A guest post on Georgism by Lars Doucet
Wait a second, Lars Doucet? The guy who made Super Energy Apocalypse and CellCraft, two of my favorite flash games back when I was a kid?
What a wonderful surprise.
One thing I don't quite understand about Georgism is: who is going to compensate landowners for the massive drop in the value of their land that would come from suddenly subjecting it to enormous taxes? Wouldn't that require a one-time payment of billions in compensation?
Or is the idea to simply randomly steal money from people?
Georgism on the Omnibus podcast, now here. Henry George is a man being recognized more and more!
> Everybody needs land, but nobody can make any more of it. You can't work, eat, sleep, or even poop without access to land
Everybody needs time, but nobody can make more of it. You can't work, eat, sleep or even poop without access to time.
So why not tax time, instead? This would reduce to the Universal Basic Tax, everybody pays the same amount per year (currently about $30K/year for the US) for the privilege of living in a given country.
Good article, thanks for writing it.
When comparing an LVT (and in particular an LVT that soaks up all the imputed rent on the land) to any other form of tax, I think a bit more attention is necessary on what exactly we want from a tax and why. Usually these discussions seem to start and end with "LVT is non-distortionary, therefore it's optimal". But a non-distortionary tax is optimal only with respect to the narrow goal of maximizing economic activity. Most people have some values other than that, and would probably agree that the state should also have some values other than that.
In particular, one effect of an LVT is to heavily penalize owning land and not using it for the maximum possible revenue generation. This is clearly economically beneficial, since it encourages land to end up in the hands of those who can generate the most income from it. But it reduces the value of land to only its economic dimension, and the median landowner -- usually, a homeowner -- is barely participating in the economic dimension of land use at all. (E.g. only a small percentage of homeowners are also landlords, or farmers, or otherwise directly generating revenue from their land.) An LVT that captures all land rents has the effect of turning all homeowners back into renters again, complete with the renter's lack of security in their domicile -- the risk of eviction by a landlord is replaced by the risk of increased local land values creating an unsustainable tax burden. This seems like a substantial social cost, with bad implications for family formation, local community, time preference, and so on. (And it's not like these things are in such very great shape now that we can afford to burden them willy-nilly.)
None of this is necessarily a defeater for the idea of LVT -- some of the suggested benefits seem very significant. But this discussion seems heavily dominated by boosters talking up LVT in comparison to the current system; I rarely see any talk of what the costs of LVT would be, and that's a major omission.
I'm not sure that I agree with the claim that a LVT has no associated deadweight loss. I sorta see the argument for the claim: since your land value isn't based on improvements, it cannot change and therefore nothing you do can change the amount of tax you pay and so the tax has no effect on economic activity other than to redistribute money a bit.
But thinking about it a bit more, just because we talk about the value of the land without improvements doesn't mean that the value cannot be changed by human activity. The land in SF isn't super valuable because it is next to really valuable natural features (though that is a small part of it). It's valuable because it is situation near a bunch of other man-made stuff like Silicon Valley. The vacant lot in SF isn't valuable because of what is built on *that* lot but because of what's built on the lot next to it.
And sure, if you don't own the nearby land, maybe this isn't so much of an issue, but I can think of a few situations where a huge LVT might cause people to make what would otherwise be suboptimal economic decisions.
1) A town is trying to decide whether or not to build a new park/school/stadium/public transit system/etc. Normally, people would be for this. However, residents note that this improvement would increase the value of their land and thus the amount they would need to pay for the LVT. Furthermore, the LVT would mean that they couldn't even afford to sell the land for any more money to escape the taxes. So they decide against the otherwise-optimal improvements.
2) An oil company offers to for free test whether or not there is oil on your land in exchange for giving them first shot at negotiating for drilling rights if they find anything. Great deal right? Not if there's a full Georist LVT. If they discover oil, your taxes will suddenly increase by the exact amount that drilling for that oil is worth. You need to let the company drill just to break even, and suddenly you have to deal with all the extra noise and everything else from the drilling operation. The only reason you'd want the oil company to check is so that if they don't find anything you can prove to the tax collectors that your land definitely *doesn't* have oil, which might marginally decrease your tax bill.
This is a good analysis. But I do want to offer a bit of pushback:
The value of a plot of land should be the difference between the cost of constructing a building on that land and the value of the completed building (the most valuable one it makes sense to build). Empty land doesn't offer much value to the user, but completed buildings do.
Since the 1960s/1970s, big cities in the US have put in place a system of zoning and development rights that determines what can get built. Scarce development rights are the limiting factor that prevents new buildings from getting built. It's common for land to be quoted in cost per buildable square foot, which is a function of the development rights that come with the land. A large plot of land zoned for a low rise building might be worth less than a small plot where you can build a skyscraper.
In New York, you can even trade development rights (commonly called air rights) on a limited basis so you can build super tall skinny towers around Central Park. Air rights are really expensive these days - hundreds of dollars per square foot.
In fact air rights are so expensive, it seems like what we really are talking about when we talk about the value of land is actually mostly the value of development rights. However, development rights are just a totally made up thing, and if we let people just build what they want tomorrow, development rights would become worthless. Land would still be valuable but probably not as valuable as it seems now. People would build a ton of new buildings, and it would push down the value of new and existing buildings closer to the cost of construction.
