ECONOMIC DEVELOPMENT is frequently accompanied by the growth of population and its increased concentration in urban areas, which imposes greater demands on the government for the provision of essential services, sometimes at a considerable cost. A real problem arises in financing this cost and equitably apportioning it among the members of the community. Because population growth and higher standards of living inevitably enhance the value of land, many governments have sought ways of allocating this cost among the landowners who benefit directly and indirectly from rising land values.


ECONOMIC DEVELOPMENT is frequently accompanied by the growth of population and its increased concentration in urban areas, which imposes greater demands on the government for the provision of essential services, sometimes at a considerable cost. A real problem arises in financing this cost and equitably apportioning it among the members of the community. Because population growth and higher standards of living inevitably enhance the value of land, many governments have sought ways of allocating this cost among the landowners who benefit directly and indirectly from rising land values.

ECONOMIC DEVELOPMENT is frequently accompanied by the growth of population and its increased concentration in urban areas, which imposes greater demands on the government for the provision of essential services, sometimes at a considerable cost. A real problem arises in financing this cost and equitably apportioning it among the members of the community. Because population growth and higher standards of living inevitably enhance the value of land, many governments have sought ways of allocating this cost among the landowners who benefit directly and indirectly from rising land values.

The philosophy that landowners should bear this cost originated partly in the classical theory of land rent as an unearned increment, arising either from the location of land or from the differential bounties of nature as to fertility of soil and deposits of natural resources. According to Ricardo, rent from land is essentially a private expropriation of its natural productivity or site value (location) which does not originate in human effort or skill.1 A tax on such unearned increases in land value therefore does not impair use of the land or deter production. This view was supported by J.S. Mill, who remarked:

  • . . . Suppose that there is a kind of income which constantly tends to increase without any exertion or sacrifice on the part of the owners: those owners constituting a class in the community, whom the natural course of things progressively enriches, consistently with complete passiveness on their own part. In such a case it would be no violation of the principles on which private property is grounded, if the state should appropriate this increase of wealth, or part of it, as it arises. This would not properly be taking anything from anybody; it would merely be applying an accession of wealth, created by circumstances, to the benefit of society, instead of allowing it to become an unearned appendage to the riches of a particular class.2

This principle underlies the theory of the “single tax” on land, developed by Henry George,3 which has considerably influenced property tax policies, especially in English-speaking countries.

Although few if any fiscal experts now believe that a single tax on rents would meet the requirements of modern government, persons still defend the taxation of increments in land value as a valid principle. These persons hold that the substantial increases in value accruing to holders of urban as well as suburban and agricultural land represent a reservoir of value which can properly be tapped to meet the social needs of developing communities without adverse effects on incentives. This paper describes the major applications of this principle in different countries; it also discusses the problems encountered and the necessary conditions of the successful application of this principle.

The principal applications may be summarized as follows:

(1) Recurrent (annual) tax on land values under a property-tax system based on capital values. (This tax may take the form of a property tax limited to urban and rural land values, as in Jamaica, New Zealand, and some Australian jurisdictions, or to agricultural land values, as in some Latin American countries; or it may take the form of a differentially higher rate on land, as in parts of Canada, East Africa, South Africa, and Denmark.)

(2) Periodic tax on increments in land value. (This tax may be based on increases in land value between valuation dates even though not “realized” by sale, as in the United Kingdom and Germany early in this century, and more recently in Denmark and Italy; or it may be based on capital gains realized from the sale of land and other property, as a special tax limited to gains realized on the subdivision of urban land, or as a tax embraced by capital-gains taxes of more general application.)

(3) Special assessment, or land betterment tax, which apportions the costs of publicly created improvements among the benefiting property owners. (Such special assessments, justified by the direct benefit theory, have a long history in the United States, Canada, the United Kingdom, and many other countries.)

Annual Taxes on Unimproved Land Values

Annual taxes on the value of property—including land and improvements—are widely employed. When assessed values are kept current with changing values, they provide an appropriate method for allocating the cost of government to property owners who enjoy rising real estate values. If the tax is limited to the site value of land or if land is taxed more heavily than improvements, the property tax can be made an even more effective instrument for taxing increments in value and encouraging more productive use of land. This view is supported by many prominent fiscal experts.4 Professor Shoup and his associates in their report on Venezuela declared: “We believe that the theoretical case for a differentiated tax, in a country with rapidly increasing urbanization, is so strong that it merits careful consideration.”5

A tax on site value, resting on an economic surplus, does not impair economic incentives to make more productive use of the land. Indeed, if land is assessed to reflect its most productive use, such taxation can be employed to encourage the use of idle land and to put underutilized land to more effective use. It is argued that if the tax is assessed on the potential output of agricultural land—that is, the output which the land would yield if it were managed with average efficiency—it would give the maximum incentive to improve land and increase its output.6

The justice of such a policy is strongly defended in countries where ownership of land is sought as a refuge from inflation. The diversion of capital to investment in land tends to accentuate the rise in land prices and provides a hedge against erosion of capital values. By effectively taxing such appreciated values under a property tax, a government can better apportion its rising costs among those realizing the greatest benefits.


Taxes on unimproved land value have historically been applied in Australia, New Zealand, Canada, South Africa, and East Africa, and more recently in Jamaica, Trinidad and Tobago, and Barbados. Most Latin American countries limit the tax on agricultural properties to unimproved land values. Similar practices are followed elsewhere, especially in Denmark.

Australia and New Zealand

The original Australian federal land tax was levied at steeply graduated rates on “unimproved land value.”7 Federal rates are applied to the total value of land held by one individual anywhere in the Commonwealth. There is considerable evidence that the tax operated in accordance with the classical theory, by contributing to the breakup of large estates into smaller and more productive units, although the influence of the tax cannot be clearly distinguished from that of government settlement policies, which greatly stimulated this movement. The land tax, never a large revenue producer, gradually deteriorated as large estates were broken up. Finally, in 1952, the Commonwealth relinquished the land tax to the states. Unimproved land value taxes continue to be employed by the Australian states and by New Zealand, together with taxes on improvements and rental value; but because of exemptions and low rates, they no longer are fiscally important.

At present the land tax is a significant factor only in business decisions involving land with a high value—almost exclusively urban land. For this land, however, the tax can be important since industrial and commercial property reaches the maximum rate—about 3 per cent in Queensland and New South Wales—fairly quickly.8


Henry George’s philosophy had considerable appeal in western Canada: British Columbia adopted site-value taxation before the turn of the century and the Prairie Provinces during the first decade of this century.9 By 1914, two thirds of the municipalities in British Columbia (including Victoria and Vancouver), all in Alberta, and a quarter in Saskatchewan had fully exempted improvements from property tax. Since then, however, the valuation of land alone in these provinces has given way to the inclusion of buildings as well, except on agricultural land. Improvements are still favored by applying the tax only to a part of their assessed value. Today municipal taxes apply to as much as 75 per cent of the assessed value of improvements in British Columbia, 60 per cent in Alberta, 66⅔ per cent in Manitoba, and generally 60 percent in Saskatchewan. Except for Ontario during 1920–24, no other Canadian provinces have ever limited the property tax to land.


Denmark has had a long and interesting history of land taxation.10 In the tax reform of 1903, a real estate tax based on commercial values replaced the Central Government’s land tax that had been in existence for almost 300 years. By 1926 a special tax on land was adopted, as advocated by the small farmers who came under the influence of Henry George’s ideas. Although the entire property continued to be assessed at its market value, the land was separately assessed as if it belonged to a “middle-sized farm and was cultivated with an average effort.” The difference between the two values—essentially improvements—was called the remainder value (restvaerdi).

The assessed value of the land was then taxed at a somewhat higher rate than the remainder value, originally 1.5 per mil against 1.1 per mil after deduction of a fixed amount. By 1937, rates were increased to 6.0 per mil on land and 4.5 per mil on the remainder. In 1957 the Central Government’s tax on remainder value was frozen, and in 1961 that of all other authorities was frozen. No taxes were levied on new buildings.

Since 1930/31 the tax on land has accounted for about 60 per cent of property-tax revenues. In 1962/63 the tax on increments in land value (grundstigningskyld), described below, accounted for about 8 per cent of the total property taxes; hence in these years site-value taxes were about twice as important as taxes on improvements. The persistence of the Henry George school of thought is evidenced by the relative decline in the tax on improvements (restvaerdi) since the 1920’s. However, there is mounting sentiment for abandoning the tax on land as well.

East Africa

In contrast to the practice in West Africa, where property taxes are generally limited to the value of improvements, East Africa has successfully taxed unimproved urban land values for many years.11 Except for Uganda’s Kingdom of Buganda and certain plantation areas in Tanzania, there is little private ownership of land in rural areas, and therefore little scope for extensive taxation outside cities and towns. Kenya’s municipalities have employed site-value taxation for more than 30 years; Uganda’s cities tax land at a rate of 1½ per cent, against ¼ of 1 per cent on improvements; and Dar es Salaam and urban council areas in Tanzania have taxed only site value since the early 1950’s. Cities in Rhodesia, Malawi, and Zambia also tax land at a much higher rate than the rate for improvements.

Nairobi’s site-value tax is representative of the best practices in Kenya. Although most of the land is leased from the state, the discounted present value of rents is generally taken as the property base. Revaluations are required every 5 years, but every 3 years is the rule in practice. Although many problems arise, the system is believed to be much simpler than one covering improvements.

