An enduring solution to poverty and inequality: Site Value Tax.

By Emer ó Siochrú.

The design and manner of introduction of the household charge exposed the mindset of the Department of Finance which believes that simplicity (€100 per dwelling owner with almost no exceptions) was more important than fairness for public compliance with a new tax.  It appears Irish people are not that simple-minded and have demanded instead that their acceptance of a new tax depends instead on its equity and effectiveness.

Land and Site Value Tax is the inheritor of a long and honorable tradition of land reform in Ireland; it is not a new idea but a forgotten idea.  James Fintan Lawlor, a leading member of Young Ireland in the 1848 rebellions wrote “I hold and maintain that the entire soil of a country belongs of right to the entire people of that country, and is the lawful property, not of any one class, but of the nation at large, in full effective possession” and that the people should decide that rents  “should be paid to themselves, the people, for public purposes, and for behoof and benefit of them, the entire  general people”.

Lawlor in turn influenced Michael Davitt who led the land struggle at the end of the 19th century.  Davitt was  influenced by the American economic reformer, Henry George, writer of the best-selling book Progress and Poverty  which held that the ownership of land was of less importance than the nature of its ownership.  Henry George did not believe that State ownership of the land was necessary or even desirable and in this he differed markedly from Socialists.  According to George, by fairly taxing the unearned income from land, the community could recapture that part which was its common inheritance and in so doing entirely eliminate the need for other taxes on productive activity. Henry George visited Ireland during the land struggles of the 1880s and found vindication for his theories in the the call for ‘tenant right’  or the three Fs of  Fair rent, Fixity of tenure and Free sale of tenant improvements.  Michael Davitt wrote in 1902 that he would … abolish land monopoly by simply taxing all land, exclusive of improvements, up to its full value…In other words, I would recognise private property in the results of labour, and not in land.  The land struggle started out well with a nuanced understanding of the nature of land ownership and how rights, responsibilities and revenues might be most efficiently and equitably assigned.   But before long tenant ‘right to buy’ became the single dominating issue and the interests of others ignored.  Davitt feared that  “increasing the number of those holding private property in land”  is “simply landlordism in another form”.  He also worried  that  peasant proprietorship “excludes the (agricultural) labourers from all hope of being able to elevate themselves from their present degraded condition”.

The Land Act of 1903 set in place the process of redistribution of farmland from the mainly Anglo-Irish landlords to their mainly Catholic head tenants by compulsory acquisition or its threat.  Whereas in 1870 only three percent of Irish farmers owned their land, by 1908, this figure was 50 percent. By the early 1920s, the figure was at 70 percent. The Congested Districts Board was then set up to consolidate fragmented landholdings of the ‘clachan’ villagers into the isolated farmhouses that many rural dwellers now insist are the traditional settlement pattern. Pádraig Pearse, writing after the major part of the land redistribution had been accomplished, plainly felt that the job was incomplete and supported Lalor’s call for “land for the people and not just for the farmers”.  The Land Commission of the new Free State and later Republic worked to little effect into the 1960s to increase agricultural productivity by acquiring under-performing farmers’ land to transfer to more efficient or more deserving farmers.  It was a highly politicised process in which Cumann na nGadheal / Fine Gael and Fianna Fáil failed to find an equitable and efficient system to apportion the nation’s land.  In a system where apportioning rights was restricted to the blunt instrument of ownership and possession of land on a finite island, only wide-scale emigration of the disinherited underwrote such redistribution as was possible.   The land issue had apparently been solved insofar as the problem had changed to that of emigration and perennial under-development.

It was 50 years before the land question was addressed again by the Irish economist Raymond Crotty in his largely forgotten book Irish Agricultural Production, in 1966.  Crotty’s first love was farming and he only took up economics to understand why the conventional agricultural advice yielded such disappointing results. Challenging received wisdom, Crotty sought out the data to develop his own theories of Irish economic development from first principles.  He concluded finally that the land vested in the occupying farmers by the various Land acts was on “exceedingly favourable” terms and this fact was the root cause of the under-development of Irish agricultural in later years:

“The decrease in farmers’ rental payments, which followed the fixing of judicial rents and the vesting of property in the tenants following upon reductions brought about by the organised agitation of the Land League, gave grounds for expecting that “the magic of property” would “turn land into gold”.