I think your analysis is right but if the goal is to make housing less scarce and cheaper, it would seem easier to just loosen restrictions on new construction, rather than keeping housing artificially scarce and then taxing land & development rights to pay for government. The latter just seems like Hong Kong, effectively.
I guess my main takeaway is it is confusing to conflate land and development rights by calling it all "land", as we commonly do these days. I think they are economically different things - land is a real constraint, and development rights are totally made up.
Which song from Mary Poppins?
Did you mean to include a link there?
There's some discussion of this below, but I'm going to make my standard objection to Georgism. The ideal of Georgism, as this article points out, is a 100% tax on land rents. Econ 101 tells us that the value of an asset is the present value of its future cash flows. Georgism taxes away all those cash flows; it is therefore confiscating the entire value of the land. It is total government land confiscation by another name, and it is therefore not much wonder that it has not caught on.
It doesn't look, from the topic list and from reading through this post until MEGO, as if any of these posts are going to explain in terms I could understand about how Georgism would actually work. If you're owning land as an investment, yes. But what if you're a not-wealthy person who bought a home back when land was cheap, and now the market has gone way up? Protests against property taxes based on market values, going up beyond people's ability to pay, gave us the Prop 13 rebellion. Why wouldn't the same problem arise with land taxes?
Lars's answer is apparently that you'd get your money back through UBI. Which seems like an awkwardly roundabout way to do it, but never mind. In that case, where is the money to run the government going to come from? Are we just going to soak the rich? I thought Lars says elsewhere that Georgism isn't going to do that.
Help me understand this:
1) LTV proposes to tax all the land value which is about 75% of the cash flows of real estate. The other 25% is improvement or whatever according to your sources.
2) The average cap rate today is 5% which means investors expect a 5% return per annum on real estate investment.
If LTV capture 75% of RE cash flows, prices will decrease 75% to meet the 5% cap rate, correct?
So.... what's the game plan on destroying 75% of the RE wealth in the world? Like, every bank will immediately be insolvent and every homeowner with a mortgage will be deeply underwater and probably bankrupt too. There will be no RE liquidity whatsoever. The 75% haircut is just the LVT hit at face value, it doesn't even consider the spiral effects and liquidity crunch.
Besides initiating the biggest destruction of wealth in the history of mankind, what is this supposed to accomplish again? Are you just intellectualizing the nationalization of real estate?
Just a heads up everyone, parts II and III will post in the next few days.
Part II deals with whether Land Value Tax can be passed on to tenants.
Part III deals with whether we can accurately assess unimproved land value separately from improvements.
What if I say, take a barren piece of land and make it more productive through some sort of permaculture or reforesting terraforming project? Essentially a "capital improvement" on the land itself, but difficult for the tax assessor to disentangle. The LVT would be disincentivizing that kind of activity presumably. Or does the fact that it is now more productive and able to command higher rents make it a wash in terms of incentives? In other words, is there no dead weight loss in this scenario?
How does Georgism deal with the problem of short term exploitation vs long term rents.
Suppose I own a fish pond whose unimproved value is $1000 a year forever or $5000 one year and then nothing.
How does a responsible owner outbid somebody who exploits the property and then disappears?
> Post-Corona Balanced-Budget Super-Stimulus: The Case for Shifting Taxes Onto Land (co-written with Kumhof, Hudson, and Goodhart).
Hey, that's actually the same Goodhart from Goodhart's law!
> And if you think all taxation is theft, well, Land Value Tax is a tax, so presumably you have a problem with it on those grounds. But if you accept that you live in a society that occasionally taxes things, you might opt for what Milton Friedman called "the least bad tax."
I've heard the geolibertarian view that unproduced resources cannot be owned (in the absolute ownership sense that libertarians usually think of), but produced resources can. In this view, it uniquely isn't bad to tax land rents, because land rents uniquely arise from monopolizing something that nobody has a justification for owning. (This does raise a question which I think you addressed in your book review a little and which maybe you'll address in a later part of the series—is it possible to make a clear conceptual distinction between produced and unproduced resources? For example, how can prospectors be compensated for locating natural resources that nobody knew about before, even though they did not in any sense create those resources?)
> Everybody needs land, but nobody can make any more of it.
Is there a mainstream Georgist perspective on seasteading, land reclamation, or property rights in space? These cases feel something like creating new land through human effort, or making new land reachable to humans that was unreachable before.
Suppose you live in a hypothetical Georgist Pennsylvania, circa 2005. A few years later, an extraction method is discovered for the natural gas-rich shale you live on. The value of your land just exploded - but unlike our system, where this represents a windfall for you, this is more likely to represent a tragedy. Your land tax spikes, you can't afford it, and you're forced out of your home to make way for Big Frack, who doesn't even pay full value for it. They can afford to wait for you to go bankrupt, then pick the real estate up when it's distressed.
