Land Value Reparations for South Africa

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South Africa’s people are enduring civil instability unseen since Apartheid. Civil unrest in 2021 left 354 people dead. This instability is set to usher in South Africa’s first coalition government in 2024. The coalition party which brings the incumbent ANC over the 50% threshold will decide the future of the South African people. If the national coalition mirrors current local and municipal elections, this party will be populist. As centrist parties refuse to coalition with the ANC, the ANC’s local coalitions are mainly with the Marxist-Leninist EFF, or a mosaic of radical micro-parties.  The long-standing radicalising force behind populist voters’ dissatisfaction is the land issue. As the writer AfroGeorgist stated in a previous article for this Substack, “Disputes over post-colonial land ownership have riven South African politics for decades.”. Any new social contract for the country must resolve the land issue. This article will build further upon AfroGeorgist's piece, expanding on how and why a land value tax is the best way to “give back” the land to previously disadvantaged South Africans¹.

What’s so special about the LVT?

Property tax and transfer duties tax the sum of improvements upon the land (buildings, fertilised soil, shops, etc.) and the land itself (i.e. property tax = improvement tax + LVT). Taxing land at a significantly higher rate (LVT) would replace property tax. Taxing the value of the land regardless of how it is used incentivises landowners to use their land productively to offset the LVT, while not paying any tax on said productivity improvements. Removing improvement tax leads to more improvements: more crops for consumers, more housing for renters, more wild animal stocks for tourists, more fixed capital for industry, etc. The primary losers would be those not contributing to the nation's improvement, i.e., those hoarding unused and unproductive land. 

When you tax most things, such as petrol, the price goes up. As people can now afford less of it, less is consumed and produced. Economic growth—the only known means of long-run poverty reduction—is produced by the factors of production (land, labour, and capital) combined with innovation. If you tax any non-land factor of production, the price of the factor goes up, and less of that factor is supplied, which typically reduces economic growth. Land is the miraculous exception to this. This is because the quantity of land is fixed. Therefore, suppliers (owners) of land cannot reduce the supply of land in response to increasing prices from taxation. When you tax land, the price actually declines as ownership creates a long-run tax liability. 

Incredibly, this price decline reduces rental costs as renters are “paying less for their landlord's mortgage”. Further, as development is now tax-free, the supply of housing rapidly increases, further reducing the cost of renting. As such, the cost of LVT falls only on landowners. As widely accepted by economists, this “inelasticity of supply” makes LVT the most efficient tax, with little to no “deadweight loss”. As per the Davis Tax Commission: “A land tax is generally considered to be the least distortive of all taxes and thus the least harmful to economic growth.” LVT is also exceptional for its low collection cost and publicly transparent valuation. As ownership is easily identified, evasion and offshoring are nearly impossible.

How is the value of land determined? Location, location, location. When others improve their land, when municipal services are improved, when greater economic activity occurs near the land, the value of the land increases². This is why land is so speculated upon—land owners merely need to wait for others to improve adjacent land for unearned profits to accrue.  This speculation creates property cycles and housing bubbles which LVT smoothes³, improving housing market and macroeconomic stability.

Why LVT is the best form of land reparations

Increased by 5% each year⁴, an LVT would redistribute the present value of all the nation’s land in just over 20 years. South Africa already has an efficient system of redistribution that can take advantage of this revenue: grants. A guaranteed lifelong Land Reparations Dividend could even be borrowed against to buy secure assets—such as land parcels. All of this means that LVT can serve quite well as the means of providing land reparations.

It is much better than prior insufficient forms of reparations such as affirmative action. As proven by SA's world-leading unemployment, affirmative action positions remain inaccessible to the vast majority of South Africans (p.95). This is because affirmative action does not address the primary labour scarring of Apartheid—minuscule investment in human capital (education), particularly in the homelands, as I write elsewhere.  Unlike affirmative action, LVT provides the means to get an education as well as the adequate health and well-being required to attend school and prioritise education. 

LVT is also far more than just wholesale land reform, which has costs and inequities that make righting SA’s central injustice through such a process inappropriate. For one thing, land reform creates the possibility of losing all one's land and the improvements in one go, i.e. confiscation (unlike a tax at a set rate per year). This reduces the incentive to improve one’s land (investment), the very thing which creates growth and employment. For another, high-stakes confiscatory land claims inevitably end in extraordinarily costly and prolonged court cases. The confiscation and handing out of parcels is also a ripe opportunity for corruption. AfroGeorgist mentions the example of Zimbabwe “whose government of former guerrilla warriors implemented a lawless land reform policy that plunged the country into economic chaos and its people into obscene poverty.” The history of land reform in other African countries is a tale of unintended consequences entrenching poverty⁵.

In contrast to confiscation, LVT creates a predictable, stable, and efficient investment environment under the well-understood process of taxation. If you cannot afford to pay the tax due to transitory non-liquidity, banks lend more readily with land as security than any other asset. Otherwise, selling the land to someone who can create better value-add from improving the land (and can thus shoulder the obligation of the tax) is a major upside of the LVT⁶.

