Introduction and Implementation of a Federal Land Value Taxation Regime

Introduction and Implementation of a Federal Land Value Taxation Regime
by Maurie Fabrikant

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Preliminaries

I believe it is true to state that most of the wealth presently owned by persons – both corporate and natural – lies in:-

  • Real estate in Australia; this will be zoned as agricultural, residential, commercial or industrial, and
  • Shares in publicly-owned corporations that are registered in Australia’s states and territories.
  • More wealth – but – I believe – considerably less than that represented above – resides in privately-owned:-
  • Capital equipment, the purpose of which is to aid in earning income,
  • Copyrights, licenses and patents that protect the author/composer/inventor from competition from others wishing to “cash in” on the creative work of others, and
  • Other man-made articles – including works of art – the possession of which improves the owners’ standard of living.

I believe I’m correct in stating that the wealth that is represented by the items defined in the first group above will be very much reduced when FLVT has replaced all existing taxes, my reasons being:-

  • The purchase price of every natural resource will fall to a very small fraction of its present price – if not to zero – because the FLVT will demand the continuing periodic payment of an amount set by citizens generally in exchange for some citizen’s right to exclusive occupancy of that natural resource, and
  • Shares in most publicly-listed corporations will experience a substantial fall in their market price because – in most cases – the total wealth of those corporations includes ownership of natural resources.

Given the truth of the foregoing, an “overnight” introduction of FLVT would cause great financial disruption to many corporate and natural persons. For example, those who have taken a loan in order to purchase real estate and/or shares will probably discover that the amount outstanding is far greater than the selling price of the real estate and/or shares purchased, the site value (SV) component having collapsed due to the introduction of FLVT. Furthermore, those reliant on superannuation payments will find that their superannuation provider may no longer be able to make payments anywhere near as high as at present due to the collapse in both real estate and share prices.

Thus there must be some gradual phasing-in of FLVT – with an equally gradual phasing-out of present taxes – such that there is minimal – or, better, no – financial disruption to any citizen … nor to the government whose duty it is to continually provide the infrastructure and services citizens demand.

Introducing FLVT via a Phased-In Approach

NOTE that FLVT – payable as from some specified date – is applied only to those natural resources to which exclusive occupancy rights have been granted to a corporate or natural person. Physical sites – parcels of land – are the commonest form of such natural resources but there are others such as:-

  • Electromagnetic spectra for broadcasting advertising, entertainment, news and personal communications,
  • Fishing rights in public water-ways and grazing rights on public land,
  • Landing and take-off rights at public airports, and
  • Docking rights at public lake-, river- and sea-ports.

Gradually increasing collection of FLVT can be achieved via either of two extremes; namely,

  • Gradually increasing FLVT can be applied to all natural resources. Initially, a rate of, say, 5% of full FLVT may be applied, the FLVT rising in steps of, say, 5% every subsequent year; by this means, full FLVT would be received 20 years after its introduction, or
  • FLVT is applied at the full rate only when the ownership of a natural resource changes. This would insulate all present natural resource owners from FLVT until they chose to become the owner of some other natural resource. Because some natural resources may remain with the present owners for many years, it may take considerably more than 20 years before full FLVT is received from all natural resources. (NOTE that corporate persons do not have a limited life – as do natural persons – so some maximum time – perhaps 20 years – may be applied to those natural resources presently owned by corporate persons after which the full FLVT would be payable regardless of change of ownership.)

I believe that the first of these alternatives could cause considerable financial disruption, particularly for those who have large outstanding loans on natural resources and/or shares. It is for this reason that I believe it to be far preferable that the second alternative above is adopted instead.

Operations Required Prior to the Introduction of FLVT

Presently, all municipal governments maintain a database defining all natural resources within their jurisdiction, the great majority having been valued in the recent past. Exceptions would include those natural resources presently owned by those exempt from paying local government rates – for example, religious groups – and each of these would need to be valued based on the community-agreed zoning applied to that natural resource. The result would be that every natural resource would have a Site Value (SV) – expressed as a Purchase Price – associated with it.

