Stewardship Economy
 
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Would it work?

What happens if the valuation is wrong?

If the stewardship fee is set at the wrong level, surely the land will not be used efficiently?  If it is set too high, the land will lie idle; if it is set too low, the owner will get an unwarranted subsidy compared with competitors and will lack the incentive to use it to the full.  Errors in valuation distort land use.

This is a serious question that advocates of Land Value Taxation have sometimes failed to take sufficiently seriously.  It applies particularly to proposals that would set the stewardship fee for a plot of land on the basis of the opinion of a state-appointed valuer. 

If the fee were to be set higher than the market rent then it would not be profitable to use the site.   Setting stewardship fees too high would damage the economy, and this could be a real danger during the downswing of an economic cycle when market rents are falling.  If these are set too low the revenue from stewardship fees would be reduced and there is also a risk that purchasers would offer illegal payments to secure stewardship of the site.

It is important that the stewardship fee is determined, wherever possible, by the market not by a valuer;  and that it is flexible, able to fall or rise depending on the state of the general economy or on local factors.

The annual re-valuation using comparables that have been exposed to the market can never be perfect – but neither is an ownership economy, which has its own ways of distorting land use.  And the steward can always appeal to valuation by the market.

Is it possible to value blocks of offices and flats?

The task for a valuer in the new land market is to estimate the Depreciated Replacement Cost of the entire building and then to apportion this amongst the various interests in the building.  The market rent of each interest is then established independently in the market, and the market rent of the whole site is the sum of the market rents of each of these interests.  This is described in more detail elsewhere (The How? Supplement: Chapter 6).  As freeholds and head leases become more of a liability than an asset they tend to be passed on to the occupying lease-holders, and the ownership structure of the property becomes more streamlined.

Wouldn’t it destroy the land market?

If 100 per cent of the market rent is collected as stewardship fees, the market value of land falls to zero.  How is stewardship transferred from one person to another?  Surely the land market will be destroyed?

Land Value Taxes have been successfully assessed and collected in ownership economies at up to 25 per cent of market rent, calculated as a proportion of either the market value of the land or its market rent.

      Different arrangements are needed when 100 per cent of the market rent is collected, as the market value of land in a stewardship economy is indeed zero. 

      The land market as we know it, in the form of direct purchases by a buyer from a seller, does not exist in a stewardship economy.  It is replaced by a new land market, in which the Land Stewardship Trust  transfers properties at auction (Page 115-118).  This is more open, transparent and efficient  than property markets in ownership economies.

Won’t it erode the tax base?

If the market value of land is zero, what is there to tax?

The stewardship fee is determined in a new land market (Page 115-118).  It depends on the gross market rent, not the market value, of land.

Won’t landowners go on strike?

The experience of taxes on the increase in land value that occurs when planning permission is granted for developmen t , like the notorious Development Land Tax, led to landowners boycotting development and waiting for the government to fall and the tax to be removed.  Although stewardship is clearly different isn’t the proposed transition, with stewardship fees equal to the increase in market rent, going to run into the same problems?

There are two big differences between the transition mechanism and Development Land Tax.  One is that it applies to all land, not just to land under development.  The other is that the market rent is collected on an ongoing monthly basis, not as a single payment at the time of disposal or development.  There is nothing to gain from delay.

Is rent really a surplus?

Adam Smith (1776 Volume I Book I Chapter XI: 217) pointed out that, while high wages and profits cause the price of commodities to be high, it is the high price of commodities that causes high rents.  David Ricardo was clear that ‘corn is not high because a rent is paid but a rent is paid because corn is high’ (1817: Chapter II: 62) – and this is accepted by orthodox economists (Paul Samuelson & William Nordhaus 1992:265).  The idea that rent is a surplus can, however, feel counterintuitive (The Why? Supplement Chapter 8).

      The reason is that, from the perspective of those of us who pay it, rent is not a ‘surplus’ but a fixed and unavoidable cost like any other.  The trader in the city centre has to pay the rent up front, and then struggle to make a profit or move to a cheaper site.  In a similar way the rent or purchase price of a house is, from the householders point of view, a ‘given’ that determines where they can live.

      But what is true when seen from the perspective of an individual is not necessarily true when seen from the perspective of the whole – to argue that way is the fallacy of composition.  Looking at the economy as a whole it is clear that rent is a price  that depends on the supply and demand for land – and demand will depend on the profit that the site could be expected to generate or the enjoyment that the owner gets from it. If traders find rents are higher than their profits they will move away and rents will fall with the level of demand.

Is the supply of land really fixed (price-inelastic)?

If the price of a manufactured good rises, producers will supply more.  Much of the reason for the price-inelasticity of land is that ‘they ain’t making it no more’ (attributed to Mark Twain).

      Of course it is possible to point to examples where land is being created or discovered – terra firma comes and goes at its boundaries with the sea, and new aspects of the natural world (radio spectrum and satellite orbits for example) are recognised as science and technology advances.  But these are of small importance when compared with the amount of land that is always there.

      And the price-inelasticity of land does not depend solely on it being more-or-less fixed in amount.  Inelasticity means that the amount supplied on the market does not increase or decrease as its price rises or falls.

      The amount of land available on the market does change.  Sometimes there are few houses on the market; sometimes there is a glut.  But the amount of land offered on the market is related to a complex set of factors including the rate of increase, or decrease, in prices – not to the price itself.

      For the many people and organisations that own land because they need it for living or production, high land prices are no incentive to sell, as they would need to buy somewhere else instead.  And for those who have invested in land, a higher price is usually a signal to hold on to their investment, not to sell it – except at the top of the cycle when there are fears that prices may fall.  The supply of land on the market is determined by confidence and expectations and does not vary directly with price – it is price-inelastic.


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