cannot reduce the supply of land in response to increasing prices from taxation. When you tax land, the price declines as ownership creates a long-run tax liability.

Incredibly, this price decline reduces rental costs as renters are “paying less for their landlord's mortgage”. Moreover, as development is now tax-free, the supply of housing rapidly increases, further reducing the cost of renting. As such, the cost of LVT falls only on landowners.

As widely accepted by economists, this “inelasticity of supply” makes LVT the most efficient tax, with little to no “deadweight loss”. As per the Davis Tax Commission:

“A land tax is generally considered to be the least distortive of all taxes and thus the least harmful to economic growth.”

How is the value of land determined? Location, location, location. When others improve their land, when municipal services are improved, when greater economic activity occurs near the land, the value of the land increases. This is why land is so speculated upon—land owners merely need to wait for others to improve adjacent land for unearned profits to accrue.

This speculation creates property cycles and housing bubbles which LVT smoothes, improving housing market and macroeconomic stability. NIMBYs might think that a block of flats next door is bad for the value of their land. Yet, this is untrue in aggregate—denser cities have higher land values and economic growth.

The remaining value of the land, such as the minerals it contains, the view to the ocean, the clean water it produces, are nature's endowment to a nation and not the privilege of any one person (the direct taxation of which I advocate for elsewhere). LVT is a tax on excluding others from nature's endowment to the nation, the nation itself, land. This is all the more required when the ownership of almost all South Africa’s land originates from well-documented asymmetric conflict, colonialism, and racial authoritarianism. 

Why is LVT more equitable than wholesale land reform?

Wholesale land reform has costs and inequities that make righting South Africa’s central injustice through such a process inappropriate. Unlike a tax at a defined rate per year, land reform creates the possibility of losing all one's land and the improvements in one go, i.e. confiscation. This reduces the incentive to improve one’s land (investment), the very thing which creates growth and employment.

Contrasting confiscation, LVT creates a predictable, stable, and efficient investment environment under the well-understood process of taxation. If you cannot afford to pay the tax due to transitory non-liquidity, banks lend more readily with land as security than any other asset. Otherwise, selling the land to someone who can create better value for the nation by improving the land (and can thus burden the tax) is a major upside of the LVT.

The focus on rural land under the status quo is especially misguided. The spoils of Apartheid and colonialism accumulated chiefly in cities, where the vast majority of non-mineral land value remains. The focus on rural land is perhaps why the two major attempts at LVT in democratic South Africa have failed (namely the Katz Commission and the 6^th (and penultimate) draft of the Reconstruction and Development Plan [s2.4.8]). Moreover, why should reparations only be granted to those with an identifiable and recorded forced removal when most South Africans suffered under white rule?

Comprehensive land reparations are particularly important for those living in the former homelands who typically cannot identify the land from which their ancestors were originally removed.  Those whose ancestors were disenfranchised by Ngcayechibi's War (1877-1879) have had as little restitution as those who lost their land to the Group Areas Act (1950).

Modern farming, under climate change and the whims of world commodity markets, is incredibly challenging, low profit (contributing 2.5% of GDP), and vital for national food security and rural employment. Further, high-stakes confiscatory land claims inevitably end in extraordinarily costly and prolonged court cases. Lastly, the government has already redistributed 24% of all farmland, and will likely reach its 2030 target of 30%.

LVT is also exceptional for its low collection cost and publicly transparent valuation. As ownership is easily identified, evasion and offshoring are nearly impossible.

Should municipalities receive a fraction of the LVT, this would reimburse the public-good value of service delivery which increases land values, now captured by landowners. This would incentivise municipalities to eliminate antidevelopment and anti-density zoning laws (i.e. almost all non-multiuse zoning categories).

This zoning rationalisation should include rewriting national heritage laws which trap neighbourhoods in a low-density, high-cost stasis. The heritage authorities should have a moderate budget of yearly LVT waivers to quantify and make explicit the cost to the fiscus of heritage protection. Beyond that, individuals or private interest groups who feel strongly about preserving a building because it aligns with their heritage values, can pay up and buy that building instead of externalising the cost to South Africans.

Lastly, affirmative action has also not amounted to reparations. As proven by SA's world-leading unemployment, affirmative action positions remain inaccessible to the vast majority of South Africans. This is so as affirmative action does not address the primary labour scarring of Apartheid—minuscule investment in human capital (education), particularly in the homelands, as I write elsewhere. 

Is the LVT feasible?

SA tax rates are high—tax to GDP is 26%+ in SA compared to the average for upper middle-income countries of 18%. Increasing total tax collection is likely to reduce economic activity so much as to reduce long-run total revenue collection. Even though the LVT is the most efficient tax, it is not efficient enough to overcome this. The LVT should thus replace inefficient taxes – starting with property tax and transfer duty – rather than increasing total revenue collection. Transfer duty is particularly punitive—restricting the movement of people to better opportunities.

The budgetary shortfall of earmarking the LVT to the Land Reparations Dividend should ideally be financed by reducing the massive public wage bill (which has risen, in real terms, by 60%+ in 10 years) and ceasing failed attempts at reparations. This is outside of current political possibility, but politics is shifting rapidly, as I highlight in the introduction. Tangible and meaningful land reparations might change how South Africans experience the post-apartheid social contract. Lastly, the buy-in of taxpayers is only plausible if the total tax burden is not set to rise.

Why don’t we have LVT? Is it because the market value of land cannot be determined separately from the value of the improvements?

Parts of South Africa were at the forefront of implementing LVTs, as early as 1918 and until at least 1979. This was primarily with the intent to increase the development of the Transvaal, with great success. Not only is land valuation (at market prices) possible, but the City Valuer of Johannesberg, J. McCulloch, circa 1978, estimated that shifting from LVT to property tax would increase the cost to value property by 40%. This is because accurately valuing buildings, for example, bathroom renovations, is more challenging as values fluctuate more rapidly than land value. With the advent of computer-assisted mass appraisal, the relative cost has shrunk further. (McCulloch also attributed the absence of empty plots and decaying buildings in Johannesburg to the LVT, a far cry from today’s rapidly decaying Johannesburg.)

Most Government land and trust land must be liable to pay the LVT for it to transform the development trajectory of South Africa. There are certainly some necessary LVT exemptions, such as schools and hospitals, but the list is narrow.

The history of land reform in Africa is a tale of unintended consequences entrenching poverty. In contrast, LVT has a proven track record, even beyond the Transvaal. The Meiji restoration in Japan initiated rapid industrialisation, South Korea’s “public concept of private land”, and Singapore’s market price of public land have all had exceptional effects on growth.  On both ends of the political spectrum, the list of economists and political philosophers who support the LVT is nearly endless.

Improving tax efficiency & prioritising economic growth are seldom political bedfellows with land reparations. Yet, the LVT opens the possibility of rejigging the economy to support investment in both labour and capital while rewriting our fragile social contract to create a politically stable South Africa. This is only possible once the true nature of land is understood as a nation’s fixed natural endowment,  not capital. We must desist from taxing that which creates prosperity. We must right the economic wrongs of our history. LVT provides a pathway to prosperity politics.