Maps containing this information must be available for inspection by all citizens for at least one year prior to the date on which the FLVT is to be phased-in. They would be able to inspect – and compare – the data associated with all natural resources defined in the database. The data stored for each such natural resource must include – as a minimum – the following:-

  • Unique identification,
  • Zoning applied,
  • Total area; this would be expressed in square metres,
  • Frontage to a public right-of-way; this would be expressed in metres,
  • The identity of the present owner:-
  • if only one natural person, that person’s full name and residential address; or
  • if a partnership of natural persons, the full names and residential addresses of all; or
  • if a corporate person, the full name, ABN and registered address,
  • Valuation of the natural resource; this would be expressed – as at present – as a Purchase Price, and
  • Valuation per unit area; this would be expressed as the Purchase Price per square metre.

If a citizen discovered a large discrepancy – greater than, say, 10% – in the last data item immediately above – Valuation per unit area – when compared with a similarly-zoned – and similarly-sized – natural resource in the database, that citizen could request an explanation … and, perhaps, a revaluation of the natural resources involved. The intention of this is to ensure – so far as is possible – that the valuations of all natural resources are accurate as at that time.

Immediately after the date on which phasing-in of FLVT commences, each record in the database described above would have added to it the full FLVT applicable to that natural resource. In fact, this would be calculated as 5% of the Valuation; that is, the annual FLVT applicable to that natural resource would be equal to 5% of the Valuation of it.

(See Explanatory Note (a) below.)

Operations Required Following the Introduction of FLVT

NOTE that following the date when FLVT commences, those holding the title to a natural resource would no longer be termed “owners”. Instead, they would be termed “title-holders” … because citizens – generally – are the true owners of all natural resources, holding them – n a “collective” sense – for their own benefit and for the benefit of future human generations. A title-holder is simply a person – corporate or natural – who undertakes to pay – periodically – the full FLVT in exchange for the exclusive right to occupy that natural resource.

FLVT would become due and payable on every natural resource when some person – natural or corporate – wishes to assume the exclusive occupancy right to it. This may occur when one of the following occurs:-

  • The present title-holder no longer wishes to retain the right of exclusive occupancy to that natural resource, or
  • The present title-holder – a natural person – dies, or
  • The present title-holder – a corporate person – is wound-up.

(See Explanatory Note (b) below.)

When a present title-holder vacates a natural resource that does not include some improvement, that title-holder formally notifies the relevant local government of the identity – full name and residential address – of the new title-holder – if any – and the date of the change.

If there is a new title-holder, that person is required to commence paying the full FLVT as from the date of the change. Such payments would be made periodically – monthly – in advance to the relevant local government.

Alternatively, if there is no new title-holder, that natural resource reverts to “communal occupancy” – and may be used on a shared basis by all citizens – until the local government finds a title-holder prepared to pay the requisite FLVT in exchange for exclusive occupancy rights to it.

When a present title-holder plans to vacate a natural resource that includes some improvement – for example, a factory, farm, office, residence or shop – that improvement must be valued by the relevant local government, the valuation of the improvement recorded together with other data defining that natural resource in the database and the title-holder notified of that valuation of the improvement.

If the present title-holder is not prepared to accept that valuation, he/she may pay some properly-qualified, independent valuer to perform a valuation of the improvement and that valuation is then submitted to the relevant local government. That new valuation – and the valuation of the improvement already held in the database – are used to calculate an average which will then replace the existing valuation in the database.

The present title-holder then seeks a person prepared to pay:-

  • To the relevant local government, the FLVT as presently stored in the database, plus
  • To the present title-holder, an amount equal to the valuation of the improvements as presently recorded in the database.

Arising from this search, four outcomes are possible:-

  • A prospective title-holder is prepared to pay to the present title-holder an amount equal to the valuation of the improvements, or
  • A prospective title-holder is prepared to pay to the present title-holder an amount greater than the valuation of the improvements; this situation may arise if several prospective title-holders compete for the exclusive access right to that natural resource, or
  • A prospective title-holder is prepared to pay only a lesser amount than the valuation stored in the database and the present title-holder is prepared to accept that lesser amount, or
  • No prospective title-holder can be found such that an acceptable payment for the improvements can be agreed upon.