Irish farmers did not strive to maximise the productivity of their land by hiring and investing: it was more profitable and less risky for them to let the land do the work fattening cattle and sheep for sale on the hoof.  The low level of farm output contrasted sharply with other similar countries such as Denmark where many more people worked the land and processed the output, and where wages and living conditions were considerably higher than in Ireland.

The measure Crotty proposed to rectify this state of affairs was an annual tax on farm land based on its full conacre rental value. Crotty believed that prioritising the welfare of land-owners over the welfare of the people of Ireland as  a whole was morally indefensible and economically damaging. Raymond Crotty introduced his proposal for a land-tax with reference to its efficiency and equity, both imperatives that are relevant today.

An Irish land-tax could play two important roles.  Firstly, it could be the means of making the real cost of land explicit to users, thereby ensuring its economic utilisation.  Secondly, it could end the acute conflict, which has existed since the appropriation of clan lands in the seventeenth century, between the landed and non-landed interests.

He argued that if the revenue from the land taxes were used to reduce the cost of non-land resources such as labour and capital, more would be employed and the output per acre would be increased.  This is none other than a re-statement of a ‘tax-shift’ from goods such as wages to the use and abuse of commons resources that environmentalists now advocate.

The improvement of the conditions of 250,000 landless labourer families, many living in windowless hovels took some time to be recognised as a legitimate part of the land struggle.  It was only after the formation of a breakaway Irish Land and Labour Association (ILLA) that serious progress was made.  The ‘Labourers Act’ in 1906 provided large scale state funding for extensive agricultural labourer-owned cottages to be erected by the local County Councils. The compulsory surrender of an acre of choice land to each labourer who claimed it, was not welcomed by the new land-owning farmers. Their objections were overcome in the event, and over the next five years over 40,000  labourers ‘ cottages  were dotted along the roadsides of the rural countryside.  D. D. Sheehan maintained in 1921, that as a result of these housing acts the labourers,

“were no longer a people to be kicked and cuffed and ordered about by the schoneens and squireens of the district; they became a very worthy class indeed, to be courted and flattered at election times and wheedled with all sorts of fair promises of what could be done for them”.

That new found influence remains strong up to the present day, and not always in a good way.

As in the case of farmland redistribution, only some could benefit from this reform.  The poor of the urban slums gained nothing.  Dublin slum conditions were notorious in the developed world  but were seen as a social problem not as a political-economic issue.  Urban dwellers had to wait till the 1920-30s to leave the tenements to rent new flats and terraced houses built by the local authorities.  Rural dwellers acquired their homes for free or at very favourable rates a generation before urban dwellers could buy their local authority house.  It is only in this year of 2012 that apartment dwellers   rights equivalent to their rural forebears’ of 1906.

The distribution of property ownership continued to be held as the ultimate solution to social and housing problems to the point where the Irish taxation and planning systems were fully co-opted to facilitate it.  Taxes on home owners were abolished in the 1970s and  further incentives introduced to help Irish investors buy holiday homes and rental properties. Rural dwellers, who no longer laboured on farms but commuted to jobs in towns, used their political influence to establish the ‘right-to-sites’ i.e. to build family houses in non-zoned rural areas under the misnamed 2005 “Sustainable Rural Housing Guidelines’. The ‘right-to-sites’ was denied to the bloodlines of those who lived in compact settlements.  This injustice was compounded by tax transfers from urban dwellers to pay for the extra  costs of servicing this rural cohort.

