Classic economic theory holds that there are three vehicles for generating wealth in an economy-capital, labour, and land. Land is fundamental, for labour cannot live without space and capital cannot be managed without offices and the infrastructure that is built upon the land. The management of land has social, political, and economic dimensions. While the post-war land reforms were driven largely by political agendas, current reforms are primarily concerned with the development of land markets.

Economists have promoted the virtues of land taxation for centuries. Advocates from George (1879) to Netzer (1998) have argued that, unlike other taxes, a tax on land neither distorts economic decision-making nor lowers the efficiency of using market forces to allocate resources. Others have been less enthusiastic in their support (Roakes 1996). In any event, land and property taxes have a number of advantages, both in terms of providing revenues to government (especially local government) and as a tool for guiding land use and development.

Any taxation system needs to be seen to be fair and to serve social objectives that are understood and accepted by those who pay the taxes. It should raise significant revenue by an amount that is substantially in excess of the cost of its collection. An exception to this may occur when the objective of the tax is regulatory (as in taxing land in order to bring it into better use), or it is used to encourage certain forms of investment. Thus vacant or otherwise unproductive land may be taxed with the specific objective of forcing the owner either to use the land more effectively or to sell the land to those who will. The converse of this is that taxes on land and property are likely to bring about changes in land use; such changes should be anticipated, although frequently they are not.

Taxing land has the significant advantage that what is taxed can easily be identified. In most societies, many people seek either to avoid or to evade the payment ot taxes. Tax avoidance is the legal process that allows citizens to make profits that are not subject to tax, by for instance placing their investments in trust funds, often in foreign countries where no tax is payable. Tax evasion, on the other hand, is a deceitful process where, for instance, a citizen does not declare to the tax authorities all sources of income such as earnings through casual labour or so-called 'black market' deals.

Taxes on land and property take two basic forms-an annual levy based on some estimate of the value of the land or property, or a levy on their transfer. Some countries use both approaches. The annual levy may be based on the estimated market value for which the property would sell under normal circumstances, or tlie assessed rental value of the land or property, or in some countries on the cadastral value. The latter may be calculated on the basis of a number of parameters such as the area, soil type, distance from markets, etc. A number of eastern European countries are introducing taxes on this basis since, at present, the market data are insufficient and unreliable.

The levy on land transfer, sometimes called Stamp Duty, is normally based on a scale of fees that relates to the value of the land or property being transferred. The tax should be paid every time the transfer takes place, the amount being dependent on the value of the transfer. Not all citizens of course are honest when declaring the price paid for property. In some cases there may be separate arrangements for the sale of fixtures such as curtains and carpets so that these arc not formally included in the price of a house sale; this is done so that the declared value of the house is lower, thus reducing the tax burden. It is essential that government authorities keep adequate records of all transactions so that significant distortions in the declared market prices can be detected and any tax evasions investigated.

Most countries in economic transition are now reviewing their attitudes to land ami property taxes. In many of the former communist countries, the market value of property has been difficult to establish because the land market is only just begining to operate in a formal way. In Latvia for example land was until recently zoned and land taxes raised on the basis of location and land use. In 1998 however, the laws that treated land and buildings separately were changed and .i new real estate taxation law was passed that will introduce new taxes in the year 2000. Under this law the taxpayers will be either individuals or legal entities who are owners or leaseholders of land or buildings. The basis for the tax will be the cadastral value, which in turn will be based on market values. Since many properties have not been sold since the introduction of land and property reforms, the actual market value must be estimated. A mass appraisal of all properties in the country is planned for completion prior to the year 2000. The situation is similar in many of the other central and eastern European countries.

Whereas property taxes are essentially concerned with improvements to the land, land taxes may be based either on the estimated market value of the land or its potential productive capacity. Agricultural land, for example, can be taxed on the estimated yield from the land per hectare multiplied by its measured area. Estimates of yield can be obtained from past experience, or from aerial photography or remotely sensed imagery that has been recorded at an appropriate time of year.

The yield that is possible from the land depends on its quality and suitability for particular purposes. Land quality refers to the condition or health of the land and its capacity to sustain any particular form of use. Common problems with land quality include land degradation, soil erosion, salination or I other forms of soil quality deterioration, pollution, and the lack or excess of * water. A variety of measures to determine the quality of land have been developed (see for instance Fieri et al. 1995). In the countries of east and central Europe during their periods under communist rule, detailed records were maintained of land quality with complex calculations from the data as to their suitability for different types of crops. Many of the data were not used as in practice it is the people on the ground who are often better judges of what should be grown. The data have more recently been used to determine the value rather than the quality of land, estimates that have been at wide variance with what the market is actually prepared to pay. Both overestimation and underestimation of the true market value have been common, the former resulting in an informal market, the latter in substantial profit for citizens purchasing the land.

Land quality in the sense of its fitness for a specific purpose can be measured on the basis of its physical qualities such as its soils, aspect, rainfall expectancy, and location. Such characteristics contribute to but do not determine what the land will be worth in an open market. Land value, in a market sense, is not the same as land quality. People pay for land what they perceive that it is worth to them. Land values are determined by a variety of factors including the quality of the land, legal constraints and the intended use of the land, and the general state of the local economy. The actual price that is paid in any transaction is what a purchaser is willing to pay and what the seller is willing to accept at the lime. The 'price paid' may or may not represent what might be normal within the market since for any given transaction the vendor may be willing to accept a lower price because of his or her urgent need to sell. Alternatively, the purchaser may pay more than would otherwise have been expected because of personal circumstances.

It is necessary to estimate the value of any land or property when buying, selling, leasing, or taxing it, or when there is a need to calculate the assets held by an individual or business for the purposes of inheritance, bankruptcy, or collateral. Valuations are also needed for investment management and for insurance. Good valuations guide the market towards fair prices and allow informed decisions to be made about the efficient use of resources. For instance they can assist investors in choosing between property and other investments in the wider market place or guide banks in determining how much they can safely lend to a mortgagee.