At a rate of about 2 per cent, set by the city council, the property tax accounts for almost half of Nairobi’s total city government revenue. The site-value basis is accepted as highly satisfactory and is generally believed to be a major factor contributing to the city’s modernization.


More recently, Jamaica has instituted a program for the introduction of a separate tax on site value, which has gone into effect for most of its parishes. In December 1956, Jamaica’s Parliament passed a Land Valuation Law which provided for the revaluation of all land and the taxation of unimproved land values. This action marked the culmination of a series of reports recommending the use of site values, dating from the turn of the century to the 1956 report of J.F.N. Murray.12

The work of revaluation was started in June 1957, in St. Catherine Parish, under the supervision of a newly created Commissioner of Valuation, and in April 1959 this parish went on the new basis. By January 1965 the revaluation had been about half completed, far behind the 5-year target period and the 3-year period originally estimated by Murray. In the process, the valuation assigned to many individual large plots was increased by as much as 30 times and more over the old valuation.13

Latin America

In Latin America, agricultural property taxes are substantially limited to land values, whereas urban taxes generally cover the value of improvements as well. Property taxes are not in effect in all Latin American states (there are none, for example, in the Dominican Republic or Peru), and even where they are in effect, they have generally fallen into neglect. In recent years, however, major steps to restore the property tax have been taken in Chile, Colombia, Costa Rica, Panama, and Uruguay, where large-scale revaluation programs have been undertaken.

Taxes on property are the most important source of local government finance in Colombia. Including special assessments, they accounted for about 63 per cent of total municipal tax revenues in 1963.14 Most of this revenue was realized from a general property tax with a basic rate of 4 per mil.

In 1960 the income tax law of Colombia authorized departmental capitals and cities with a population over 100,000 to impose a property tax of up to 2 per cent on developed urban land and up to 4 per cent on undeveloped urban land.15 The tax is limited to land values of residential properties of over 1,000 square meters. These measures were intended to promote more efficient utilization of land, especially that held for speculative reasons, and, by increasing the availability of land, to encourage housing development. Several cities have indicated their interest, but implementation of the provision has been delayed because of the requirement that they adopt an approved master city plan which delineates the urbanized lands.16

Chile is of special interest because of the standards adopted to measure the market values of land. An appraisal of Chile’s rural areas was required in 1956 for the first time; but this program failed because it depended largely on self-appraisal by the property owners themselves. The law of November 16, 1962 decreed a general reappraisal of all real property; for farmland it required that appraisals be based on scientific soil classification in terms of potential-use capacity, with appropriate adjustments for the factors of location. The revaluation, however, has been based essentially on 100 per cent of current market values of the land. Farms are appraised in terms of provincial average values; individual values are determined in consultation with a provincial commission of five accredited agricultural engineers. A formula was devised to calculate indices of potential-use capacity and the effect of the factors of location and distance; on the basis of this formula, individual property values were calculated by the use of a computer. The reassessment of all urban and rural properties, completed in May 1965, had the effect in general of tripling the previous assessments, slightly more on the rural side.


Despite strong support of taxes limited to site value on equity grounds (as a tax on windfall gains) and on economic grounds (as an incentive for encouraging better use of land, including more productive cultivation of the soil and capital improvements), many have objected to these taxes on grounds of possible hardships to property owners, as well as administrative feasibility and equitable apportionment of government costs.

Equity considerations

One objection raised against adoption of site-value taxation is its effect on property owners who did not anticipate any increase in taxes when they bought the land.17 Moreover, much land is in the hands of those who paid current values and do not enjoy any unearned increment.18 Many property owners would therefore be penalized if the entire current burden of the property tax were reallocated to them; when property taxes are heavy, the current net rent of land, and hence its capital value, might be sharply reduced. However, an increase in taxes is a risk faced by all taxpayers, and the discriminatory effects of the increase must be evaluated against alternative measures. Revaluation of property for real estate tax purposes would simply result in a redistribution of tax burdens between those holding different ratios of land value to total capital value.

Professor and Mrs. Hicks expressed much concern over the effects of such redistribution on property owners in Jamaica.19 Since the derating of improvements would reduce the total value of property assessed, and entail a greatly increased rate, the owners of property with little improvement would be faced with sharply increased taxes. This possibility suggests the desirability of making a gradual transition from a capital-value to site-value tax if such a step is taken. The shift to a differentially heavier tax on site value in Pittsburgh, Pennsylvania, was completed over a 12-year period.

Despite the drastic change effected by the revaluations in Jamaica, they do not appear to have had serious repercussions on the landowners.20 Some large property owners were induced to sell because of the additional cost of carrying the property; although they may have realized less than they otherwise might have because of the capitalization of the increased tax, there is no evidence of actual loss by comparison with original cost. Such division of properties as occurred, of course, is consistent with the objectives of the site-value tax. One reason for the little disturbance in Jamaica is the low property-tax rate.

Some believe that the exemption of improvements of urban property may fail to allocate many costs of local government properly in proportion to the direct benefits received. Moreover, it is argued that the exemption would favor owners of luxury homes, hotels, and other valuable improvements, and tend to place a heavier burden on those less able to pay. For this reason, Murray proposed that Jamaica enact a real estate tax for municipalities covering improvements as well as land so as to apportion municipal costs more equitably.21

Effects on land use

One of the principal benefits claimed for the exemption of improvements is its effect in stimulating the development of vacant sites. There is considerable evidence, for example, that site valuation in Canada helped to break up large landholdings and encouraged subdivisions.22 Yet development must await favorable economic conditions for expansion, and many subdivided lands in Canada remained undeveloped for years.

Contrary to the claims made for site-value taxation, there is no evidence that the tax on unimproved land values has had much if any effect on the pattern of land use in Australia.23 No differences in this respect are discernible between communities using site value and those using a broader property-tax base. This result is attributed to the homestead exemption and generally low rates. However, the earlier graduated land taxes administered by the Commonwealth of Australia and the Central Government of New Zealand undoubtedly helped to break up large estates, and contributed to the realization of the Governments’ political objectives.

While admitting the merits of a site-value tax in providing an incentive to the improvement of land, Professor and Mrs. Hicks saw no merit in derating the value of improvements already in place. For this and other reasons of equity, they advocated instead an exemption limited to new improvements for several years after these are made.24

Administrative considerations

The taxation of unimproved property values has been opposed because of the alleged difficulty of establishing separate values for land and improvements. However, experience in Australia, Chile, Jamaica, New Zealand, Uruguay, and many other countries refutes this claim. Values established in Jamaica have been found acceptable by most taxpayers;25 there were many appeals but these can be expected under any reassessment program. In Australia and New Zealand these complaints are seldom heard, and experts are agreed on the administrative simplicity of appraising large numbers of land parcels by the use of modern techniques. Once bench-mark values are established in different areas, it is relatively easy to extrapolate these values to separate properties by the use of land-value maps or “cadastral maps.”26 Although land-value maps do not make difficult valuations easy or provide a substitute for the necessary evidence on which valuations are properly based, they should form an integral part of any system of land-value taxation.

The Hickses’ report on Jamaica expressed doubts about the ability of assessors to catch the development value in their appraisals, that is, the difference between the value of land in its present use and its prospective value in future more productive use.27 It is this increment that speculators anticipate in acquiring property for future development. According to Murray, however, it is precisely this value that is reflected in current market prices of land and should be accepted by the assessors, rather than its value in its present use.28

Determination of site values shares a problem common to any real estate tax: that is, the difficult technical task of instituting and maintaining assessments in line with changing property values. The establishment of a satisfactory property cadastre for any country is a major undertaking that is both time consuming and costly. The task requires not only technically skilled assessors but also a substantial government investment. This is evidenced by the experience in Jamaica: revaluation, initiated in June 1957, was only about half finished 7½ years later, in January 1965. Chile’s valuation program took almost 3 years to complete; and Uruguay’s latest reassessment took over 5 years to complete. With the best of technical assistance and an adequate, trained staff, a minimum of 3–5 years would be required to cover a small country satisfactorily, depending on the adequacy of land records. But short cuts can be taken, especially in treating small, low-value holdings and avoiding a survey of each individual plot.

Australian and New Zealand experts forcefully argue that substantial savings in cost are realized and the quality of assessment raised if the property tax is limited to site value.29 It is dangerous to generalize about costs because of differences in quality; but the institution of a cadastre by experts for a small country (40,000–50,000 square miles in area) would involve an estimated US$3–4 million, spread over 3–4 years.

Other considerations

The feasibility of site-value taxation partly depends, of course, on the system of land tenure in effect. Where agricultural property is communally owned or there is no adequate system of land registration, as in much of equatorial Africa, property taxes are impracticable.30 Even here, however, the possibilities of urban land taxation are undeveloped, especially in West Africa. In the view of Professor Due, the general field of land taxation offers equatorial African states perhaps the greatest opportunity for improvement in their tax structures.31 Even in East Africa and Central Africa (Rhodesia, Malawi, and Zambia), where extensive areas are owned by the state or by district councils, land taxes have effectively been assessed on the capitalized rental values of long-term leases.

Taxes on property values are also impractical in rural areas where low population densities result in low land values. However, the possibility of anticipating rising land values should not be overlooked.