Does the Georgist have sympathy for our Pennsylvanian? Perhaps they do, but think their plight is outweighed by the plights of people whose properties lose value under our current system, so this is no worse of a problem than that. But wait, let's think about property losing value more rigorously.
Suppose you live near a river, and a lot of people near you love it. They fish, swim, row, and generally enjoy themselves; and the draw of that river represents a big chunk of local land value. However, you don't much care for the river; the land values have started rising because city slickers are moving in; and you're upset about it. If such a person can ruin the river - toss in crude oil barrels, introduce invasive species, whatever - doesn't Georgism incentivize them to do so?
TL;DR: does Georgism subsidize living near a toxic waste spill - or spilling it yourself? That would line up with the old adage "you get less of what you tax", where "what you tax" is "Nature's bounty."
There are a few problems. It will strongly incentivize preventing development, because people will not want their taxes to shoot up. The problem is for people who are not landlords is that the only way to access the value of the land is by selling it. A lot of of real estate value is single-family homes, and forcing them to move with the vagaries of land prices will make them very unhappy and also cause its own market inefficiencies. They would just vote against Georgism, but assuming they couldn't, what would result is a turbo-charged version of NIMBYism. Either banning development or in various ways sabotaging it.
Also true Georgism could only be enforced the same way as collectivism, by violent revolution. It would effectively be destroying roughly half of wealth. Urates isignificantlylower than the true rent value of land in California resulted in Proposition 13 and is now considered a third rail of politics there. Your numbers suggest that over 40% of the land value is held by the 50-90th percentiles, which is a broad enough group to shut down such a movement without having to hire people to do it, especially since older people and the type of people who have a lot of land have disproportionate power, among other reasons, because they vote at much higher rates. Average voter is in their 50s right on the boundary between Gen X and Baby Boomers.
Read through and by George do I have some questions, apologies if these will be answered later.
How does land retain value if the government taxes away such a large portion of the income land generates?
Who will bother owning land at all? And if you make land worthless, how do we tax its value?
How can land have value when there is no point to owning it, and how can that value fund our country?
Does it even count as owning land if not only do you have to pay all of its income as tax, but you are taxed on its theoretical income regardless of if you produce it or not? The only benefit you would profit from ownership of land would be intangibles, and it seems like in theory even those would be taxed.
Does your argument that LVT can finance things hold up when land loses its value because nobody wants it because you can't derive income from it?
In this post you bashed the Fed's, NYC's, and cities in general on their ability to adequate assess the market value of land. How is the solution to rely far more heavily on new taxes that rely on accurate valuation of land? Will there not be rampant corruption? ("No there won't be corruption" on its own is not an acceptable answer).
There's a broken link in the recap part zero with link text "Strong Towns" which goes to https://www.fortressofdoors.com/p/1bbeeaa7-5e11-4219-91e6-64847e8537cd/strongtowns.org/landvaluetax/ (a 404)
I'm guessing it should just go to https://strongtowns.org/landvaluetax ?
You linked that thing about housing crises in MMOs. Did any MMO ever try a land value tax? I think a land value tax in an MMO would be a highly worthwhile experiment, for several reasons:
* It lets us troubleshoot the idea, and debug unforeseen problems, in a test environment where catastrophes are less catastrophic.
* It should be much easier to persuade an MMO to try this than to persuade a government. There aren't as many stakeholders, the policy is more easily rolled back, and it can directly help the success of the game/make money for the game's creators. Also, it should be easier to gain an audience with MMO leadership than real-world leadership.
* If it works in the MMO, that will help convince people to try it in real life. Imagine Georgia Gamer telling her parents and grandparents to vote for LVT after it fixes her favorite MMO. Also, the idea of translating MMO policy into real-world policy would make for a great clickbait headline. Clickbait headlines are the main things which power social movements nowadays, of course.
I may just be stating the obvious with this, but there's a few ideas I want to work through in writing.
It seems like one way of thinking about land value is that it isn't the value of the land, it's a measure of the total spillover value of everyone else's activities, where proximity is relevant.
If instead of talking about land value, we talk about spillover value, does that make the idea clearer? If there's a plot of land in the middle of a city, it's more valuable than a plot of land in the middle of a field because living there (consuming it) would be a lot more fun, because of all the other people and amenities nearby. And doing business there (investing in it) would be a lot more profitable, because of all the other people and amenities nearby.
If a 100% LVT were instituted, all of the difference between the two plots of land would be taxed away. It would at that point become (on average) equally fun to live in the city and the country. If you lived in the country, you could use your extra money to buy the fun you want; if you lived in the city, you'd benefit from the fun of the city, but have less money to spend on other stuff. It would also be equally profitable to do business in the two places: if you lived in the city you'd get more profits from having lots of people (employees and customers) nearby; but you'd have to pay lots of tax for the privilege, so overall it would be a wash.
One possible outcome might be that more people move out of the cities... but maybe not. People like living close together.
It sounds like public goods/spillovers that are unrelated to proximity might start to have more important effects. For example, the law, which applies equally, everywhere. Internet access...
Sorry, I'm not sure I've actually worked anything out yet. I'll post and keep thinking!
