REPORT dated 4 October 1999 to
THE PORTFOLIO COMMITTEE ON FINANCE,
CAPE TOWN
by Godfrey R. A. Dunkley,
Cape Town,
the Immediate Past President of 'The
International Union for Land Value Taxation and Free Trade'.
Dear Sirs,
The views expressed are my own,
whilst conforming to the objectives and beliefs of the International Union and
all its affiliates and also based upon the works of Henry George and the
teachings of the School of Economic Science, London.
PREAMBLE
A Land Tax is not merely a fiscal
matter. It is not about collecting finance for some local rural administration
areas, nor even about raising additional revenue for central government. A land
tax is rightfully a user charge arising from the privilege of excluding others
from enjoying the benefits of tenure and use of selected parcels of land. The
value of that privilege will vary from one site to another. It is determined in
a free market according to a number of factors provided jointly by nature and
the community, past and present. Location relative to infrastructure and
markets is a major consideration.
Prime sites and mineral rich land
provide an unearned advantage over marginal sites and this advantage is
expressed in market value applied to the land only, excluding improvements.
Those citizens, who, under the
protection of law, reap the largest benefits from land tenure or ownership,
should rightfully contribute the largest share towards the defence and
stability of the nation. They have the most to loose.
Traditionally, according to most
original scriptures and recorded history, land tenure was accompanied by
corresponding duties to the community and government. These duties included
defence, keeping the peace and caring for those unable to care for themselves.
Security of tenure was for the purpose of production, not for speculative
withholding at the expense of others.
All wealth, by definition, is
produced by the application of labour to or on land. Those who are deprived of
access to land are automatically deprived of the opportunity to provide for
themselves and their families. Their only alternative is to seek employment.
These points are so fundamental that
they merit some elaboration: Land may have intrinsic value arising from a
number of sources. It may have agricultural potential, mineral potential, be
endowed with water, scenic beauty, have value conferred upon it by the
community around it in terms of infrastructure, social services, access to
employment, markets, population density etc.
Some land, particularly in rural
areas, is so marginal in its intrinsic value, that any man or woman using it
may only just be able to produce enough on it to sustain themselves and their
families. If they then have imposed upon their income any taxes, such as VAT or
income tax, they will not be able to sustain life and will abandon the marginal
land and move in towards the more valuable land in the hope of finding
employment. This leads to the universal phenomenon of urbanisation, a force
that cannot be controlled unless it is addressed at this fundamental level. It
is this
effect of taxation at the margin
that we refer to as the "tax wedge".
Without going into too much further
detail, one can easily see how a vicious circle can be set up. Abandoning the
margin reduces the total productivity and the potential tax net. In order to
maintain revenue, the authorities increase the tax rates. This further reduces
the margin.
The injudicious imposition of a land
tax at the margin could aggravate the effect of the tax wedge described above.
On the other hand, I believe that the proper application of a land tax would
present the opportunity to reverse the cycle described above and ameliorate the
negative aspects of urbanisation.
A national land value tax or user
charge is therefore the only natural and logical form of taxation. It will
result in equity and justice for all. Such a land tax or user charge should be
designed to collect most, if not all, of the annual rent of all land irrespective
of its current or intended use, provided it has a rent value in a free market.
The revenue thus raised will allow
for removal of the tax wedge that separates labour from employment. This tax
wedge is a collection of taxes that do not reduce to zero at the margin of
production and, by increasing the cost of labour, are a major cause of
unemployment. The most destructive of these are VAT, PAYE or SITE and fuel tax.
Not only does this wedge of taxes
results in marginal land being put out of production, but it introduces a
further problem, namely, it introduces a class of marginal labour even on prime
land.
Marginal labour applies to all
levels of employment where the cost of employment is equal to their productive
return. Impose on this any portion of the tax wedge and they becoming too
expensive to employ. Proof of this is readily observable throughout the
country, particularly in the former independent homelands where taxation has
closed many industries down. Thousands of unemployed workers have no other
employment opportunities to turn to nor is there land available for
self-employment.
The total amount of revenue
available for collection as a land tax or user charge will be larger than that
available under the present system of taxation. The former encourages economic
growth but the tax wedge is highly destructive. Meanwhile land lies idle for
the want of labour and labour is idle for the want of land
SUMMARY OF BENEFITS
Many benefits will arise from
collecting a land value tax or user charge for the exclusive use of land,
together with the removal of the tax wedge. These can be summarised as follows;
· Removing tax from labour will provide work opportunities for the
unemployed.
· Taxing land will reduce speculative withholding and provide new
access to land.
· Improved employment will relieve poverty and its resultant
misery.
· Increased employment will substantially reduce the level of
crime and civil unrest.
· Steady employment will restore dignity previously destroyed by
economic in equities.
· Reduce tax evasion.
· Help to restore law and order.
· Conform to justice and the provisions of the Constitutions.
Most of these are obvious and
require little elaboration.
PROPOSED LEGISLATION
Any new legislation relating to land
use and taxation should comply with the appropriate clauses in The Constitution
of the Republic of South Africa, 1996.
Significant here are the following
clauses in the Preamble and Founding Provisions of the Constitution:
· South Africa belongs to all who live in it.