Summary of evaluation

Expert opinion varies on the feasibility and desirability of site-value taxation. Although it is defensible on equity grounds as a tax which rests substantially on unearned increments, some experts maintain that it fails to allocate the costs of government properly to those owning buildings which largely give rise to the government services entailed. On economic grounds, the taxation of unimproved land provides an incentive for its more efficient utilization, but a temporary exemption of improvements might accomplish much the same purpose. Opinion also differs on the comparative administrative efficiency of determining the value of land separately from the value of buildings, although the weight of expert opinion and logic would appear to support the superiority of separation. These opposing points of view may explain the middle ground taken by real estate taxes in many countries with differentially higher rates on land value.

Once a system of property taxation is established, it becomes embedded in existing values and there is great resistance to change.32 Although Australian municipalities have shifted from one form to another, the effect of the tax has been mitigated by the generally low rates and the persistence of state and municipal overlapping systems which alter only the “mix,” or the relative weight of tax on land and improvements. One of the most radical experiments in recent years is that in Jamaica, the full effects of which win not be known for several years.

Conditions for success

Successful implementation of a tax on land values requires not only a clear system of title registration and a well-designed tax structure but also a high order of administration. Experience in Australia, New Zealand, East Africa, Canada, and elsewhere points to the following minimum standards:

(1) Site value should be interpreted not as value in current use (or “use value”) but as the capital sum which the title to the land might be expected to bring in a bona fide sale, regardless of use. Also, the tax base should be defined as “site value” rather than the value of unimproved land.33 Improvements are generally defined to include both visible and invisible site improvements such as the cost of clearing land and drainage. The concept of site value employed in the recent statutes of Jamaica, Trinidad and Tobago, and Barbados does not exclude the value of such invisible, nonstructural improvements.

(2) Assessment should be organized in single departments covering areas large enough to support qualified experts. For most countries this may mean a centralized cadastre covering both urban and rural areas, properly decentralized for administrative efficiency. A good example of such organization is provided by Uruguay, which has an independent commission (Dirección General de Catastro y Administración de Inmuebles Nacionales) responsible to the Minister of Finance. This office is charged with the valuation of all urban and rural real estate in Uruguay and the maintenance of up-to-date records of property ownership. It records all property transfers and thus maintains an inventory of all privately held real estate in the country, including its description, ownership, and assessed value. It operates through 19 field officers—one in each department of the country.

(3) Personnel should be of professional quality, trained in the latest techniques of property-tax administration and valuation procedures. They should desirably hold civil service status so as to maintain independence from political influence.

(4) Assessments should be kept current, on a systematic basis, with 4–5 year reassessments legally required and adequately supported by budgetary appropriations. More frequent reassessments should be undertaken in areas of rapidly changing values, such as urban and suburban developments. Under inflationary conditions, where the general price level is rising rapidly, interim adjustments by the use of indexes should be made.

Taxation of Increments in Land Value

Rather than levy an annual low-rate tax on the value of land periodically reassessed to reflect whatever changes in value may have taken place, as described above, many governments have attempted to tax the increases in the value of land (or total property) over a period of time. Such taxes may be levied at the time of transfer of the property or on periodic unrealized increases in value. In many countries, realized increments on the sale or exchange of real estate are covered by capital-gains taxes; but in some countries, special provisions for taxing increases in real property values exist independently. The latter provisions are generally calculated to assess the so-called development value or increase in value of land converted from agricultural to industrial or residential use.

Early history

One of the earliest experiments in the taxation of increments in land value originated in the German colony of Kiauchau, China, in 1898. Anticipating the considerable increases in land values that would result from large expenditures for the construction of harbors and other public improvements, the Government took measures to ensure that part of the gains would be recouped.34 The famous land ordinance of 1898 provided for both a direct increment tax (direkte Zuwachssteuer) and an indirect increment tax. The former imposed a tax equal to one third of the increase in value after deducting the cost of improvements; the latter enacted a similar tax on the increase in value every 25 years.

The Kiauchau experiment with a tax on unrealized increments in value attracted the attention of German municipalities; beginning in 1904 with the city of Frankfurt, its use spread by 1910 to about 4,500 cities and towns, covering about one fourth of the total German population. The tax was generally applied to the difference between the last purchase price and the current selling price of the real estate, with an exemption for the cost of improvements. The rate was typically graduated with the percentage increase in value, with no tax on the first 10–30 per cent increase in value, and rose to a maximum rate of 25–30 per cent.

In February 1911, these municipal taxes were superseded by a new German Imperial Increment Tax Law (Wertzuwachssteuer), under which the tax applied to the increment in the whole value of rental property, with 40 per cent of the proceeds going to the municipalities and 10 per cent to the states to cover cost of administration. The tax was graduated along similar lines, reaching a rate of 30 per cent on all increments of value over 290 per cent of the 1885 value.35 In 1913, the Imperial Government replaced this law by a new act (Besitzsteuergesetz), which provided for a graduated tax on increments in property value over 3-year periods, the first falling due on December 31, 1916.36 The rate ranged from ¾ of 1 per cent to 1½ per cent on the increased value. This tax was superseded by the Act of 1922, which imposed a tax graded from 1 per cent to 10 per cent, depending on the amount of the property (Vermögenszuwachssteuer);37 it was repealed in 1925.

In Great Britain, the Finance (1909–10) Act imposed a somewhat more comprehensive tax on increments in the site value of land.38 The tax was payable on all land on the following occasions: (1) sale, (2) lease for more than 14 years, (3) transfer at death of owner, and (4) after 15 years during which the land had not changed hands. The tax of 20 per cent applied to an increase in site value over its value at April 30, 1909. Exemptions were provided for the first 10 per cent increase in value, as well as for certain agricultural land, the value of small holdings, and leases of tenements or flats in an apartment house. In order to fix the initial values as at April 30, 1909, the Government undertook a cadastral survey of all landholdings in the United Kingdom, comparable in scope to the eleventh-century Domesday Book.

This tax encountered considerable legal problems, and the basis of valuation of land was declared invalid because it failed to comply with the statute. In the budget for 1920/21, the Chancellor of the Exchequer declared that the 1910 duties were unworkable and had produced little revenue. Accordingly, the Act was repealed in the Finance Act of 1920, and the revenue was returned to the contributors.39

Taxation of unrealized increments

In recent years, few attempts have been made to tax increments in land value before they are realized by a sale or another form of transfer. The taxation of realized capital gains, described below, has been found to be a more fruitful approach.


Denmark’s grundstigningskyld offers perhaps the best modern example of a tax on unrealized increases in land value.40 Enacted in 1933, it provided for a tax on increases in the real value of land between two assessment dates, taken at 4-year intervals. Initially the tax base was determined after deduction of (1) a market supplement, calculated as a percentage of the original value to reflect the general increase in land values, and (2) an assessment error, usually 10 per cent of the original land value. The original base was one half of the increment less the deduction for the supplement; in 1950 the base was increased to three fourths of the increment; and in 1958 the full amount of the increment was made taxable and the deduction for the assessment error was eliminated.

The tax, at an annual rate of 4 per cent, was intended to reflect a “normal rate of interest.” Since the interest on long-term mortgage loans averaged 5 per cent in the 1940’s and 6 per cent in the 1950’s and in recent years has exceeded 8 per cent, the tax did not succeed in fully capturing increments in land value due to rising economic rents.

At the time of its abolition, in 1964, the grundstigningskyld accounted for about 8 per cent of all property-tax revenues. Its repeal reflected a growing sentiment for the abolition of all property taxes in Denmark.

United Kingdom

Since 1947, the United Kingdom has undertaken an interesting experiment in controlling the development of land under a system whereby the development value is captured by the state.41 The Town and Country Planning Act of 1947 provided that all development of land required planning permission. The owner of land could buy back the right to develop land only by paying a “development charge,” which was supposed to be equal to the difference between its value in use and its market value for new development purposes. Any private builder who intended to develop or change the use of his land had to apply for planning permission and to pay the “land charge” equal to 100 per cent of the development value. The Central Land Board, established to administer the Act, could also buy land on a compulsory basis in order to dispose of it for development.

The Central Land Board was not successful in achieving its objective of capturing the development value. Most transactions in land were undertaken at prices higher than the existing-use value, and an increase in the costs of building was not prevented.42 This can be explained partly by the fact that the 100 per cent “development charge” did not leave an inducement for the owner to develop his site, and if he sold his land he asked for more than the existing-use value; the purchaser was liable not only for the “development charge” but also for the excess price to the seller. In 1953 the “development charge” was removed, and one year later all private restrictions on sales of land were abolished. Development of a two-price system for land—one for land compulsorily purchased and the other for free, private sales—finally forced the Government in 1959 to adopt the market value as the basis for compensation paid on occasions of compulsory purchase.

Finally, in 1965, the British Government proposed the establishment of a special Land Commission, which would have the powers of compulsory purchase of land and of imposition of a levy on the development value of land.43 The Government’s two main objectives are (1) to ensure that the right land is available at the right time for the implementation of national, regional, and local plans and (2) to ensure that a substantial part of the development value created by the community is returned to the community.

The Land Commission proposal includes payment of a land levy on the development value of land. This development value is defined as the increase in value attributable to the prospects of “material development,” as distinguished from the value in current use. The basis for determining the development value is the market value of the land at the time when it reflects the increment in value due to development, for example, its change from agricultural use to housing. Anyone whose land has risen in value between the time of purchase and the time he develops it will have to pay the levy in addition to the cost of development; the levy applies even to the additional value that accrues during the construction period.