I would like to second the question of how to handle the instant drop in their land values. Realistically you would probably need to correspondingly unilaterally forgive bank debt against real estate, which would cause every US bank to fail. I am a big LVT fan and I think the land price bubble/underdevelopment of urban land is THE #1 issue in the US today, but I am not sure how to do this without destroying the economy
Thank you for writing these ! I've found them entertaining and rather persuasive so far.
I do want to push back against the claim that farm land is unimproved if it doesn't have any buildings on it. An empty plot of land ready to be farmed is worth much more the same land covered in rocks & trees or with degraded soil. This doesn't affect your conclusion much because most Land Rent is urban.
As soon as you wrote "the rich paying their fair share", with the implication that "the rich dont pay taxes", I stopped reading, you stopped being interesting. Try fewer applause lights next time.
Get 10-100 billions dollars, build a city, sell it - you should get 30 billions! 300%
Even if it will take 10 years, that is 11% of interest, way better than market.
Why nobody is doing that? Maybe it is not THAT EASY?
Just... drop the term land and land tax. What you are talking about is taxing profits from resource hogging of any kind. It is an easier sell, too. Not "the evil government wants to make my house worth nothing", but "the fair government ensures that no one profits from hogging resources they didn't create".
I've become big enough fan of Georgism in theory that questions tend toward the "okay, but how do we get a land tax implemented in practice?" side of things.
And in the USA at least I can think of several big obstacles:
1) The tax represents an enormous one-time (assuming the real-estate market reflects the new policy accurately) transfer of wealth from urbanized to less-urbanized areas. Property values in the former will fall much more than in the latter but the benefits will (by hypothesis) be distributed evenly. This is a hard sell politically for tribal / class reasons, even more so because the tax's claimed upside (better aligned incentives) matters much more in urban areas than in rural ones.
2) It's unconstitutional for the federal government to impose a land tax. As in, not just "technically prohibited due to an oversight" but "this would fundamentally alter the concept of federalism". Land belongs to states, not the US, and as another comment pointed out, taxing 100% of land rent is equivalent to nationalizing land.
3) Due to 1) and 2),the natural place to advocate for a land tax would be at the local level (where property taxes are assessed today). But the typical US urban area contains several different local governments, which will face a coordination problem assessing land taxes. Because it's relatively easy to substitute between locations within an urban area, in the short to medium term a land tax will likely raise tax and rent burdens within the locality and drive people elsewhere, while the long-term anti-distortionary benefits accrue to the whole urban area.
Krugman's disinterest in LVT likely has more to do with political rather than economic factors. In fact, looking at the linked 2009 article the quote was pulled from the very next paragraph is:
> The context was health care. "We're having enough trouble trying to make sure we repeal the Bush tax cuts," Krugman added, "and trying to shift to a completely different base of taxation is just not going to be on the table."
In general in his writing about public policy he seems to heavily weight both the economic AND political factors, and so is less interested in spending time on dramatic changes that (in the US) would probably face enough opposition to need an enormous Democratic super-majority to pass, if even politically possible at all (this probably also includes things UBI). Look at how much trouble California has had making even minor changes to Prop 13, which as far as I know isn't because of economists liking the current policy.
So the lack of enthusiasm probably doesn't say anything bad about LVT as an economic policy! And it also seems like a great topic for this blog which has a bit broader focus than near-term public policy stuff.
Georgism kind of reminds me of Marx's labor theory of value. In both cases we're trying to take a single thing, and assert that everything else has value because of that thing. In both cases it kind of appears to make sense if you assume a 19th century society, but totally falls apart in the 20th century and beyond.
In the 1800s you could sort of make an argument that things only have value because of land. (I still think it's a faulty argument, but it's at least a somewhat convincing wrong argument.) You need land to produce food (most Americans were farmers back then). Railroad tycoons were rich because they owned a lot of land. Mine and factory owners owned physical things in the real world -- mines and factories.
The argument just descends into farce in the 2000s, though. For example, should Bill Gates be taxed $0 if he chooses to live on a yacht rather than live in a house? His programmers don't need a lot of land to produce any value. They could also live on yachts or in tiny apartments like a lot of them do already, voluntarily.
The truth is, land in and of itself doesn't have a lot of value. Some land has gold or oil buried underneath, but most doesn't. When we talk about the value of land, we're mostly talking about the value of externalities like who lives nearby, what the government rules happen to be for that land, or whether a road was built nearby, etc. Just saying you will tax "100% of the value of the land" doesn't really make sense because it's not clear how much of those externalities you want to capture. Should Bill Gates pay 100% of his profits on Microsoft in land taxes for his Redmond headquarters? Well, that seems absurd. But 0% also seems kind of absurd. What if Bill owned a factory instead of a software business? Still 0%? Or 50%?
Any number you pick is arbitrary. And the whole thing invites shell games like person A selling property to person B for $100 to set the LVT to $100.
I notice that you piggybacked on the modern-day "the rent is too damn high movement" here. (A problem that didn't exist in George's day, by the way!) Let's talk about that. The sky-high valuations of land in San Francisco, Seattle, and similar cities are not because of any magical property of the land itself, but just because people want to live there, AND the government is not allowing a lot of building.