· Human dignity, the achievement of equality and the advancement
of human rights and freedoms.
· There is a common South African citizenship. All citizens are -
equally entitled to the rights, privileges and benefits of citizenship.
In economic terms the Constitution
would imply that all citizens have an equal claim to the collective rent of
land in South Africa. It would not be practical for them all to have access to
the same pieces of prime land. Those who are deprived of access to prime land
have a duty to protect the right of tenure of others to that land, provided the
rent is collected for the use of society.
Conversely, those who are deprived
of all access to economically viable land have no duty to contribute to
taxation in any form. It is also in the overall interest of those on prime land
to have the state subsidise those who attempt to make a living on sub-marginal
land, thus reducing the incentive to migrate to urban land as squatters.
It is thus the duty of legislators
to pass suitable legislation at all appropriate levels and divisions of
government to enable the intent of the Constitution to be respected. This can
only be achieved by eliminating the tax wedge and collecting all revenue from
the annual rent of land.
EIGHTH INTERIM REPORT
The original terms of reference
given to the Commission of Inquiry were "To inquire into the
appropriateness and efficiency of the present tax system and make
recommendations on its improvement".
In 1995 the Minister of Land Affairs
requested through the Minister of Finance that the Commission give attention to
the question of the introduction of a land tax in South Africa. However their
investigation was narrowed down to an insignificant portion of the advantages
to be derived from this form of change in taxation.
While the report has been limited to
rural areas, I strongly contend that the proper principles of land taxation
could be applied with great benefit to society across the whole spectrum of
land usage in South Africa. It would not however be appropriate to pursue this
issue at any length in the present submission, so I shall confine my comments
and recommendations to the ground covered by the Subcommittee.
I strongly support the
recommendations of the Subcommittee that a land tax be introduced and most
importantly, that the facilities for administering such a tax in South Africa
should be developed. This would include comprehensive surveying of boundaries,
proper record keeping, regular revaluation of land etc.
It seems that the Subcommittee has
recognised the effect of the tax wedge at the margin and seeks to ameliorate
this by treating the tax as a provisional tax in terms of the fourth schedule.
(230.26). While this is a very pragmatic proposal it does not go far enough in
removing the tax wedge at the margin, since the current level of income tax at
the margin would still fully be in place. Some way must be found to reduce the
effect of income and other taxes such as VAT to zero at the margin. While the
short-term effect may be a small reduction of tax revenue, the longer term will
result in more extensive land use (i.e. widen the margin), greater productivity
and employment and wider tax net with increased tax revenues. The Subcommittee
needs to apply their expertise and resources to this specific problem.
At the other end of the scale, on
agricultural land adjacent to urban areas where market values may be higher
because of speculative pressures, the Subcommittee support using a user value
(230.22) so as not to discourage agricultural activity. I would, however, see
"market value as being the natural measure of the intrinsic land value.
This increase in market value and tendency to change the use of land (from
agricultural) is a natural consequence of economic development and cannot
really be artificially stopped in the long term. I suggest that the use of
market values (on land values, not improvements) be phased in over a period of
five to ten years.
Furthermore, when looking at the
more valuable land (i.e. away from the margin), one sees that part of the
income to the landowner derives effortlessly from the intrinsic land value,
rather than solely from the efforts of the owner. There is an opportunity for
the land tax to actually increase the total tax revenue, rather than just be
treated as provisional income tax. This could more than offset any loss of
revenue at the margin as outlined above. Again, the Subcommittee should apply
their expertise to this question. One
suggestion would be some sort of sliding scale resulting in reduced overall
taxes at the marginal land and increased overall taxes at the more valuable
sites.
CONSIDERATIONS ON A RURAL LAND TAX
If the decision is made to settle
for second best in the form of a land value tax on rural land only, then there
are a number of points to be considered.
1. Tax base; land values are highly dependent on water rights so
these should be included.
2. Flat rating, i.e. including improvements, has been proved to be
the worst system and should not even be contemplated. There is a mountain of
evidence to prove this.
3. Method; market value should be used in all cases. This will
quickly bring market values down to realistic levels, as the speculators will
also have to pay.
4. Tax rate; this should be established at a national level of 2%.
Exceptional cases could be given rebates or deferred payment.
5. The rates liability should be offset against taxes that form
part of the tax wedge only. For instance employers could be allowed a
percentage discount or rebate on their wage bills. This would compensate for
VAT and SITE thereby reducing the cost of labour. This would encourage
employment.
6. Capping should be discouraged and only allowed in the first
five-year period.
FINAL REMARKS
If the Subcommittee wishes to pursue
these suggestions, which would serve to refine of fine tune their
recommendation there are a number of international experts who could be
approached for advice. I would happily set up contact between the Subcommittee
and these experts if so desired.
I will be available for an oral
presentation if required.
Yours faithfully,
G R A Dunkley
ATTACHMENTS:
"Land Value Taxation around the
World" Robert V. Andelson
"That All May Live - Guidelines
Towards a Better Society." Godfrey
Dunkley
"Land Tenure: A Time Bomb
Ticking in South Africa" Godfrey
Dunkley
A copy of the "Economic
Monitor"
Several copies of "Land and
Liberty"