The initial rate of tax proposed is 40 per cent, with provision for increasing it to 45 per cent and eventually to 50 per cent. The Government decided to exclude the development value from the recently enacted 30 per cent tax on long-term capital gains and to consider the land levy an allowable expense in the case of the short-term capital-gains tax.


In 1963, Italy enacted a tax on increases in the value of building lots, which all communities with a population of 30,000 or more are required to impose.44 This new tax replaced a “specific” betterment contribution on increases in value of developed rural and urban property. The basis of the new tax is the increase in value over a period of 10 years, as measured by the difference between the initial and the final value of the lot determined by assessment for registration and succession taxes. The tax is to be imposed 10 years from the date of enactment and every succeeding 10 years afterward. However, to accelerate the application of the tax and to increase its yield, the Government authorized communes to impose the tax retroactively as at the time of its enactment, with respect to the previous 10-year increase in value.

The rates are based on a complex progressive scale, depending on the average annual rate of gain over the initial value. Rates range between 15 and 30 per cent of the increase in value.

Taxation of realized increments

In recent years, a number of countries have enacted special taxes on the increment in the value of land realized at the time of its transfer. Many of these are aimed at the gains on the sale of property that have accompanied the expansion of urban areas. Examples may be found in the Middle East, Africa, Asia, and South America. In other countries, capital gains on the sale of real estate are covered by a capital-gains tax of general application.


The special tax on gains realized from the sale of land is illustrated by Israel’s Land Betterment Tax, introduced in 1949 and amended in 1963.45 The tax is based on the difference between the sales price and acquisition cost of real estate. The tax rate varies with the relative size of the unearned increment and the length of time the land is held. The rate is 20 per cent if the increment does not exceed 200 per cent; 30 per cent if it is between 200 and 400 per cent; and 40 per cent if it exceeds 400 per cent. These rates apply if land is transferred within 2 years; a rate reduction of ½ per cent a year is made for the next 13 years, and 1 per cent for every year thereafter. If the betterment tax does not exceed I£1,500, the assessee is exempted; if the tax is between I£1,500 and I£2,000, the rate is halved. In 1963/64 the betterment tax accounted for 24 per cent of total property-tax collections, but for only about 1 per cent of total tax revenues.


Special provisions for the taxation of long-term capital gains in Africa below the Sahara are a recent innovation. In April 1965, Ghana introduced a tax on capital gains realized from the sale of land, buildings, and business assets; sales of agricultural land are exempted, thus limiting the tax to gains realized on urban property. The tax rate ranges from 50 per cent on assets held 1–7 years to 10 per cent on assets held 21 years and over. The Malagasy Republic taxes gains realized from the sale of land at rates graduated from 10 per cent on gains of FMG 80,000–500,000 to 30 per cent on those in excess of FMG 1,000,000. Information on experience with these taxes is not available.

Latin America and elsewhere

In Latin America, capital-gains taxes limited substantially to real property are in effect in several countries. In 1946, Argentina extended the coverage of its income tax to certain capital gains, at a 20 per cent rate. Since then the law has undergone many changes in coverage and rates; in 1961 a general rate of 5 per cent was introduced, and on January 1, 1963, gains from the sale of urban subdivisions were made subject to a 10 per cent rate. Bolivia has had, since 1958, a 4 per cent tax on gains realized from the sale of urban real property and a 10 per cent rate on gains realized from the sale of rural property. Colombia’s capital-gains tax, enacted in 1960, is limited to gains realized on the sale of real estate. The basic rate is the normal income tax rate, ranging from 5 per cent to 51 per cent; capital gains as calculated for purposes of this tax are reduced by 10 per cent for each year the property is held (including the years before the capital-gains tax was introduced). Gains realized on the sale of real estate are also covered by provisions of the income tax laws in Brazil, Chile, Ecuador, El Salvador, Mexico, Panama, Peru, and Venezuela.

Other developing countries, such as India, Indonesia, Pakistan, and the Philippines, also have capital-gains taxes of general application, including gains realized on the sale of real estate. In the Republic of China the Agrarian Act of 1946 instituted a special tax on the net increment in value of land, levied when the land is transferred or, in the absence of transfer, after 10 years.

Evaluation of taxation of increments in land value

Properly designed and administered, special taxes on increases in the value of land can capture for the government increments in land value that accrue to property owners. They can be justified on equity and economic grounds as taxes on unearned increments that reflect, in large part, community-created values stemming from the growth of population and increased urbanization. Such taxes on gains, nevertheless, are subject to certain limitations as to revenue yield, equity, economic effects, and administration, that tend to restrict their effectiveness.

Revenue yield

Although reliable data are scanty, there is reason to believe that such taxes have produced little revenue. This situation is attributable not only to ineffective enforcement but also to the relatively small share of personal income represented by capital gains realized on the sale of property. Because of various exemptions and adjustments and the need for moderate rates (described below), the potential yield has been small—equivalent perhaps to no more than 2–3 per cent of the personal income tax. We have seen that the tax on unrealized increments contributed about 8 per cent of Denmark’s property-tax revenues, and 24 per cent of Israel’s property-tax revenues and 1 per cent or less of its total tax revenues. The British land values duties imposed by the Finance (1909–10) Act yielded meager revenues, which were finally refunded.

Effect of inflation

It is virtually impossible to isolate the real appreciation in property values from the effects of the inflation which tends to characterize many developing countries. Attempts to adjust prices of land by commodity or other price indexes may mitigate this problem somewhat. Many countries provide for the arbitrary exemption of portions of the increases in the value of property, depending on the length of the period for which it has been held; others adjust the original cost by a price index. The reduction of rates as the length of the holding period increases tends to offset inflationary effects, but any such rate schedule cannot anticipate the rate of inflation, if any, and is bound to be arbitrary.

On the other hand, some experts deny the need for such an adjustment for inflation, maintaining that property holders are especially sheltered against a decline in the value of money. The purchase of real estate is an established hedge against general price increases, and, it is argued, no one is in a better position to pay taxes under these conditions than large landowners.

The lock-in effect of high taxes

Taxes based on the realization of increments in property values tend to inhibit the sale of land and result in higher reservation prices. If tax rates are very high, this lock-in effect may result in substantial withholding of property from development. At the same time, such a tax tends to curb speculative land transactions. The strengthening of Israel’s Land Betterment Tax in 1963, for example, is reported to have brought speculative land transactions to a standstill and to have resulted in a considerable reduction of prices outside big cities.46 One virtue of the taxation of unrealized increments in value—such as annual taxes on unimproved land values—is to spur more productive use of the land through its sale or improvement. Rather than tending to enhance the value of land through locked-in gains, it encourages sale and therefore lower land values.

Administrative problems

Taxation of increments in land value (or development value) encounters serious administrative problems. As regards realized gains, not only is it sometimes impossible to identify all transactions resulting in effective sales or transfers of ownership, but it is also difficult to establish the gains because of the ease with which both the original cost and the price at which the sales took place can be concealed. Countries with an efficient system for the registration of titles to land have a check at least on the transactions that are registered. The revenue administration office needs only provide for an effective reporting system by the land registrars. However, it is possible to avoid the tax by arranging contracts of sale without actually effecting transfers of title, as is reported to occur in Israel; avoidance may also be accomplished by incorporating a land company and effecting changes in ownership through sale of bearer stock. Unusual technical and legal problems may arise in the administration of some types of land increment taxes, as illustrated by the United Kingdom’s 1947 Act to recapture development values.47

Taxation of increments in land value is greatly facilitated by a system of property taxation. A property cadastre is of course indispensable to the administration of a tax on unrealized increments. Such a tax is no better than the reliability and efficiency with which such a cadastre is maintained and kept up to date. A cadastre of current real-estate values also facilitates the effective administration of a tax on gains realized from the sale of land. It is not only important to the establishment of original cost, or the cost as of the date of enactment of a land increment tax; it is also a useful bench mark with reference to which current sales values can be confirmed. Because of the ease with which sales prices can be falsified, some countries set a minimum price at the cadastral value; this is frequently adjusted by an index of land prices based on changes in the cost of living or in rents.

Special Assessments (Land-Betterment Taxes)

Another major device for taxing increases in the value of property is the special assessment, better known in the United Kingdom and elsewhere as a land-betterment tax. A special assessment may be defined as “a compulsory contribution, levied in proportion to the benefits derived, to defray the costs of a specific improvement to property undertaken in the public interest.”48 Such a betterment tax is defended by the principle that “persons whose property has clearly been increased in market value by an improvement effected by local authorities, should specially contribute to the cost of the improvement.”49

Historical background and present-day use

Special assessments were instituted in England in 1662, when the city of Westminster was authorized to charge the cost of widening the streets to the abutting property owners in proportion to the benefits received.50 A similar system was introduced in colonial America by the Province of New York, in 1691, when an act authorized the Common Council of Cities to impose a tax in proportion to the benefits received from public improvements. In the United States, this method of financing local improvements was used increasingly, until by 1893 it was authorized by the legislatures of 42 of the 44 states then existing. At the peak of its popularity, in the 1920’s, many U.S. cities financed 20 per cent or more of their budgets this way. During the depression of the 1930’s, however, special assessments declined. By 1960 they accounted for only 2.5 per cent of city revenues.51

Special assessments are also employed in many other countries, not only within the British Commonwealth but also in Latin America.