The second thing is very very important! If you look at places like Houston, the property values are not high. How come? It's not because the government is taxing them more and preventing evil speculators from jumping in. It's because people are allowed to build outward. In California hardly any building is allowed, because of a complicated patchwork of rules -- tight urban growth boundaries, aggressive zoning, intense environmental reviews, etc.
Really, the old joke about how "they're not making more land" is actually very misleading because the government could quite easily "make more land." If someone waved a wand and made those land use rules go away, the sky-high property valuations would go too.
That brings me to my last point. I think people are way too optimistic about the future of cities and dense urban areas in general. The last two years showed a lot of white-collar businesses that remote work was possible. More than that, it culturally normalized it. To oppose remote work was to be an evil COVID denier. These cultural changes are not going away. And that's bad news for dense urban areas whose bread and butter was "being the place you have to live if you work at Google" (or wherever).
In the long term, the solution to high rents in SF is not to live in SF. The future is decentralized and does not resemble a 19th century factory town. Decentralization is a solution that will make most people happy. And when the next big earthquake or terrorist action comes, it will also save lives.
If there are places where 70% of property values are land, doesn’t that mean their property taxes are pretty Georgian already? (I mean, not California due to Prop 13, but maybe other places?) Are they seeing benefits from high property taxes? If not, maybe changes to property taxes can’t fix as much as Georgians think.
I suspect that property taxes matter much less than zoning, so changing property taxes alone won’t move the needle much if you don’t also fix zoning.
So, uh, what happens if the Land Value Tax goes above 100%?
Like, I don't have formal economics education, and my internal models don't mesh well with Georgism yet, and I'm ever so slightly tipsy. :-) But the arguments so far seem to be of the variety that don't stop applying at some particular level of tax. So if the US wanted to switch over to a Georgist system, and we discovered that we could replace all other taxes with a 240% LVT, why not do it? As you say, it's not like anyone's creating more land.
And although I'd love to be convinced that Georgism and the LVT comprise the One True Way, I'm deeply, reflexively suspicious of arguments that don't have a built-in stopping point. They smack of ideologues dreaming of castles in the clouds, and not of engineers making cost/benefit analyses in the cold harsh light of day. (Although, in that spirit, I suppose I could be persuaded around to a point of view that held that even at arbitrarily high levels, a LVT would be less bad than any other combination of taxes that generated the same amount of revenue.)
What I absolutely love about Georgism is that you can replace "land" with "commons".
You don't get taxed because you own a piece of land in Manhattan. Nobody cares about that piece of land per se. You get taxed because of everything people built around your piece of land - you get taxed because of and proportional to how useful Manhattan is. That's value created by society, and to the extend any tax is fair at all, this is the most fair type.
Compare this with taxing income. You work, you better yourself to be more productive, put in hours... and somebody comes and takes half of that. Just because they can.
Now, why Georgism will be very hard to implement is how incentives are distributed. Everybody would win some. But land owners will lose a lot, and they'll fight tooth and nail against it, by any means possible. They do have a fait point as well - if you just paid 1 million for your home and still own the bank 900k, you will be a bit miffed to have to pay what pretty much amounts to double mortgage. TBH, not sure how to fix this, but there probably are methods. Delayed application for residential areas, for instance.
Another (mostly positive) consequence: just seriously talking about this will drive home prices way down.
When you say "The housing crisis is driven by inflated land prices, which in turn drives poverty, homelessness, and all other manner of social ills" you miss the main point: land prices are inflated in the first place because of lack of supply, not primarily in the sense that you can't create more land, but mainly in the sense of constraints on what (very little) is allowed anymore to be built on the land that does exists. It's the inherent NIMBYism of modern society that is driving inequality, and until A LOT more building is permitted in our productive urban areas (until supply = demand) it won't get better. In fact, the benefits you imagine from your wished for tax only work in a static world where demand for housing and other productive assets magically freeze at current levels. Sorry, this is just Soviet style planning dressed up in well intentioned rhetoric. I like your openness to seeing flaws in your argument. Hope you'll see this one.
Some Dutch cities have a system that resembles Georgist taxes, called "Erfpacht". You pay taxes to the local government based on the value of the land, and it is indexed regularly. Most places nowadays allow you to pay it off in perpituity, but its still normal to pay it. A colleague just bought a house that was a lot cheaper than others around it because he needs to pay the yearly tax. I am not sure what the difference is with a real Georgist tax, there has to be something as I have not seen this example brought up before.
Here's a cleaner (more formal) way to make the roller-coaster point. At the time of building, we can use the naive formula that:
property value = land value + building cost
Why? Because if both transactions are arms-length, then some real buyer paid both prices, and by the subjective theory of value, that's what they're worth.
