South Africa has made great strides in many areas since the 1994 transition to democracy. Those who predicted all sorts of disasters have been proved wrong; we have only to consider the 2010 Football World Cup as an example of how far we have come since the dark days of two decades ago. But if we South Africans are by nature optimists, we are also realists, and we are well aware that we still face very serious challenges. We remain an unequal society, with a great gulf between the wealth of a few and the poverty of many. And we remain a society in which the great majority of citizens lack access to land, the absolute foundation of the ‘better life’ for which so many people sacrificed and struggled.

This article shows how equality and the land question are intimately linked to our system of taxation. And how, if we are to seriously address inequality and landlessness, we must be prepared to make fundamental changes to the tax system. If we do not, then we will simply perpetuate inequality, poverty and landlessness for generations to come. Nothing illustrates the problem better than the story of the Gautrain. By the time the Gautrain is up and running, it will have cost somewhere in the region of R25 billion. The great majority of this money comes from South African taxpayers through direct government funding or loans which are guaranteed by the State. Of course, there will be many substantial benefits from the Gautrain quicker travel, fewer cars on the roads, etc. But one small group of people is going to benefit far more than anyone else; they are going to enjoy a massive, unearned bonus, paid for by the taxpayers. These are the people who own land near the Gautrain stations.

It happens every time that the state spends public money taxpayers’ money to build a road, a school, a new railway station, a taxi rank: a few lucky people who happen to own land nearby suddenly find that their land is now worth far more than before. Almost overnight, these people are rich, and they’ve done nothing to earn it.

How Does This Happen

In one way, it’s very simple: Mr A owns a small shop on a big plot, say in Lansdowne Rd, Khayelitsha. One day, the municipality decides to build a new taxi rank right there. Obviously, the shop can now look forward to much more business from commuters; it, and the plot it is built on, are suddenly worth a lot more. Mr A might even sell it to a bigger business which will put up a supermarket. Next door is an ordinary house, owned by Mrs X. She sees potential for a cell-phone agency on her property, and applies for it to be rezoned to commercial so that she can set up her own shop and take advantage of the new opportunity presented by the taxi rank. Her piece of land is now also worth much more than before.

The important thing to note is that Mr A did nothing, and Mrs X almost nothing, to make the land more valuable they just sat back and watched it happen. It was the municipality’s decision to build a taxi rank that made Mr A’s land more valuable. And it was the municipality’s decision to allow a rezoning that caused the value of Mrs X’s land to sky-rocket.

This is happening every day all over our country; the Gautrain is the biggest example, but it’s not the only one. Think of the new football stadiums and the new public transport links in our cities, for instance. People who own land near these facilities are generally enjoying a windfall vastly increased land values in return for no effort on their part. This all has to do with the question of land values, and the factors that influence those values.

How Land Gets Its Value

It is crucial to understand where the value of land comes from. Land is not created by anyone; it is provided by nature. No land owner can do anything to increase the value of his or her land. (We are not discussing ‘improvements’ to the land, such as buildings, irrigation, earthworks, but the bare, underlying land itself.) Land derives its value in the first place from its natural endowments. These include such things as its fertility, weather, and views. Secondly its value relies on location: Bishops Court vs Bishop Lavis. Clearly, none of these things are created by the land owner.

Thirdly, land becomes more valuable the more it is sought after. This, in turn, is largely a function of increases in population. Since there is a fixed supply of land it stands to reason (and the rule of supply and demand dictates this) that if more people compete for it, its price will rise. Again, the rise in population is not something brought about by any land owner.

Fourthly, land increases in value as a result of the efforts and investments of the community as a whole. For example, rural agricultural land will become more valuable if it is connected to a city by a road or railway line. A residential plot will become more valuable if the government or the private sector decides to build a school nearby. Land near a polluting factory will become more valuable if the authorities enforce environmental regulations. And if the state keeps law and order and combats crime, once again, land values will rise as it becomes more desirable to live in secure and peaceful surroundings.

In all these cases, the effort and resources have been put in not by the land owners but by the community (represented by one or other arm of the state); however, the benefit of the increased land values has accrued exclusively to the land owners.