In 1947, Venezuelan governments at all levels were authorized to use the special-assessment device.52 The law provides for a levy of up to three fourths of the increase in value of property arising from public improvements (such as widening of streets, avenues, or plazas and construction of irrigation or drainage projects) which benefit the property. To establish the increase in value, the law provides for an appraisal before and after the improvement. The contribution required may be paid immediately, or in 10 annual installments with the addition of a 25 per cent charge. Apparently little use has been made of this provision.53

In Colombia, the department capitals and other cities with over 25,000 population are empowered to assess the cost of public improvements to benefiting property owners.54 Municipalities have considerable flexibility in making special assessments, and they need not be limited to the cost of improvements but may tax the amount of increases in land values. The usual practice is to assess the actual or budgeted cost plus 20 per cent. The assessment is usually payable over a period of years into a special revolving fund which is used to finance public works.

Special assessments in Colombia in recent years have yielded about 30 per cent of property tax revenues.55 Their importance, however, varies considerably from department to department. In 1959, they accounted for as much revenue in Bogotá as real property taxes—15.2 per cent of total revenues.56

In Ecuador, the Ley de Régimen Municipal authorizes municipalities’ to levy special assessments on property owners whose property increases in value as a result of a public improvement. The levy is 20 per cent of the difference in the cadastral value before and after the improvement. Payment may be made in a lump sum or in 10 annual installments, at the option of the assessee.

Uruguay also makes extensive use of special or additional property-tax rates to finance public improvements such as sanitation, highways, bridges, and streets. Since 1919, for example, the National Government has levied taxes on those benefiting from sanitary improvements. Urban and suburban properties are subject to a rate of 1 per mil, and rural properties to 2 per mil on property values in excess of Ur$ 100,000. Montevideo levies special rates on property abutting city road projects such as the Rambla Sur, Rambla Costanera, and Ave. Agraciada.

Greece also has a system of betterment levies. Property benefiting from new public works is subject to 15 per cent of the consequent increase in its capital value as ascertained on completion of the work, provided the total amount charged does not exceed 50 per cent of the cost.57 The levy is payable in six annual installments, except that the whole becomes due upon transfer of ownership.


The procedures for special-assessment financing in the United States provide a good example of modern practice.58 These procedures generally offer the affected property owners two opportunities to be heard—first, on whether or not the improvement should be authorized and, second, on the amount of assessments to be levied against each property. The following pattern, in general, is followed:

  • (1) Initiation of the project by property owners, administrative recommendation, or the city council.

  • (2) Adoption by the city council of a resolution authorizing an investigation and setting a hearing date.

  • (3) Preparation of an administrative report analyzing need, estimated cost, boundaries of benefiting property holders, and similar matters.

  • (4) Holding of public hearing, on sufficient notice, on whether improvement should be authorized.

  • (5) Adoption by the city council of a resolution of intent to proceed. This presents the nature of the improvement, describes the benefit district and method of payment, authorizes advertising for bids, orders preparation of assessment roll, and sets the date for a public hearing.

  • (6) Obtaining of bids (or estimates prepared by engineering department) and preparation of the assessment roll.

  • (7) Holding of public hearing on amounts of assessment.

  • (8) Confirmation of assessment roll and awarding of contract.

Allocation of cost

A major question arises as to how much of the cost of the improvement should be allocated to property owners directly affected and how much to the rest of the community. This allocation revolves on a decision of how much of the improvement is a special benefit as distinguished from the benefit enjoyed by the community at large. In some states, this allocation is prescribed by law; in others, standard formulas have been developed depending on the nature of the improvement and its location. About 80 per cent of the cities in the United States share part of these costs.

Determining the most equitable method of allocating the cost of the special benefit is perhaps the most difficult part of the special-assessment process. Authorizing laws generally provide that the cost must be charged in proportion to the special benefits conferred. Five major methods are employed:

  • (1) The front footage method is the most common one in the United States.59 According to this method, the total frontage facing the improvement is divided into the cost, and the number of feet of each parcel fronting the improvement is multiplied by the cost per foot. This method is most suitable for sidewalk, curb, and gutter improvements, but it disregards the depth, value, and location of the lot.

  • (2) The area method takes into account the entire zone of improvement, with the cost proportioned to the total area of each lot benefited. This method is employed most frequently for sewer construction.

  • (3) Another method sometimes used is the value of the unimproved land. This method is limited by the fact that two pieces of land of equal value may not benefit equally from the improvement.

  • (4) The benefit zone method is a refinement which takes into account the proximity of the land to the improvement as well as the front footage. This method may be especially suitable for streets, parks, parking lots, and like improvements.

  • (5) The fifth method uses the actual cost of the work done for each parcel.

Attempts to measure the value of the land before and after the improvement as a basis for allocating the cost are bound to be arbitrary in practice because of the well-known lack of precision in establishing values, especially in the absence of market transactions. If an undue part of the cost of improvements is imposed on benefiting property, public improvements may be deterred by the resistance of property owners, especially when the assessment exceeds the cost of the project.60

Financing methods

Unless the assessment against each property owner is modest, some means must be found to finance payment of the charge over a period of years. In the United States, advance payments are often obtained for smaller projects; assessments are made on the basis of estimates, and payment is made while the construction progresses. For most improvements, however, special-assessment bonds are issued. Preferably, these are serial bonds secured by a lien on all the properties in the special-assessment area. Some cities establish revolving funds, financed by the issuance of general credit obligations. Special-assessment collections over a period are used to replenish these funds and make capital available for future projects. Other cities give special liens or warrants on the property to the contractor, who may sell them to banks; this method is strongly condemned because it generally results in inflating the cost of the improvement.

Recent developments

Special assessments traditionally have been employed in urban areas to finance suburban developments as well as improvements to older areas of the community. More recently, however, they have found a new role in financing nonurban projects that offers promising prospects.

Urban and suburban financing

Special assessments, though in widespread use in one form or another, apparently are declining in importance for financing urban developments. In the United States they reached their peak during the boom of the 1920’s; during the ensuing Great Depression, many special-assessment securities defaulted, and security holders lost heavily because the securities had no backing other than the property of the assessees.

Today, U.S. cities have become more selective in their use of special assessments. The method of financing subdivision improvements especially has greatly altered. As a result of new planning and zoning requirements, contractors are increasingly being required to undertake the necessary improvements in advance of subdivision, recouping the cost in the sale or lease of the property.61 Moreover, Federal Housing Authority regulations require urban facilities to be completed before mortgages are insured. The cost of the improvements is then incorporated in the sales price of the building, and is usually financed over a period of years in the amortization of the mortgage on the property. Temporary financing is furnished through construction loans.

Agricultural areas

Increasing recognition is being given to the financing of improvements in nonurban areas through the use of special assessments. There seems to be a definite place for special-assessment financing in the fiscal programs of developing countries. Its precise role in any individual country depends on the size and composition of the public program and the comparative suitability of other financing methods.

The special-assessment technique appears to be especially well-suited to drainage, flood control, and irrigation projects, and to be somewhat more limited in financing highway transportation projects. One of the best-known projects financed by special assessment was the $33 million Miami (Ohio) Flood Control Project, involving the apportionment of costs to 77,000 separate parcels of property.62 The methods employed here were so successful that it has served as a model for many subsequent projects of the same type. The general principle involved in apportioning the cost was based on the estimated difference in value of property with and without flood protection.

Because property owners are in effect purchasing an improvement to their property, it is important to give maximum weight to the benefit-cost aspect of the project. One of the best safeguards is to limit the special-assessment technique to projects where the benefit-cost ratio is especially high. This policy will better ensure that the price to each property owner is within reasonable limits of the benefits received. (The benefits of the Miami Flood Control Project were estimated at $77 million, against a cost of $33 million.)

Several developing countries have provided for the financing of irrigation projects through this technique, sometimes in connection with land-reform programs. The 1946 Agrarian Law of the Republic of China instituted a construction benefit charge similar to a special assessment to meet the costs of agrarian and water improvements. In Colombia, the Land Reform Act of 1961 provides for the payment of a “betterment” tax on land benefiting from irrigation projects, collected on unexpropriated land in irrigation districts. In Tunisia, 1960 and 1963 legislation on land reform in irrigation zones requires the owners of the land benefited to contribute their share of the cost either in the form of a parcel of land or the proceeds of its sale.63

As we have seen, it will usually be necessary to allow property owners to pay their special assessments over a period of years, unless the amounts are small. In the interim, the authorities must find a means of financing the improvement outlays. This may be a difficult task in less developed countries where bonds cannot be readily sold to local investors. It is also necessary to take account of the delay in collection of special assessments in evaluating the possible inflationary effects of a project that is to be paid for in this way.


British Taxation of Increments in Value of Land After World War II64

In September 1965, the British Government submitted a White Paper to Parliament proposing the establishment of a special Land Commission, which would have the authority to purchase land on a compulsory basis and to impose a levy on its development value.65 The Government’s proposal has two main objectives: (1) to ensure that the right land is available at the right time for the implementation of national, regional, and local plans and (2) to ensure that a substantial part of the development value created by the community is returned to the community, thereby reducing the cost of land for essential purposes.