Now let's talk about the old building. Naively, we want to subtract depreciation of the built structure--a new structure would not be identical, but rather shiny and new. But we should also be aware that opportunity cost increases over time. At the time of building, somebody was willing to pay the built price for the built structure. Since the world changes over time, both in its needs and in its building methods, that becomes less and less true over time. So you have to multiply the improvements term by the chance that a new buyer of the land would want to preserve that improvement rather than tearing it down. And then if the buyer wants to tear down, you have the destruction cost (including permitting, which for a historical district or whatever could be enormous). So:
property value = land value + prob(retention) * (building cost - depreciation) - [1-prob(retention)] * destruction cost
Prob(retention) is likely to be U-shaped. Unless the initial builder is super-idiosyncratic, flipping at the start should only involve the flipping costs, and depreciation isn't generally as high as with a used car. After a long time, properties are "historic" and they're worth more as rehabs (to fix the depreciation, which might be extensive) than as teardowns. So the Fed line is likely to be pretty good for areas full of very new or historic properties, and way too low for the vast majority of improved US land, which is neither.
So I've been very persuaded by Georgism about cities, because the value dissipated in economic rents, the poor usage of valuable space, and the resulting drag on the national economy are all so overwhelmingly obvious.
I'm a bit worried about how this applies to rural land, however, precisely because it's not clear to me that we want to maximize the immediate improvement of rural land the way we do city land. Say that farming in Iowa inevitably uses up a finite inheritance of topsoil. Land value depends on the amount of topsoil. Future farming methods use less topsoil per bushel of corn than current ones. So currently the farmer is incentivized to farm less intensively now than his discount rate would suggest, in order to preserve land value. If a Georgist tax makes land value-less, or nearly so, then the farmer should farm more intensively. A very similar story could be told about a West Virginia coal field.
So now I worry that Georgist taxes are destructive in rural areas without also passing Pigouvian taxes, which we haven't done a good job of so far. Or more precisely, the case for Georgism seems to rely on land values bounded from below at the Ricardian rent-free rate (no improvements and no neighboring improvements with spillover). But with land containing natural resources, that's just not the case.
Thanks, it's great to see how much effort you put into nailing down your claim, and I totally believe that you are trying to be very honest about them.
One (mild) criticism: for the question how the money is actually spent, you jump between different options, taking the option that is most convenient at a given place. If we raise 1 billion of LVT, we can use it *either* to pay for military/social services and remove other taxes, *or* we can give the money back via UBI. We cannot do both.
For me, this doesn't change the fundamental picture. If other taxes are removed, then this has _very_ roughly the same effect as a UBI, except that the distribution is totally different. And I think your calculation with UBI makes sense and gives an important insight. But it is not as transparent as it could be that this is an *alternative* to removing other taxes, and you are obviously aiming for perfect clarity elsewhere.
"But won't landlords just raise the rent to make up for the LVT, passing the burden of the tax on to the tenants? Georgists say no, because land is special in that it is scarce and nobody can make any more of it."
Kindly remember that I am an innumerate idiot. This doesn't seem to make sense to me, because it sounds like arguing that increases in prices won't be passed on, because the entity wanting to put up the price can't make more land.
And that sounds like "My electricity supplier is going to pass on the increase in costs by raising my electricity bill" where the Georgist says in response "Don't worry, they can't do that, because land can't be created!"
Landlord (be that private individual or commercial operator) wants to make a profit off renting out their property. Take away running costs etc. they want enough left over to make it worth their while to be a landlord. Private individual often wants to pay mortgages or live off the rental income, commercial landlords are running the business.
So the Land Value Tax is going to come along and take a bite out of their income (your example of $500/year lease payment) to a greater or lesser extent. Let's take that $500 - now, if it's taxed at 40%, the landlord only gets $300. Maybe the landlord decides this is not enough, in comparison with the running costs and the expected profit.
So what do they do? Pass the charge on to the tenant(s) either by hiking the rent or adding in a new 'charge'. No business is going to voluntarily take a cut in revenue. The prevention of that is passing legislation to prevent rent hikes (hey, isn't rent control controversial round here?), not saying "Ho ho, they only have one plot of land where the building stands, they can't create a second one, so they can't pass the rent hike on!"
Also, the parking lot next to the skyscraper - maybe you *need* the parking lot more than another skyscraper, because if people can't access transport to get to the skyscraper, it's no good to them. So yes, maybe the parking lot is as valuable. But if the owner then builds a new skyscraper there instead of leaving it as a parking lot, now the people can't park their cars anywhere on the streets and the skyscrapers are, in effect, unusable by them.
The greater value of urban land over rural land is generally urban land is under "planning control" and you have to get permission to build anything.
That San Francisco land sale notice made sure to note what the land was zoned for and thus what you could build on it.
I think your analysis has a large weakness as a result of this. I did not read the whole thing, but searching for "planning" or "permission" did not turn anything up.
If you don't discuss how much of the land value is in the permissions vs. location + area, then the value you tax on is going to be artificially inflated (quite a lot in the case of places like SF or New York which are notoriously difficult to get planning changes for).
If the value of the land changes a lot depending on what you're allowed to build on it, and the government can change this at will, then it's not really the land value you are talking about, which depends on the value being related to things that can't change like location close to other things that make it desirable.
"If you take Georgism to its natural conclusions, you might start to question government-enforced monopolies over other kinds of "Land," such as electromagnetic spectrum..."