Good Luck To The Few


To go back to our Khayelitsha example, do we just say ‘good luck!’ to Mr A and Mrs X, and hope that next time someone else will be as fortunate as them? Well, if we do, we are perpetuating a very serious situation, the situation of landlessness in our country.

We know that millions of our people, predominantly black and almost all of them poor, do not own any land. At the same time, we know that there is actually more than enough land to go around. Frost and Sullivan, the multinational market research company, has estimated that there are 28 million hectares of potential arable land in our country that could be made available to landless people. But it’s too expensive, poor people can’t afford it and the state can’t afford to buy it all and give it away.

And the land is getting more expensive all the time: average residential land values have increased by 7.5 times over the last 13 years, for example.


Isn’t This Unfair

Of course it is. The people of South Africa, working together and through the channels provided by a democratic state, have created the conditions under which land values have been able to rise. But only a relatively small number of those people the landowners are enjoying the fruits, while the majority the landless see their dreams unfulfilled.

And to make matters worse, the longer this continues, the worse it gets land values rise more and more as landowners sense that demand is firm, and thus ask for higher prices, more out of the reach of poor people than ever.

Before continuing, we should make it clear that this unfair situation is not the ‘fault’ of landowners. In fact, there is nothing that an individual  landowner can do about it giving away his land to a landless person, for example, would simply mean that the new owner would become one of the exclusive group of landowners. Landlessness would continue. What is at fault is the system of taxation. As we will demonstrate, our current system of taxation, based on income tax, VAT and company taxes, is a direct cause of high land values. And, consequently, a direct cause of landlessness. Therefore, in order to address landlessness, we have to address the tax system. Landowners don’t actually pay taxes.

It may look as if landowners, just like everyone else, are paying their normal taxes. They pay tax on their salaries; they pay VAT on their purchases, and so on. And all these taxes go to the state and enable it to run the country build infrastructure, schools and hospitals, put police on the streets, etc. These social goods benefit all citizens, but the only ones who can measure any actual increase in their assets as a direct result of these social goods are land owners. As we have seen, a well-run and stable country is one where people will want to live and invest, causing land values to increase.

Here’s How It Works

The worker living in an informal settlement pays VAT on his or her purchases; excise duty on cigarettes and drinks; and in many cases income tax, even if at the lowest rate. A company that rents its premises pays company tax of 27% on its profits. A pensioner living in an old age home pays VAT, as well as tax on the interest they may earn from investments. But neither the worker, nor the company, nor the pensioner sees any increases in assets as a direct result of paying these various taxes. Meanwhile, whoever owns the land on which the worker’s shack or the company’s factory or the old age home stands, sees the value of that land increase year in and year out, without having to put in any effort, or to pay anything back to the community, in return.

Therefore, land owners are the only tax payers who see their assets increasing in value as a result of the current tax regime. Thus, when a land owner pays income tax he or she is making an investment on which the return is not only safe streets and functioning schools, but also more valuable land. And if, over a period of time, the value of the land has increased by an amount that exceeds what the land owner has paid in taxes, he or she has made a net profit at the expense of the rest of the community.

This is why we say that landowners do not actually pay tax; they merely lend it to the state and get it back later in the form of increased land values.
And it is only landowners who are in this very fortunate position if you don’t own land you cannot benefit from the increase in its value.

And It Gets Worse

Landowners are, in effect, the recipients of unearned wealth. They are being partly subsidized by landless South Africans. SARS has to bring in a certain amount of revenue every year to fund state expenditure. Whatever it does not get from one tax source, it must get from the other tax sources.

Currently, the levying of taxes on earnings, savings and trade means that no tax (other than a negligible capital gains tax, transfer duties, etc) is levied on land values. The owners of land, therefore, enjoy this growth in the value of their land ‘free of charge’ while everyone else pays up in the form of income tax, VAT, etc. The revenue that could, and should, be recovered from the land (ie: the rent) is allowed to leak out to the owners instead. If this rent was recovered for the fiscus, then everyone else’s taxes could be reduced. (Admittedly, most landowners also pay VAT, income tax, etc. However, unlike non-landowners, they enjoy asset growth as a result.)

What About The Constitution

Landowners are, in effect, the recipients of unearned wealth. They are being partly subsidized by landless South Africans. SARS has to bring in a certain amount of revenue every year to fund state expenditure. Whatever it does not get from one tax source, it must get from the other tax sources.

