This is the principle of returning to the community, by means of a tax or levy, the value that the community itself has created. This value is measured through land values, which are simply an indication of collective prosperity. With the growth of a community the value of any site will increase due to the surrounding communal activity or community-funded infrastructure that has the effect of enhancing the value of the site. This increased value falls fortuitously to the benefit of the owner and may be realised in the form of increased rents or capital value at any point of sale. The revenue thus derived is not due to any work done by the owner, and is clearly unearned. It is known, by economists, as the ‘economic rent of land’ (generally abbreviated to the ‘economic rent’). The classical economists, from Adam Smith onwards, were aware of this source of revenue, however it was David Ricardo in his Principles of Political Economy and Taxation, of 1817, who first identified the economic rent. (see Part 3, item 17, Definitions). The economic rent still exists, it has never gone away, it is still collected and it still goes into private pockets. The prime purpose of LVT is not to stop this collection but to re-channel it into the public coffers, thereby returning to the community the value that it has created.
The difference between land value and site value as used here, is a matter of scale. Land value is the term used when applied to a large geographical area, within which there are many sites. Land value is therefore an expression of the aggregate of all the site values within the area under consideration. Land value indicates the general level of prosperity of an area. One may have specific high value sites within an area of general low prosperity and low value sites within an area of general high prosperity.
The value of any property has two parts: the value of the building––the bricks and mortar––and the value of the site. Unlike the building value, the site value, in the urban situation, is determined by its location within the community. As most estate agents would concur, where property valuations are concerned, it is more a question of ‘where’ rather than ‘what’–– primarily a matter of location. In the urban context, it would not be incorrect to describe LVT as a location-value tax, where the value of a particular site is determined by communal demand at that particular location. It should also be noted that LVT is proposed as a replacement tax, not an additional tax. To the degree that it is introduced, other taxes should be proportionately reduced or eliminated; the overall tax take would remain the same.