Those who benefit from new infrastructure being built should be the ones who pay for it
The construction of the main road in and to Badda raised the price of land from Tk2 lakh per katha to Tk30 lakh per katha according to an article published in the Dhaka Tribune. That tells us all we need to know about who should pay for roads to be built -- the owners of the land the road opens up.
This is a more general insight as well -- the people who should pay for infrastructure improvements are the people whose assets, usually land, increase in value as a result of the improvements to the infrastructure.
This is not a new thought even if it’s not applied as much as it should be in the modern world. When fully thought through and written out it is known as “Georgism” after Henry George, the 19th-century economist.
His point, and a true and valid one, was that the value of land is really determined by what everyone else, society, has built around it. Land in, say, Gulshan, is not inherently worth more than in the Sundarbans.
What makes it so is that one is surrounded by Dhaka, the other by a mangrove swamp, and, odd as humans may be in thinking this way, people will pay more to be surrounded by the capital city than they will be by tiger infested wet mud.
The value of Gulshan is determined by what everyone else has done to build Dhaka. The value of land in Badda has been increased by the tax-payers building that road out to it. The rest of us, the society itself, should recoup that cost out of the profits of the landowners.
When fully implemented, this is known as land value taxation and one merit of it is that it is regarded, within economics, as the most efficient method of taxation available. It also seems fair -- if the rest of us pay to increase the value of someone’s land then the least they can do is pay a bit of tax on that gift to them.
The way to implement this is easy enough as a general principle. Landowners are charged tax according to the value of the rent they can receive for their land. As we’ve already said, that value is largely determined by what everyone else has built around it.
So, taxing the land value is dependent upon how much everyone has done. Some patch out in the Sundarbans pays near nothing, something in Gulshan quite a lot.
We can also take this further as a method of paying for specific pieces of infrastructure. To give an example, there’s an area of London called Battersea. It’s just across the river from Westminster, where parliament and government are based.
But, oddly for central London, it never had a tube or metro station. Just how the system developed, it didn’t. It was therefore rather cheaper than the other areas close by it in that centre of the city.
Then there was a large old industrial site (the old power station) that was to be developed into housing. The promoters of the scheme knew that they would be able to sell the new apartments for much more if there was a subway station right there.
So, they paid the London transport company to build one. The value of their development rose by more than it cost them to do this and everyone else in the area also gained. This was also done in another area of the city, out in the old docklands region.
An area there had bad transport links but if it had good ones it could be an extension of the finance district. So, the developers paid 500 million pounds to the transport company to extend the tube line out to their site.
This is also how much of Hong Kong’s public transport system is funded. If a new metro station is built, then the shops right by it -- or even the land you could put shops upon -- becomes more valuable.
So, the tax rises in the value of the land to build the new station. Plus, the places you could put housing around it and so on.
At heart, it’s easy to see the attraction of the idea. Those who benefit from the infrastructure being built should be the ones who pay for it. This is as true of sewage and water lines, electricity supply, as it is of transport links. Land close to these things is worth more.
So, tax away some of the additional value of the land to pay for the things being built. It’s also entirely possible to see the difficulty in the fact that landlords are not known for their willingness to pay taxation. It’s thus politically difficult to bring into being.
But our example of Badda shows that it definitely should work -- there’s an awful lot of tax that can be paid out of a rise in value from Tk2 lakh to Tk30 lakh per katha after all. Rather, more than the cost of the road, that causes the profit too.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.