In all but the last outcome above, a settlement date is mutually agreed upon and the relevant local government notified of that date, of the identity – full name and residential address – of the incoming title-holder and the sum agreed to be paid for the improvements.

(See Explanatory Note (c) below.)

Phasing-out Existing Taxes

Over a period of time – expected to be several years, probably in excess of twenty – increasing FLVT will be paid. Because it would be most unreasonable to expect title-holders to pay FLVT and all present taxes – federal, state and local – title-holders paying FLVT must receive credit to offset these taxes. I am of the opinion that it would be least difficult to apply the FLVT paid to offset income tax – corporate or personal – payable. During these early years, therefore, no existing taxes could be phased-out … unless the governments concerned were prepared to accept reduced total income.

Because income taxes – corporate and personal – constitute a very large fraction of all taxes presently received, a point will be reached when the total FLVT received is equal to the anticipated total of all income taxes for that year. At this point, both corporate and personal income taxes must be completely eliminated. Two very beneficial effects of this would immediately be felt:-

  • To render unnecessary all corporate and natural persons’ needs to file income tax returns; this would considerably reduce their overhead costs and should lead to reduced costs for goods and services supplied, and
  • To allow government taxation departments to be very greatly “down-sized” with a consequent reduction in the need for taxes to maintain them.

With continually increasing FLVT received, other taxes could be progressively eliminated thus leading to further “down-sizing” of taxation departments. I am not familiar with the details of taxation levying and collection but I presume that some taxes are more costly to administer than others. Naturally, those that are most costly should be eliminated first.

Eventually a point will be reached where FLVT will be generating most – if not all – requisite revenue. Any further gains in FLVT may then be used to build additional infrastructure and/or to provide additional services for the benefit of all citizens.

Explanatory Notes

(a)

In Victoria’s relatively recent past – that is, before the 220-plus local governments were disbanded and fewer than 80 formed in their stead – natural resources in Victoria zoned as residential – by far the most numerous – attracted rates that were to be paid to the relevant local government unless an exemption had been granted. In about half of these local governments, the rates were based on the Site Value (SV); that is, the value of the natural resource only, the value of any improvements on the natural resource being completely ignored for rating purposes. But in the remainder, the rates were based on the value of the natural resource plus the value of all improvements – that is, the residence, outbuildings, boundary fences and vegetation which may include fruit-bearing trees and vines – on that natural resource. In this latter case, the local government applied a rate based on either:-

  • The Capital Improved Value (CIV) of the natural resource, expressed as a Purchase Price, or
  • The Nett Annual Value (NAV) of the natural resource, expressed as an Annual Rent.

In all cases, the NAV was set at 5% of the CIV.

Because this system had been in effect for many decades, I believe it is reasonable to state that citizens generally were in agreement with the proposition that a fair rent for some residential real estate was about 5% of its purchase price. And nowadays, it is commonly found that annual rents are often set at about 5% of the purchase price of real estate.

For this reason, I believe it reasonable to set the initial FLVT equal to 5% of the most recent valuation of the natural resource as stored in a local government database. As will be demonstrated later in this document, the FLVT of all similarly-zoned natural resources is updated whenever there is a change of title-holder on a natural resource which includes improvements.

(See Explanatory Note (c) below.)

(b)

The record defining that natural resource in the local government’s database would have included in it the date on which the new title-holder takes up the right of exclusive occupancy. This would always be set at the first day of the month in which that title-holder’s exclusive occupancy right commenced. From that date, FLVT would be payable to the relevant local government for that – and subsequent – months.

Any payment received more than seven days after the first day of a month would be considered “late” and a penalty – equal to, say, 5% of the FLVT payable in that month – applied. It would be the responsibility of the local government to recover the FLVT and the “late” penalty and – if necessary – to commence legal proceedings to recover it.

That rate of FLVT would remain payable – at monthly intervals – throughout the first year of that title-holder’s exclusive occupancy right assuming that there was no change of title-holder to that natural resource during that first year. In other words, each record in the database would have two figures for FLVT stored; namely,

  • Current FLVT; that is, the FLVT payable by the present title-holder during the first year of his/her occupancy, and
  • Future FLVT; that is, the FLVT payable by either:-

The present title-holder if that title-holder continued to occupy that natural resource beyond the first year, or

A new title-holder who replaces the present title-holder.