The fortunes that were made by landowners of greenfield land zoned for development finally spurred the famous Kenny Report  in the early 1970s.  This expert group, true to form, recommended the  compulsory purchase by local authorities of development land at agricultural values plus 20%.  By this time the drawbacks of using the land-transfer mechanism were more apparent and the landowners (often the descendants of the beneficiaries of the Land Acts) more politically well-connected for the recommendations ever to be put into practice.  In any event, the economic recession in the 1980s led to a ‘temporary’ reduction in Capital Gains Tax on development-land sales.  The final growth ingredient that turned academically-challenged farmers’ sons and carpenters into masters of property empires, and the ordinary people of Ireland into debt slaves, was the adoption of the euro and cheap credit from the Irish banks.

Many distinguished economists have documented the series of events that led to the bank guarantee, the bail-out and the advent of the Troika to Ireland.  What has generally been missing from these accounts is the broad politico-economic perspective that gives the big story. Thankfully a few economists, like Henry George and Michael Davitt in the 19th century and Raymond Crotty in the last, have questioned orthodoxies to undercover the primal forces that are driving current epoch-changing events. Chief amongst these is Professor Michael Hudson, a scholar, writer and analyst with degrees in economics, philology and history.  In brief, his analysis is as follows:

“Whereas landed aristocracies in times past owned most of the land free and clear, property ownership has been democratized – on credit. Banks find their main business to be the financing of homeowners and commercial owners or absentee investors. The largest debt categories are real estate (mainly land) and basic infrastructure – the economy’s two largest asset categories. As rent-yielding assets, however, they (or at least, their economic rent) were widely expected to remain in the public domain.  The old landed fortunes have been transmuted into financial fortunes, receiving interest, dividends and financial gains in place of land rent. Finance is today’s major source of wealth and recipient of economic rent. Buyers bid against each other for bank loans to buy property that formerly was held free and clear. The winner is whoever agrees to pay the most rental income to the banks. This financialization of land ownership ends up transferring the expected rent to the bankers – and recently some of the site’s price gain as well”.

Rather than lifting an unfair burden on homeowners, the removal of domestic rates and reduction of other taxes on the ‘free lunch’ from the ownership of farm-land, real estate and development land has facilitated its transfer to the financial sector.  Professor James K Galbraith another independent-minded economist, confirmed that the gross inequality of the last 30 years can be fully accounted for by the enrichment of the financial sector. The distribution of the ownership of land from the Anglo-Irish aristocrats to the native tenants, without demanding that the unearned ‘economic rent’ element be paid to the State in trust for the people, sowed the seeds of our current predicament.  Michael Hudson’s remedy echoes that of Raymond Crotty:

“But not all taxes are bad. The classical free market economists endorsed taxes on unearned income: land rent and natural resources, monopoly rent and financial privilege. These categories of income have no counterpart in a cost of production undertaken by the rent recipient. The more that governments can shift the tax burden onto land and property, the lower housing prices will be – and the less governments will need to tax labour by income and sales taxes”.

To fluff the transformational opportunity to adopt a site-value tax for the want of proper understanding or the lure of short term political opportunism would be tragic.  It is irrelevant that the OECD supports a site-value tax,  that a property tax is demanded by that Troika and that the receipts may be used to repay speculating hedge-fund bondholders.  The end game of the current economic and financial system is in play.  If the State reasserts its right to all ‘economic rent’ and charges for the use of all natural and socially-created ‘commons’ beginning with the Site Value Tax, the property and other monopoly assets which the financiers may receive in repayment of their debt contrivances will be hollow shells.  The last words are Michael Hudson’s:

“Bankers back anti-government ideology because they want to obtain all of the untaxed rental revenue as interest. So taxes that otherwise would be paid to the government will be paid to the bankers. The result – what you’re seeing today in Europe and North America – is an economic grab that is in many ways like that which gave birth to European feudalism. But this time around it is financial, not military”.

Emer Ó Siochrú is a Director of the Smart Taxes Network and an Executive member at Feasta, the Foudation for the Economics of Sustainability.