Currently, the levying of taxes on earnings, savings and trade means that no tax (other than a negligible capital gains tax, transfer duties, etc) is levied on land values. The owners of land, therefore, enjoy this growth in the value of their land ‘free of charge’ while everyone else pays up in the form of income tax, VAT, etc. The revenue that could, and should, be recovered from the land (ie: the rent) is allowed to leak out to the owners instead. If this rent was recovered for the fiscus, then everyone else’s taxes could be reduced. (Admittedly, most landowners also pay VAT, income tax, etc. However, unlike non-landowners, they enjoy asset growth as a result.)

The key point is this: If South Africa captured all land rents, land would soon become affordable to everyone. There would, in other words, be no entry cost, no barrier preventing poor people from accessing and owning land. To see how this works we have only to consider the everyday example of municipal property rates.

Property Rates Equals Land Rents

South Africa already has a partial system of land taxes. Municipal rates levied in terms of the Municipal Property Rates Act 6 of 2004 are for all practical purposes a claim on land rents, which are payable to the local government arm of the state. It is apparent from sections 11 and 46 of Act 6 of 2004, read with the Act’s definition of ‘property’, that rates are levied on the combined value of the land and any buildings on it. Municipal rates are, therefore, in part a land rent.

Now, the rates liability of a property is one of the factors that influence its price. If two identical properties happen to bear different rates liabilities (for example, because of a valuation error), the one with the lower rates will clearly be more attractive to a potential buyer. He or she is getting an identical
property but has to pay less rates to the municipality. In order to compete for the attentions of buyers, therefore, the price of the higher-rated property would have to decrease.

Clearly, the higher the tax on a property’s value, the more its price will be driven down, all other factors being equal. At present, municipal rates are very low when compared to the value of land. For example, in Cape Town, the owner of an empty plot of residential land worth R1million would have to pay a little under R10 000 in rates every year to the municipality. Nevertheless, this amount will have an influence on the owner’s decisions about whether or not to sell the plot, and will also influence the price that he or she could ask for it. It is easy to imagine, then, how much more the decision to sell and the asking price would be influenced if, in addition to property rates, the plot was also subject to a land rent charge of R50 000 or R100 000 per annum.

Thus, if government imposed a land rent on all land in South Africa, we could confidently expect that the price of land would come down. Owners would be keener to sell, in order to avoid having to pay the tax, while buyers would not be willing to pay high prices, knowing that they would also have to foot the tax bill. Unused or unproductive land would come onto the market as it would be too costly to hold, and pay tax on it, without earning an income from it. These factors would clearly cause the price of land to fall.

Perpetuating Landlessness Or Ending It

Section 25(5) of the Constitution says that “the state must take reasonable legislative and other measures, within its available resources, to foster conditions which enable citizens to gain access to land on an equitable basis.”

The same applies to housing: section 26(2), read with s 26(1), provides that “the state must take reasonable legislative and other measures, within its available resources, to achieve the progressive realisation” of the right to have access to adequate housing. And obviously, you cannot have housing without first having the land on which to build houses.

Since the Constitution came into effect a certain amount has been done to make these rights a reality in the lives of poor South Africans. However, it is widely acknowledged, even by the government, that these efforts have fallen far short of resolving the problems of landlessness and a lack of housing. Clearly, the state doesn’t have the money [the available resources] that would be required to buy sufficient land on the open market and ‘hand it over’ to people who are currently landless. Simply put, the high cost of land constitutes a barrier to the realisation of the rights set out in sections 25(5) and 26(2) of the Constitution. It may be expected, therefore, that in fulfilment of its constitutional duty under these sections, the state will take advantage of any reasonable measures, including legislative measures that would bring about a reduction in the price of land. The only such measure that is open to the
state is to collect all land rents.

The reason for this is simple. Land is one of the few resources that cannot be grown, mined, produced or manufactured in order to meet the demand for it; neither can new technologies be applied to make it more cheaply or freely available, as is the case with almost all other commodities. The only way to reduce the cost of land (remembering that the Constitution does not allow the government to ‘arbitrarily’ take the land it needs) is to appropriate its rents for public purposes.

References: Though land values do decrease in war time or civil strife such as in Mozambique in the 1980s.