Monthly in arrears – that is, on the last day of each month – each local government would provide detailed information to the federal government concerning FLVT received, each such record containing:-

  • Identification of the natural resource,
  • Identification of the present title-holder(s),
  • FLVT paid for that month including – if applicable – any “late” penalty,
  • Date that FLVT was received, and
  • FLVT payable for that month on that natural resource.

The local government would also pay all FLVT received to the federal government.

The federal government would then be in a position to calculate tax credits that would offset the various taxes payable by title-holders. It is my opinion that it may be preferable to use those credits to offset income tax payable but it is possible that a title-holder’s FLVT payments may exceed his/her payable income tax. In such a situation, the credits could be applied to some other tax; for example, the stamp duty payable on the purchase of a motor vehicle.

As will be seen in Explanatory Note (c) below, changes in the title-holder in similarly-zoned natural resources in the same local government’s jurisdiction may cause changes to the Future FLVT held in all such records in the database.

(c)

When there is a change of title-holder to a natural resource which includes improvements, the incoming title-holder undertakes to:-

  • Pay to the relevant local government the Future FLVT – assuming that such a figure exists in the database – or, otherwise, the Current FLVT; refer to Explanatory Note (b) above, and
  • Pay to the present title-holder – or to his/her estate in the case of the death of a natural person – the value of the improvements. As explained earlier in this document, the amount paid may differ from the valuation stored in the database.

This latter payment is made on the mutually agreed date when the change of title-holder occurs. For the first year following this mutually-agreed date, the Current FLVT is replaced by the Future FLVT assuming that such a figure exists. If there is no such Future FLVT, the Current FLVT remains unchanged.

If the incoming title-holder is prepared to pay to the vacating title-holder an amount for the improvements that is exactly equal to the valuation of them as held in the database for that natural resource, it is obvious that the incoming title-holder believes that the FLVT payable is a reasonable assessment of the worth of that natural resource. However, if the incoming title-holder has undertaken to pay more – or less – for the improvements, the following can be assumed:-

  • If the amount actually agreed to be paid exceeds the valuation, the natural resource is more attractive than the FLVT payable suggests thus an increase in FLVT – after the first year of occupancy – is warranted, or
  • If the amount agreed to be paid falls short of the valuation, the natural resource is less attractive than the FLVT payable suggests thus a reduction in FLVT – after the first year of occupancy – is warranted.

It now remains to propose some formula that may be applied such that a Future FLVT is computed and that will become payable after the incoming title-holder has occupied the natural resource for one year.

The formula proposed is as follows:-

Ff = Fc + Fc * (Vp – Vd) / (5 * Vd)

where

  • Ff is the Future FLVT; that is, the FLVT that will apply after the first year of occupancy,
  • Fc is the Current FLVT; that is, the FLVT that applies during the first year of occupancy,
  • Vp is the amount paid to the vacating title-holder for the improvements, and
  • Vd is the valuation of the improvements as stored in the database for that natural resource.

Careful inspection of that formula will show that:-

  • Ff will be greater than Fc if Vp is greater than Vd
  • Conversely, Ff will be less than Fc if Vp is less than Vd
  • Regardless, the percentage change in Fc will be only one fifth of the percentage change in Vp in comparison with Vd.

The effect of this will ensure that changes in FLVT will be relatively small compared with the differences between Vp (the amount actually paid for improvements) and Vd (the valuation of the improvements as stored in the database).

If there has been a change in the FLVT of a natural resource for which there has been a change of title-holder – that is, Ff differs from Fc – a computation must be applied to every natural resource in the database that has the same zoning. Initially, a multiplying factor, M, is computed equal to Ff divided by Fc; clearly, Ff will be greater than 1 if Vp exceeds Vd.

The details pertaining to the computation for one such natural resource in the database follows:-

  • If there is no Future FLVT stored, the Future FLVT is set equal to the Current FLVT, and
  • Future FLVT is multiplied by M and the result replaces the existing value for Future FLVT.

In other words, the Future FLVT of all similarly-zoned natural resources in the database experiences a percentage change that is exactly the same as the change that has just occurred in the natural resource experiencing a change of title-holder.