Additionally, the land reforms that focus on rural land under the status quo are especially misguided. The spoils of Apartheid and colonialism accumulated chiefly in cities, where the vast majority of non-mineral land value remains. Why should relatively worse-off rural people bear the burden of reparations?⁷ Moreover, why should reparations only be granted to those with an identifiable and recorded forced removal when most South Africans suffered under white rule? This is particularly unjust to those living in the former homelands, who typically cannot identify the land from which their ancestors were originally removed.  Those whose ancestors were disenfranchised by Ngcayechibi's War (1877-1879) have had as little restitution as those who lost their land to the Group Areas Act.

Is LVT feasible?

I argue that a feasible LVT needs to replace inefficient taxes rather than increasing total revenue collection⁸. SA tax rates are high—tax to GDP is 26%+ in SA compared to the average for upper middle-income countries of 18% (p.24). Increasing total tax collection is likely to reduce economic activity so much as to reduce long-run total revenue collection. Even though the LVT is the most efficient tax, it is not efficient enough to overcome this. We should start by replacing property tax and transfer duty⁹.

The budgetary shortfall of earmarking the LVT to reparations should ideally be financed by reducing the massive public wage bill (which has risen, in real terms, by 60%+ in 10 years¹⁰) and ceasing failed attempts at reparations. This is outside of current political possibility, but politics is shifting rapidly, as I highlight in the introduction. Tangible and meaningful land reparations will likely change how South Africans experience the post-apartheid social contract. 

So why don’t we have LVT? Is it because the market value of land cannot be determined separately from the value of the improvements? In fact, parts of South Africa were at the forefront of implementing LVTs, as early as 1918 and until at least 1983. This was primarily with the intent to increase the development of the Transvaal, with great success. Not only is land valuation (at market prices) possible, but the City Valuer of Johannesburg, J. McCulloch, circa 1978, estimated that shifting from LVT to property tax would increase the cost to value property by 40%¹¹. This is because accurately valuing buildings, for example, bathroom renovations, is more challenging as values fluctuate more rapidly than land value. With the advent of computer-assisted mass appraisal, the relative cost has shrunk further. (McCulloch also attributed the absence of empty plots and decaying buildings in Johannesburg to the LVT, a far cry from South Africa’s now decaying cities).

LVT has a proven track record, even beyond the Transvaal. The Meiji restoration in Japan initiated rapid industrialisation, South Korea’s “public concept of private land”, and Singapore’s market price of public land have all had exceptional effects on growth.  On both ends of the political spectrum, the list of economists and political philosophers who support the LVT is nearly endless. 

Conclusion

Improving tax efficiency & prioritising economic growth are seldom political bedfellows with land reparations. Yet, the LVT opens the possibility of rejigging the economy to support investment in both labour and capital while rewriting our fragile social contract to create a politically stable South Africa. This is only possible once the true nature of land is understood as a nation’s fixed natural endowment. We must desist from taxing that which creates prosperity. We must right the economic wrongs of our history. LVT provides a pathway to prosperous politics. 

1. The remaining value in the environment, such as the minerals it contains, the view to the ocean it provides, and the clean water it bestows, are also the nations natural endowment. I advocate for the taxation of them elsewhere.

2. NIMBYs might think that a block of flats next door is bad for the value of their land. Yet, this is untrue in aggregate—denser cities have higher land values and economic growth.

3. “Taxing land reduces the likelihood of land price bubbles (and the resulting macroeconomic instability caused by such price bubbles) by stabilising land prices” (p.61)

4. 5% of total value, or something closer to 100% of annualised rent

5. Joshua Nkomo, the closest contender to Robert Mugabe in the 1980 Zimbabwe Elections, was an incrementalist Georgist. The people of Zimbabwe endured 25 years of declining incomes after their first democratic elections. The relative prosperity under the Nkomo counterfactual is hard to fathom.

6. One example of this in practice was California in the late 19th and early 20th centuries. Taxing land value and exempting improvements got large landowners to hand off their land to small farmers.

7. Interestingly, there have been two major attempts at LVT in democratic South Africa. Both have failed (namely the Katz Commission and the 6^th (and penultimate) draft of the Reconstruction and Development Plan [s2.4.8]), likely due to the exclusion of urban land from their scope of LVT.

8. A position which AfroGeorgist agrees with, as he articulates in his Substack piece.

9. Transfer duty is particularly punitive in how it restricts the movement of people to better opportunities.

10. “Within the public sector, the fastest growth has been registered at local government level, which the QES reflects as having increased by over 60% between 2010Q1 and 2020Q1.” (p.15)

11. “Because the SVT does not necessitate the monitoring of structures and their values, its administration costs are much lower than those of the flat rate. McCulloch (1979) estimates that the cost of maintaining the Johannesburg valuation roll will increase by 40 per cent if buildings are included in the tax base.” (p.163)