Is electromagnetic spectrum not already handled in a Georgist way? Governments hold auctions where you can buy monopoly rights over the spectrum for 10 years, say. So companies basically rent the spectrum from the government at the market rate for that period, which to me is indistinguishable to paying a tax equal to the market rent. An important aspect is the period of the rights - having <= 20 years makes it harder to profit by just holding onto the spectrum - an increase in value over time can easily be wiped out by the reduction in the remaining term. For a longer term, this would look less Georgist.
And actually, this is a pretty good advert for Georgism. The approach seems to work very well for electromagnetic spectrum and has been widely adopted around the world. Replacing the approximately pre-2005 approach where the monopoly rights were typically awarded by a bureaucracy via some opaque process in a form of corporate welfare.
There is no such thing as the "natural" value of the land. Farmland becomes valuable because you can farm on it, and the better you can farm, the more valuable it becomes. Land in the city, even if there's no building on it, is valuable because of the surrounding city. Your patch of land in the desert might be worthless in itself, but it will become really valuable once someone starts a technology park nextdoors.
This article convinced me that land plays a bigger role in modern economies than I gave it credit for.
One question regarding a side remark in the article: How is a lvt supposed to end 'wasteful, environmentally damaging sprawl' if in an ideal world it is implemented without deadweight-losses, i.e. in a way that doesnt change the optimal use of any given piece of land (other than for speculation) and is thus incentive-neutral? I understand that a lvt would not change the cost to rent anywhere, not in a city and not in a suburb or rural area. So if it makes sense for someone to live in a suburb now it should still make sense after the implementation of a lvt.
Another point: you can't short real estate. Also demand is pretty inelastic. This means real estate prices are doomed to go up long term - and since people realized this, that's the third incentive to put money in it, no matter the price.
TBH, I don't know of any measure outside georgism that can fix this, and doesn't have horrible side effects.
Perhaps I am missing something, but it seems like several times in this article the author equates land rents (in the technical economic term) and "how much money I can rent my land out for". That was not my understanding of what "rent" was.
For example, suppose I claim a plot of land and build an apartment complex on it. Furthermore, let's say I can rent it out for $500. The "rent" I am capturing is not $500. It's the portion of the $500 that is not due to me building an apartment complex on the land. So if I could rent out an equivalent apartment complex in the empty countryside for $300. Then the rent is (at least more approximate to) $200, not $500.
Putting aside all of the other economic criticisms (e.g. how much would land be worth under a georgist system). I don't think you can just look at cap rates and conclude that this is fully equivalent to the rent being extracted on this land.
"The purpose of LVT is not just to raise revenue, but to end speculation, rent-seeking, unaffordable housing, and wasteful, environmentally damaging sprawl."
Non-single-tax georgists are actually quite confusing to me. There are clear and easy ways to fix all of the issues mentioned that have nothing to do with an LVT. Speculation can be taxed, housing can be subsidized, ending zoning laws will inherently discourage wasteful sprawl, but you can also just tax sprawl if need be.
The attraction of an LVT is that it accomplishes all of these things efficiently. However, if you're ok with a non-single-tax then you're clearly ok with doing things inefficiently. Which raises the question: why even support georgism in the first place? Figuring out what portion of a land's value is due to rents is a difficult problem. Subsidizing urban housing is quite a simple problem, though inefficient.
Interesting stuff. I propose a way to implement a LVT here: https://gideonmagnus.medium.com/a-simple-way-to-tax-land-3cbf7b81887d
> Also, keep in mind that LVT would see the elimination of the portion of property tax that falls on buildings. I just checked my own property tax records (I live in the suburbs of a medium-sized town far from any major urban cores). If the assessed land share more than doubled to 40%, under a 100% LVT regime I'd actually save $545.05 on my property taxes every year–and that's without a Citizen's Dividend.
Whatever Citizen's Dividend you could have would be lower, given that the one you calculated was splitting all the revenue equally (ie. not lowering any taxes whatsoever). Who is better vs. worse off largely depends on the way the money is spent (even some who owns no land directly or indirectly, could be worse off if the money goes to expand negative-value government programs).
You seem to be saying something contradictory, maybe you can clarify.
"If ATCOR is true, a Single Tax policy will always work. Abolishing capital and income taxes causes the lost tax revenue to get soaked up by rising land values, which you can then capture with a 100% LVT. You're raising the exact same amount of revenue as before, but the elimination of income and capital taxes lifts a burden off of labor and investment while LVT keeps housing prices and rents down, boosting the economy and lowering the cost of living. This economic boost in turn raises land values, which are fully captured by LVT, thus keeping land values stable."
Lost tax revenue causes land value to go up (if ATCOR is true), which would be necessary for these taxes to cover the reduced/eliminated taxes. I follow that fine. In the same paragraph, you say that it will keep housing prices and rents down, which is contradictory. Either land value goes up, or it goes down, but certainly not both. It appears that your overall statement here is that land value would, net of all effects, remain stable. That is a problem for the overall Georgist proposition, because we are trying to lower the prices because they are "Too Damn High" while also offsetting less efficient taxes. It sounds like you are saying that those two goals are themselves contradictory and we can't have both (or maybe either).
Can you help clarify this point?