Concluding Comments

As has been stated earlier in this document, I anticipate that the purchase price of all natural resources will fall very considerably – perhaps to zero – immediately following the introduction of FLVT. In fact, it is highly probable that this fall will occur very shortly after the announcement is made that FLVT is to be phased-in as from some nominated date!

This will – obviously – cause a great deal of disquiet – if not outright mutiny! – among the majority of citizens, most of whom will have an outstanding loan that is considerably greater than the value of the natural resource that they gave as security for that loan. Many such citizens will complain that the introduction of the change to FLVT has destroyed much of their savings due to the collapse in value of the natural resource they purchased previously.

Even if there is no longer an outstanding loan, a residence that may presently be valued at $500,000 – say, $125,000 attributable to the improvements and $375,000 attributable to the natural resource on which the residence has been erected – would, after the decision is made to introduce FLVT, be valued at only $125,000. That represents a loss of 75% of the value of that owner’s wealth.

How can citizens be convinced that such a change will be to their advantage?

First, we must emphasise the enormous disadvantages of the present means adopted to raise revenue for spending on infrastructure and public services. They may be summarised as follows:-

  • They are extremely costly financially. There are well over one hundred different taxes imposed at federal, state and local levels; together, their complexity requires thousands of pages of text to define them and most citizens must pay experts to calculate their financial obligations then file their periodic taxation returns. Even then, legal disputes are common due to the taxes’ complexity. All of this adds greatly to citizens’ cost of living. Introduction of FLVT will render completely unnecessary most – if not all – present taxes!
  • They are extremely costly socially. Due to the enormous “up-front” costs of exclusive access to a natural resource – a site – most citizens cannot afford to set up their own business; instead, they must rely on employment. However, employers are finding it increasingly difficult to cope with the plethora of regulations – and their attendant costs – thus they rely increasingly on “contractors”; that is, citizens operating their own business. The overall result is increasing unemployment and – also – underemployment; that is, citizens forced to accept part-time work when they really want full-time work. It is widely believed that such unemployment and underemployment leads directly to anti-social – even criminal – behavior due to drug abuse, the cause of which – in most cases – is boredom due to insufficient income to pay for the “simple luxuries” of life they see others enjoying. The results of this are all too frequently visible in our cities. Shop-lifting, house-breaking and car theft are increasing and citizens are now more likely to be attacked by small groups whose intention is to steal money, credit cards, mobile phones, lap-top computers and the like. Our jails are usually filled and more police are needed to patrol public places … especially at night. And – worse still – family breakdown is increasing with single-parent families increasingly prevalent.

Second, we must emphasise that approximately two human generations ago, the price of a “quarter acre block” – on a “made” road and with connections to electricity, gas and water supplies, telephone network and sewage disposal – in an outer suburb of Melbourne cost about two years of pay at the then base adult pay-rate. A similar item of real estate now costs about fourteen years of pay at the present base adult pay- rate. That – certainly – is the reason that most young adults cannot now afford to purchase their own residence in Melbourne. In fact, it is difficult for them to even pay the requisite rent on such a residence so many are forced into very sub-standard accommodation – for example, a caravan park or a single room in a house having only one bathroom, kitchen and toilet – on a long-term basis. Presumably, this situation will even worsen because the causes of it are not even understood!

Third, we must emphasise that the present extremely high valuations for natural resources are inflated way above their true value. As stated in the previous paragraph, the purchase price of residential real estate in an outer suburb of Melbourne has escalated by a factor of seven – by comparison with the wages paid to a person earning at the base adult rate of pay – during the past fifty years. Expressed another way, if an adult’s rate of pay had remained fixed during those 50 years, the price commanded by residential real estate would have increased by 4.0% every year! And who is to say that the value that real estate commanded fifty years ago was not inflated then? All that can be stated – with certainty – is that it was less inflated then that it is now!

Fourth, we must emphasise that it will be – with FLVT replacing present taxes – far easier for our children – and their children – to gain access to natural resources for living, for working or for both … because they will not need to find a very large “up front” payment to acquire exclusive occupancy to such a natural resource. That means they will have far less debt early in their lives … and that means they will have far less financial stress and a far reduced likelihood of suffering from family breakdown.