The Government’s proposal has to be understood in the light of postwar attempts to implement control over development planning and to tax increments in land value within the framework of the Town and Country Planning Act, 1947, as amended in 1952, 1953, 1954, and 1959. The 1965 White Paper proposing the establishment of a Land Commission would further amend this Act.

Development Charge—Town and Country Planning Act of 1947

In 1947 the Labor Government passed the Town and Country Planning Act for the purpose of gaining effective control over all types of physical development—i.e., “the carrying out of building, engineering, mining or other operations, in, on, over or under land, or the making of any material change in the use of any buildings or other land.” Thus, the Act provided that all land development required planning permission. Indeed, it took away the existing rights to develop the land possessed by many owners, and transferred the financial benefits from the development of land to the state. The owner of land could buy back the right of development from the Central Land Board, by paying a so-called development charge, which was supposed to equal the difference between the value of land with and without the benefit of permission to carry out certain specified developments. In this way, the element of development value should be eliminated from the market price of land, and the price of land should be expected to equal its value for “existing use.” In addition, the Central Land Board was authorized to buy land on a compulsory basis in order to dispose of it for development.

On the one hand, any private builder who intended to develop or change the use of his land had to apply for planning permission and subsequently had to pay the “land charge,” which comprised 100 per cent of the development value. On the other hand, those who were refused permission to develop were, in general, not paid any compensation. However, if land became incapable of reasonably beneficial use in its existing state, and permission to develop was refused (or was granted subject to conditions which prevented its being made capable of reasonably beneficial use), the owner could serve on the county borough or county district council a purchase notice requiring them to buy the land. If the Minister of Town and Country Planning agreed that the land was not capable of reasonably beneficial use in its existing state, the council was required to buy the land at its existing-use value. Furthermore, compensation was payable if another permission of less value was granted.66 This compensation was equivalent to the depreciation of the value of the land as a result of the Act. It was aimed at covering mainly land acquired prior to the Act at prices which included a prospective development value.


The “development charge” was not envisaged as a tax at all, but as the freely negotiated price of permission to develop.67 After one year of experience, it became clear that the concept of the “freely negotiated” charge had certain shortcomings. Summing up the initial experience, The Economist stated in May 1949:

  • It is not the fault of the Board, but of the Planning Act, that the fixing of development charges at present follows rather arbitrary and experimental lines, and is accompanied by a good deal of haggling and inconsistency. The Board is attempting to evolve new principles of valuation, appropriate to the new conditions created by the 1947 Act, but numerous cases—such as that of the club whose development charge was reduced from £60,000 to £35,000 at the first protest—show that these principles are anything but exact. The Board is continually tempted to charge what the traffic will bear; and this gives a general impression of unfairness and arbitrariness to its clients.68

The vagueness of the concept of “existing-use value” and “development value” was caused mainly by exclusion of many elements that a market valuation would include. Arbitrariness of valuation was increased by the fact that the “development charge” was determined by the same institution that finally collected the money, and that there was no appeal from its decision.69

In its first annual report, in 1949, the Central Land Board conceded that the object of the Act—that all land should change hands at its value for “existing use,” without the element of the development value—had not been achieved. Most transactions in land were continuously undertaken at prices higher than the existing-use value, and thus an inflation in the price of houses and other buildings was not prevented. Even in the following year the Board was not successful in stopping this practice.70 Its failure can be explained by the fact that the 100 per cent “development charge” did not leave an inducement for the owner of land to develop his site; furthermore, if he sold his land he asked for more than the existing-use value of the land. As the buyer was liable for the “development charge,” he had apparently paid the market price to the seller, and in addition he paid the “development charge” which was determined by the Central Land Board. If the landowner was forced by the Board to sell, he received just the existing-use value. As the Board hardly used its power for compulsory purchase, it was possible that two markets for land came into existence.71

When the Conservative Party came to power it removed the “development charge,” in 1953. One year later, when the restrictions on the private sale of land had been removed, the two-price system for land—one for the compulsory purchased land and the other for free, private sales—became fully evident. “Prices paid when land with development value was sold privately were higher than those paid when such land was acquired compulsorily for public purposes.”72 This finally forced the Government, in 1959, to establish the free market value as the amount of compensation to be paid on occasions of compulsory purchases.

Although the main criticism of the Act of 1947 had been directed against its adverse effects on the supply of land caused by a 100 per cent charge,73 objections had also been raised against its practical application. It turned out that the “development charge” was too closely tied to the process of granting planning permission. The principle of levying a “development charge” on any increment in value of land proved to be impracticable. It resulted, in some cases, in the imposition of a “development charge” when the front room of a cottage was changed into a village shop, or a goal post was placed in a field and it was used for sport.74

Land Levy on Development Value—the 1965 Land Commission Proposal
Basis for assessment

The 1965 Land Commission proposal provides for the payment of a land levy on the development value of land. The development value is defined as the increase in value attributable to the prospects of “material development.” This value is distinct from the current-use value (i.e., the value of land in its previous designation). In contrast to the valuation practice under the original Town and Country Planning Act of 1947, the basis for determining the current-use value and the development value is the market value for land. This is intended to ensure that the owner of land will receive the same price regardless of whether he is selling to a private purchaser or to a public body.

To arrive at the development value, a so-called base value—either the current-use value or the price the seller paid for the land plus an allowance for improvements—is subtracted from the new value of land (i.e., the market price at the time when it reflects the increment in value due to development). The basic condition for charging the levy is the change in the use of the land, as for example, from agricultural purposes to housing.

To avoid tax evasion on the occasion of the introduction of the levy, the White Paper provides in Section 29:

  • Owners selling land will be able to claim for this purpose the price paid if they bought the land before the date on which this Paper is published. If they have bought the land between that date and the appointed day, when the powers of the Commission come into operation and transactions become subject to levy, the price they have paid will not be recognised as the base value for the calculation of the levy.75


The levy will be imposed on the development value realized in private transactions, as well as in sales of land to public authorities under compulsory purchase power or by agreement. It will apply not only when the development value is realized by transactions, but also when the value is increased by the actual development of land and has not been realized in a previous transaction. Anyone whose land has risen in value between the time of purchase and the time he develops it may have to pay the levy. The levy will even be charged on additional value that accrues at the time building actually takes place.76

  • . . . Thus, to give a simple example, if a piece of agricultural land worth £300 as such is sold for £3,000 with a planning permission for housing, levy would apply to the difference between the market value and the agricultural value, i.e., £2,700. If the land is developed immediately thereafter the market value at point of development would still be £3,000 and no more would be payable. However, if the land was not developed for, say, three years, by which time market values had risen and the value of the land was then £3,500, levy at the time of development would be payable on the additional £500 then realised. It may happen that the land changes hands more than once before development. For example, the agricultural land worth £300 as such might have been sold first without a planning permission, but with some hope that one would be granted, for £1,000. The development value realised in the first sale would then have been £700, which would have been subject to levy. If the man who bought for £ 1,000 later sold for £3,000 and there had meanwhile been no increase in the agricultural value of land, he would be realising a further £2,000 development value; so he would have to pay levy on £2,000.77

There will be no charge on the development value of Crown land, or on land which a person owned at the date of publication of the White Paper and on which he intended to build a single house for occupancy by his family.

In summary, the following basic changes are made from the “development charge” of the Town and Country Planning Act:

  • (1) The new development levy will not take all of the development value.

  • (2) In case of compulsory purchase, the valuation is to be made on the basis of the market price.

  • (3) Additional value accruing before the building takes place will be charged regardless of the fact that no transaction takes place.

  • (4) Normally, the seller, rather than the buyer, has to pay the land levy.

Tax rate

The initial rate of the levy will be fixed at 40 per cent. However, the Government has indicated that it intends to raise the rate progressively to 45 per cent and later to 50 per cent at reasonably short intervals.

The Government has decided to exclude the development value from the long-term capital-gains tax and to consider the land levy as an allowable expense in the case of the short-term capital gain which is taxed as ordinary income.78 Hence, the capital-gains tax will only apply to those profits on the sale of land which are attributable to an increase in the market value for the existing use of land. While up to now the development value realized in transactions has been taxed as capital gains, those increments in the value of land which are now realized by development will be subject to the new levy. Furthermore, the proposed tax rate of the development levy is 40 per cent, against the 30 per cent capital-gains tax rate.


As the levy will not be charged on the increase in the existing-use value, it will be difficult to break down the total increase in value into the development value, on one hand, and the increase in the existing-use value, on the other. Questions will occur, for example, how to prove that the selling profit for a farm is exactly increased by a certain amount in expectation of planning permission. The solution of the valuation problems will require a large professional staff, which will make the development levy quite expensive to collect.

During parliamentary debate, the proposal that the land charge be administered by the Land Commission was opposed, and it was recommended that Inland Revenue should assess and collect the levy.79

There might be a certain reluctance to apply for development permission because of the tax; this is reasonable as long as there is a possibility that the development levy will be abolished one day, e.g., by a new government. However, the major opposition party does not oppose the levy, although it is very critical of the establishment of a powerful Land Commission.

An unwillingness to develop may also be caused by lack of available funds to pay the levy. Land developers will then wait for highly profitable investments, with the result that rent (e.g., for housing) may go up. In the parliamentary debate it was alleged that the levy might in some cases discourage industrial modernization and expansion.

  • A development levy might be payable if a manufacturer had around his factory a large area of land upon which he wished to put an extension to his factory. In order to do that he would have to apply for planning permission. . . . When he put up the building he would have developed the land. The development would probably be a “material development”. It would be required to extend his business and, in certain cases, to modernise his business. It would rank as development attracting a development levy. Thus, under the White Paper a manufacturer who modernised or expanded would not only have to finance the modernisation or expansion but pay a levy because he had expanded.80

If they expect an increment in the existing-use value, landowners may hesitate to apply for planning permission because the capital-gains tax rate on the existing-use value is only 30 per cent. But independently of their consideration, public planning may already have caused a development value, and thus establish a liability for the land levy when they finally sell.

Whether the tax will be shifted to the buyer will depend mainly on the landowners’ attitude toward withholding land from sale. Shifting would occur if the land levy caused owners to withhold land from the market or development, thereby curtailing the supply of land for development. If the levy were thought to be temporary, this effect might be highly important. If, however, landowners are reconciled to a permanent tax, any influence on the supply would appear to be minor. Any postponement of sale motivated by the fact that the appreciation in value of land may occur at a faster rate than the potential earnings of interest on the resulting sales profit is counteracted by two factors.

First of all, the plan to raise the rate to 45 per cent and then to 50 per cent is presumably aimed to provide an incentive to get land on the market more quickly.81 Secondly, the compulsory purchase power of the Land Commission may force people to sell. Subsequently, the Land Commission may dispose of the land to those who are willing to develop it, thus increasing the supply of land and keeping prices down. Besides, the Land Commission may even offer land under its market price.

The market price will be essentially influenced by the compulsory purchases of the Land Commission, and in this way counteract the tendency for the tax to be shifted to the buyers. Indeed, the Government has disclosed plans for compulsory purchase, in case “the levy may be used by some landowners to create an artificial market value prejudicial against a private developer.”82

Imposition de la valeur des propriétés non bâties

La poussée démographique et le progrès économique entraînant une hausse de valeur de la propriété foncière, de nombreux gouvernements ont cherché les moyens de faire couvrir certaines dépenses publiques par les propriétaires fonciers qui bénéficient de ce relèvement.

Parmi les méthodes d’imposition de la rente économique, on peut citer l’impôt annuel sur la valeur actuelle du sol. Bien que cet impôt encourage une meilleure utilisation du sol, il est possible qu’une exonération temporaire accordée en faveur des aménagements du sol puisse fournir un stimulant approprié et plus équitable. Il semble que l’imposition distincte de la valeur des propriétés non bâties soit plus efficace et plus précise qu’une imposition globale couvrant notamment les aménagements. Mais tout régime rentable d’imposition foncière exige l’adoption de normes juridiques rationnelles de valeur, un personnel d’évaluation bien formé, et un cadastre à jour représentant les valeurs courantes.

Une autre méthode consiste à imposer les plus values foncières, au moyen de taxes périodiques sur les accroissements de valeur enregistrés entre les dates d’évaluation, ou bien en ne taxant les gains qu’au moment de la vente. Les taxes périodiques susmentionnées exigent, pour être mises en œuvre avec succès, une très grande précision dans la mesure des changements de valeur.

Bien que l’imposition des bénéfices réalisés sur les ventes foncières puisse se justifier en ce sens qu’elle permet de tirer avantage des plus-values résultant indirectement de l’accroissement démographique et de l’urbanisation, ces impôts sont soumis à certaines limitations: il n’est pas facile d’isoler les effets de l’inflation sur les augmentations de valeur de la propriété foncière; les impôts en question sont défavorables aux transferts fonciers et freinent l’aménagement des sols; le pointage de toutes les transactions et la détermination du montant des gains imposables soulèvent de nombreuses difficultés d’ordre administratif; enfin, le rendement de ces impôts est faible.

L’imposition spéciale (taxe sur les aménagements fonciers) constitue elle aussi une des principales méthodes d’imposition des plus-values. Les partisans de cette taxe font valoir qu’elle permet de répartir les coûts des aménagements publics en fonction des avantages qu’ils procurent. Il est cependant fort difficile de déterminer la proportion de l’aménagement qui correspond à un avantage spécial pouvant être mis à la charge des propriétaires fonciers.

Tributación sobre el valor de la tierra

En vista de que el crecimiento demográfico y el progreso económico encarecen el precio de la tierra, muchos gobiernos han tratado de encontrar la forma de hacer que los costos públicos recaigan en los terratenientes que resultan beneficiados de esa plusvalía.

Un método de gravar la renta económica es el de establecer un impuesto anual sobre el valor de los terrenos. Aun cuando este impuesto contribuye a que se haga mejor uso de los mismos, pudiera suceder que la exención tributaria temporal sobre las mejoras que se les hagan proporcionara incentivos adecuados de una manera más equitativa. Se considera que es más eficaz y exacto gravar separadamente el valor de la tierra sin las mejoras que se le hagan, que hacer una tasación global con inclusión de dichas mejoras. No obstante, para que un sistema de gravación de la propiedad inmueble tenga éxito, es menester establecer normas jurídicas de tasación adecuadas, contar con peritos competentes, y con un catastro actualizado que refleje el valor actual de las propiedades.

Otro método consiste en establecer, bien un impuesto de plusvalía que aumente periódicamente de acuerdo con los incrementos de valor que se produzcan entre las fechas de tasación, o un impuesto que se cobre sólo sobre las utilidades que se obtengan cuando se efectúe su venta. El éxito del primer método requiere un alto nivel de exactitud al calcular las variaciones que se registran en el valor de la propiedad.

Ahora bien, aunque la gravación de las utilidades obtenidas de la venta de la tierra puede justificarse como medio de que la plusvalía que se origine a causa del crecimiento demográfico y de la urbanización se convierta en una fuente de ingresos tributarios, tales impuestos están sujetos a ciertas limitaciones, a saber: es difícil aislar los efectos que la inflación ejerce sobre la plusvalía de la tierra; la gravación en el momento de la venta inhibe el traspaso de la tierra y sus edificaciones; existen muchos problemas de orden administrativo que impiden averiguar las transacciones que debieran gravarse, y determinar el monto de utilidad imponible; y finalmente, los ingresos tributarios que se obtienen son limitados.

Otro medio importante de gravar la plusvalía consiste en una tributación especial (impuesto de saneamiento y urbanización de la tierra). Se ha abogado por este impuesto porque constituye un medio de repartir el costo de las mejoras públicas en proporción a los beneficios recibidos. Sin embargo, surge un importante problema al determinar qué proporción de la mejora constituye un beneficio especial que se debiera cargar a los propietarios de los bienes raíces.


Mr. Lent, Chief of the Tax Policy Division, formerly served as assistant director of the tax analysis staff, U.S. Treasury Department; consultant, Organization of American States; and research associate, National Bureau of Economic Research, New York. He was on the faculty of the University of North Carolina and Dartmouth College.


David Ricardo, Principles of Political Economy and Taxation (first published 1817).


John Stuart Mill, Principles of Political Economy (Toronto, 1965), p. 819 (first published 1848).


Progress and Poverty, Book VIII, Ch. III (first published 1879).


For an excellent summary of the principles involved and their application, see Haskell P. Wald, Taxation of Agricultural Land in Underdeveloped Countries (Cambridge, Massachusetts, 1959), pp. 71–126.


Commission to Study the Fiscal System of Venezuela, The Fiscal System of Venezuela: A Report (Baltimore, 1959), p. 340, hereafter cited as the Shoup Commission Report. (The Commission consisted of Carl S. Shoup, Director; John F. Due; Lyle C. Fitch; Sir Donald MacDougall; Oliver S. Oldman; and Stanley S. Surrey.)


N. Kaldor, “The Role of Taxation in Economic Development,” in Problems in Economic Development, E.A.G. Robinson, ed., International Economic Association (London, 1965), p. 179, and Haskell P. Wald, “Reform of Agricultural Taxation to Promote Economic Development in Latin America,” in Fiscal Policy for Economic Growth in Latin America, papers and proceedings of a conference held in Santiago, Chile, December 1962, and issued by the Joint Tax Program of the Organization of American States, Inter-American Development Bank, and Economic Commission for Latin America (Baltimore, 1965), p. 326.


For an excellent historical analysis of the Australian and New Zealand property tax systems, see A.M. Woodruff and L.L. Ecker-Racz, “Property Taxes and Land Use Patterns in Australia and New Zealand,” The Tax Executive, Vol. XVIII (1965), pp. 16–63. See also Edwin R.A. Seligman, Essays in Taxation, 9th ed. (New York, 1921), pp. 516–31.


Woodruff and Ecker-Racz, op. cit., pp. 32–33.


For a brief history and critical appraisal of Canadian experience, see F.H. Finnis, “Site Valuation and Local Government,” Canadian Tax Journal, Vol. XI (1963), pp. 118–19.


For a good account, see Kjeld Philip, Skattepolitik (Copenhagen, 1965), pp. 476–88.


For a good survey, see John F. Due, Taxation and Economic Development in Tropical Africa (Cambridge, Massachusetts, 1963), pp. 102–18.


J.F.N. Murray, Report to the Government of Jamaica on Valuation, Land Taxation and Rating (Kingston, 1957). Murray recommended that a progressive rate be applied to the unimproved value of all lands held in one ownership. In addition, he recommended a flat rate based on capital value that would supplement the site-value tax.