Initially, suppose there are three natural resources zoned residential; data is held for these as follows:-

IdentificationNatRes 1
Zoned Residential
Area 860 square metres
Frontage 20 metres
Owner Pers 1
Valuation $320,000
Val/Area $372.09 per square metre
Improvements valued shortly before 01 Aug 12 $125,000
valued shortly before 01 Mar 13 $240,000
Current FLVT $16,000 per year; that is, $1,333.33 per month
Future FLVT after NatRes 1 change $16,384 per year; that is $1,365.33 per month
after NatRes 3 change $15,879.88 per year; that is $1,323.32 per month
after second NatRes 1 change $17,534.03 per year; that is, $1,461.17 per month
IdentificationNatRes 2
Zoned Residential
Area 560 square metres
Frontage 15 metres
Owner Pers 2
Valuation $215,000
Val/Area $383.93 per square metre
Current FLVT Current FLVT $10,750 per year; that is, $895.83 per month Future FLVT
Future FLVT after NatRes 1 change $11,008 per year; that is, $917.33 per month
after NatRes 3 change $10,669.29 per year; that is $889.11
after second NatRes 1 change $11,780.67 per year; that is $981.72 per month
IdentificationNatRes 3
Zoned Residential
Area 1,170 square metres
Frontage 20 metres
Owner Pers 3
Valuation $455,000
Val/Area $388.89 per square metre
Improvements valued shortly before 01 Sep 12 $65,000
Current FLVT $22,750 per year; that is, $1,895.83 per month
Future FLVT after NatRes 1 change $23,296 per year; that is, $1,941.33 per month
after NatRes 1 change $23,296 per year; that is, $1,941.33 per month
after NatRes 3 change $22,579.20 per year; that is $1,881.60 per month
after second NatRes 1 change $24,931.20 per year; that is, $2,077.60 per month

First, assume that FLVT becomes payable by all title-holders who are granted an exclusive occupancy right on or after 01 Jul 12. NOTE that title-holders who were owners of natural resources prior to 01 Jul 12 are not required to pay FLVT … although they may choose to do so. To encourage them to do so, I suggest that the federal government credits their payable income tax by an amount 10% greater than their annual FLVT. This would accelerate the rate at which the change to FLVT would take place thus benefits would be experienced sooner.

Second, assume that NatRes 1 has a change of title-holder as at 01 Aug 12. The incoming title-holder – Pers 4 – agreed to pay $128,000 for the improvements; that is, $3,000 above the valuation recorded in the database. The Future FLVT would therefore rise to 16,000 * 128,000 / 125,000 = 16,384. This would cause all other similarly-zoned natural resources in the database to experience a similar percentage change in FLVT.

Third, assume that NatRes 3 has a change of title-holder on 01 Sep 12. The incoming title-holder – Pers 5 – agreed to pay $63,000 for the improvements – that is, $2,000 below the valuation recorded in the database – and the present title-holder agreed to that lesser amount. The Future FLVT would therefore fall to 23,296 * 63,000 / 65,000 = 22,579.20. This would cause all other similarly-zoned natural resources in the database to experience a similar percentage change in FLVT.

Fourth, assume that NatRes 1 has another change of title-holder as at 01 Mar 13. The incoming title-holder – Pers 6 – agreed to pay $265,000 for the improvements; that is, $25,000 above the valuation recorded in the database. The Future FLVT would therefore rise to 15,879.88 * 265,000 / 240,000 = $17,534.03. This would cause all other similarly-zoned natural resources in the database to experience a similar percentage change in FLVT.

Finally, assume that NatRes 2 has a change of title-holder as at 01 May 13. Because there are no improvements on NatRes 2, there is no information that may be used to alter the Future FLVT on all similarly-zoned natural resources in the database.

The examples above clearly show that changes in the title-holders – where sale of improvements is involved – generates information that can be used to update Future FLVT. Locations which are attractive – for a variety of reasons – will stimulate prospective title-holders to pay more than the latest valuation for improvements and this will cause a corresponding increase in the FLVT available to government for the provision of the infrastructure and services demanded by citizens.

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