For a review and appraisal of this experience, see Daniel M. Holland, “The Taxation of Unimproved Land Value in Jamaica,” in Proceedings of the . . . Conference on Taxation, 1965, National Tax Association (Harrisburg, Pennsylvania, 1966), pp. 442–70.


Richard M. Bird, “Local Property Taxes in Colombia,” in Proceedings of the. . . Conference on Taxation, 1965 (cited in fn. 13), p. 482.


Harvard Law School, World Tax Series: Taxation in Colombia (Chicago, 1964), pp. 138–40. These rates represent ceilings inclusive of all property tax rates except special assessments.


Bird, op. cit., p. 494.


Shoup Commission Report, p. 339.


See Dick Netzer, Economics of the Property Tax, The Brookings Institution (Washington, 1966), p. 209.


J.R. Hicks and U.K. Hicks, Report on Finance and Taxation in Jamaica (Kingston, 1955), p. 137.


Holland, op. cit.


Murray, op. cit., p. i.


Finnis, op. cit., p. 119.


Woodruff and Ecker-Racz, op. cit., p. 62.


J.R. and U.K. Hicks, op. cit., p. 139.


Holland, op. cit., p. 449.


Woodruff and Ecker-Racz, op. cit., p. 58.


J.R. and U.K. Hicks, op. cit., p. 134.


Murray, op. cit., p. 6.


Woodruff and Ecker-Racz, op. cit., pp. 58 and 62–63.


Due, op. cit., pp. 102–18.


Ibid., p. 118.


One of the few systematic comparisons of the alternative systems of property taxation in the United Kingdom was made by the Committee of Enquiry of the Ministry of Housing and Local Government on the Rating of Site Values, over a five-year period, 1947–52. Although a majority of the Committee declared against a site-value system, the minority supported it. Skepticism about the merits of site valuation, which apparently originated in institutional and legal factors, is evidenced by the following excerpts from the majority report: “On the main issue before us of whether the imposition of a site value rate is practicable or desirable, the great preponderance of evidence was opposed to the introduction of such a rate, and we were impressed by the reasoned arguments both in regard to its undesirability and the practical difficulties in respect of its application” (Ministry of Housing and Local Government, Scottish Home Government, The Rating of Site Values: Report of the Committee of Enquiry (London, 1952), p. 72). The Committee took as its terms of reference the Town and Country Planning Act, 1947 (described in the Appendix), which limited its consideration to value in use. The Committee concluded that “the only effect of a site value rate on existing use value would be a shift of burden as between individuals and classes of property,” but that there was “no evidence that there would be either advantage or equity in altering the relative amount of rates borne by those classes of property or persons” (ibid., p. 76). Moreover, the Committee was impressed by the administrative difficulties, the prospects of litigation, and the undesirability of diverting much-needed manpower for the relatively small revenues involved. The minority report, however, concluded that “the rating of site values is both practicable and desirable” (ibid., p. 97), and charged that the majority’s adherence to a concept of “the existing-use value” vitiated the conclusions reached (ibid., p. 77).


See Woodruff and Ecker-Racz, op. cit., p. 34.


For a good description of this and similar German taxes, see Seligman (1921), op. cit., pp. 505–15. On the enactment of the imperial tax referred to below, see Gustav Cohn, “Taxation of Unearned Increment in Germany,” The Economic Journal, Vol. XXI (1911), pp. 212–22, and Karl Bräuer, “Wertzuwachssteuer (Grundstücksgewinnsteuer),” in Handwörterbuch der Staatswissenschaften, Vol. VIII (Jena, 1928), pp. 1017–42.


J.C. Stamp, “The Incidence of Increment Duties,” The Economic Journal, Vol. XXIII (1913), p. 201.


Gustav Cohn, “German Experiments in Fiscal Legislation,” The Economic Journal, Vol. XXIII (1913), pp. 544–45, and Edwin R.A. Seligman, “Comparative Tax Burdens in the Twentieth Century,” Political Science Quarterly, Vol. 39 (1924), pp. 124–25.


T. Pistorius, “Direkte Zuwachs- und Kriegsgewinnsteuer,” in Handbuch der Finanzwissenschaft, Vol. 2 (Tübingen, 1927), p. 175. In 1919, a special tax was imposed on individuals on the increment of all property value (Kriegsabgabe vom Vermögenszuwachs), graduated from 10 per cent on the first DM 10,000 to 100 per cent on increases over DM 375,000 (ibid.).


H. Ronald Parker, “The History of Compensation and Betterment since 1900,” in Land Values: The Report of the Proceedings of a Colloquium Held in London on March 13 and 14, 1965, Under the Auspices of the Acton Society Trust, Peter Hall, ed. (London, 1965), pp. 65–72. See also Seligman (1921), op. cit., pp. 491–94.


The Rating of Site Values . . . (cited in fn. 32), p. 20.


See Philip, op. cit. This tax evolved out of the “railroad levy” introduced in 1910 to tax increases in land value induced by the railroad. It was made available to municipalities in 1926.


See Appendix, p. 116, for a more detailed review.


Central Land Board: Report for 1950–51, House of Lords Papers and Bills (London, 1951).


Minister of Land and Natural Resources and the Secretary of State for Scotland, The Land Commission, Cmnd. 2771 (London, 1965), hereafter cited as The Land Commission, Cmnd. 2771.


Harvard Law School, World Tax Series: Taxation in Italy (Chicago, 1965), pp. 265–70.


Bulletin for International Fiscal Documentation (Amsterdam), Vol. XVIII (1964), pp. 13–14. The law was amended in 1963 because of widespread evasion of the original tax, which was based on transfer of legal ownership via registration with the Land Registry Office. Speculative transactions remained untaxed because of failure to register the transfer. The new tax applies to the mere transfer of contractual rights in land.


E.W. Klimowsky, “Capital Gains Taxation in Israel—Modifications,” Bulletin for International Fiscal Documentation, loc. cit., p. 455.


For a review of these problems and conditions for a successful program, see P.H. Clark, “Site Value Rating and the Recovery of Betterment,” in Land Values. . . (cited in fn. 38), pp. 73–96.


Seligman (1921), op. cit., p. 414.


Report from the Select Committee of the House of Lords on Town Improvements (Betterment), 1894 (cited by Seligman (1921), op. cit., p. 433). The Uthwatt Report (Expert Committee on Compensation and Betterment, Final Report, Cmd. 6386 (London, 1942)) attempted to expand the concept of betterment to include the “enhancement in the value of property arising from general community influences, such as the growth of urban population” (pars. 260 and 276). This study follows the more restricted concept.


Victor Rosewater, Special Assessments: A Study in Municipal Finance (New York, 1893), p. 9.


International City Managers’ Association, Municipal Finance Administration, 6th ed. (Chicago, 1962), hereafter cited as Municipal Finance Administration, p. 114.


Ley de Expropiación por Causa de Utilidad Pública o Social.


Shoup Commission Report, p. 337.


Joint Tax Program of the Organization of American States and the Inter-American Development Bank, Fiscal Survey of Colombia (Baltimore, 1965), p. 136.


Bird, op. cit., p. 492.


Fiscal Survey of Colombia (cited in fn. 54), p. 140.


George Break and Ralph Turvey, Studies in Greek Taxation, Center of Planning and Economic Research (Athens, 1964), p. 82.


Municipal Finance Administration, pp. 111–30.


The Municipal Year Book, 1959 reported that 570 of 835 reporting cities use the method exclusively, and 183 use a combination of footage and area (ibid., p. 121).


Cf. Bird, op. cit., p. 492.


Municipal Finance Administration, p. 114.


See International Bank for Reconstruction and Development, The Use of Special Assessments to Finance Development Projects, Appendix I (unpublished mimeographed paper, July 15, 1953).


See E.H. Jacoby, “Problems of Land Taxation,” Information on Land Reform, Land Settlement and Co-operatives, Food and Agriculture Organization, No. 2 (Rome, 1965), pp. 9–10.


Prepared by Carl-Heinz Tretner, economist in the Fiscal Affairs Department. Mr. Tretner studied at the University of California in Los Angeles, the Institut d’Etudes Politiques in Paris, and the University of Cologne, where he was an assistant. Before joining the Fund staff, he was assistant treasurer with the German branch of an international oil firm.


The Land Commission, Cmnd. 2771.


The Rating of Site Values . . . (cited in fn. 32), p. 26.


The Economist, May 10, 1947, p. 701.


The Economist, May 14, 1949, p. 881.


The Economist, November 15, 1952, p. 433.


Central Land Board . . . (cited in fn. 42).


Parker, op. cit., pp. 65–67 and 71.


The Land Commission, Cmnd. 2771, p. 4.


See Alan Day, “The Case for Betterment Charges,” in Land Values . . . (cited in fn. 38), p. 100.


The Economist, November 15, 1952, p. 433.


The Land Commission, Cmnd. 2771, sec. 29.


Loc. cit., sec. 26.


Loc. cit.


“Land Commission Proposals,” The Financial Times (London), October 21, 1965, p. 20.


House of Commons, Parliamentary Debates, Weekly Hansard, No. 671, November 8–11, 1965, col. 372, and No. 687, March 6–12, 1966, cols. 606–732.


Loc. cit., No. 671, November 8–11, 1965, col. 483.


The Financial Times, September 23, 1965.


House of Commons, Parliamentary Debates, Weekly Hansard, No. 671, November 8–11, 1965, col. 398.