"If a piece of land costs $10,000 to buy, and is leased for $500/year, then an LVT that captures 100% of the land rent is $500/year, which works out to a 5% annual tax of the land value."
But if I buy that land for $10,000 then rent it out (whether it's agricultural land or I build a house on it or whatever) for $500/year, then you come along and take that $500 with LVT - what am I getting? $500-$500 = $0. You're not charging me 5% of the land value, you are taxing me on the rental income. The only value I can get is by selling on the land and getting my $10,000 back! That's where land speculation starts!
On the other hand, if you charge me 5% of the land value which is $500 and I can rent it out for $1,000, then I make $500 and it's now in my interest to farm the land or build houses.
"In a sane world, the "ground truth" value of most financial instruments like stocks and bonds would terminate in good old fashioned capital and labor, but we've already been through one crisis where much of the world's paper wealth turned out to be just elaborate incantations cast upon regular people's mortgages."
And there's the rub. In Henry George's time, taxing an empty lot in a city made sense, because it did revolve around capital and labour: build an apartment block there for housing or a factory to make things for sale.
Today it's all fancy skyscrapers full of offices where nobody *makes* anything, they push electronic bits around to manipulate stocks and shares prices. Manufacturing physical goods has been outsourced to cheap labour and cheap costs countries overseas. Everything is online and in the cloud. You could do it as well from that field in the middle of nowhere as from the middle of the city, so the value is ephemeral: is the field in the middle of nowhere worth what it sells for, or worth what the data centre on it generates?
Not sure if this is too IRL for this blog/discussion, but a significant amount of conservation in large parts of this country is owing to conservation easements, private agreements that run with the land, and frequently offer those who can take advantage of it a one-time income tax deduction. These obviously can often decrease the assessed value of the land, as the landowner is waiving development rights and other activities; but they don't always do so. Sometimes the highest value of a piece of land turns out to be just that - to be a piece of land that sustains wildlife, recreation and/or some well-managed ag (grazing or timber).
As an environmentalist, my fear is that someday the highest value of the land will be ... well, superstititiously, it's not something I even want to utter, as I'm afraid if the libertarian crowd were to read it, they'd say, oh yeah, we need to do that now!
But I do wonder what provision Georgism would make for private conservation.
I remember that the original review defined "land" to include anything that was naturally occurring and had productive capacity. This seems to have fallen back into talking about literal land, and that may be an important mistake. For one thing, it may make it look like "land", writ large, is less relevant to the modern economy than it actually is. For another, it may cause people to underestimate the available tax base for a "single tax".
For example, the laws of nature are "given", and they allow you to do certain things to produce wealth. A patent is an exclusive right to use part of that natural capacity by taking certain actions. Looks like land ownership. Perhaps patents should be taxed at 100 percent. And there are probably at least a few other high-value examples if you go looking.
... and shouldn't there also be recovery for extraction? If I mine $1 worth of gold out of the land, then that's $1 that won't be there later. I have permanently reduced the value of the land. The same applies if I pollute either "my own" land or the environment generally.
Personally I like the idea of a "single tax", or at least the idea of a "handful of taxes" on just a few land-like things, not only because of George's arguments, but because they're relatively simple to administer, relatively non-distorting, and probably in many cases relatively hard to cheat.
Most of the big taxes nowadays are on broad categories transactions and activities like "income" and "sales", meaning that you have to think about the tax consequences of everything you do, and sometimes otherwise economically reasonable things don't get done because of distorting effects of the tax system. Or vice versa.
The problem of coming up with an accurate appraisal for land is hard, but if you have a bunch of taxes on transactions, transfers, and ownership of random things, you have to look at the aggregate difficulty of coming up with rules for valuing all of those. I think I'd rather have the land problem, even if I end up having to do it for a handful of different categories of "land".
The administrative cost of valuing land (even in the extended version) is going to be *vastly less* than the aggregate cost of all the accounting people have to do on *every single act and transaction* to support, say, income tax or even a VAT or sales tax.
Actual land, and probably a lot of land-like things, are hard to hide, which reduces the cost of policing against evasion.
Super minor point, but I think it would be correct to say that Pigouvian taxes have _negative_ deadweight loss instead of zero. It's not that it doesn't distort the incentives on a free market: it's that it distorts them in the way they "should" be distorted, internalizing the externalities.
Another example of a tax with zero DWL, at least in theory, would be a lump-sum tax that every person has to pay no matter what. Thatcher's government something similar for a while: https://en.wikipedia.org/wiki/Poll_tax_(Great_Britain).
I used to be a Georgist, until it was pointed out to me that 100% of the burden of the tax falls on the present owners of the land. A perfect Georgist tax reduces the market value of the land to zero, since it now produces zero net income. The present value of the land is the net present value of the income stream, so the state has just confiscated the land from its current owners.
To take an example close to home, I (jointly) own a house worth £650k. Its rebuild cost is c£250k, so presumably the land is worth the other £400k. If a perfect Georgist tax were introduced, I would lose that £400k which doesn't sound great. But it's worse than that, because I owe the building society just over £400k (coincidentally), for which they would no longer have sufficient security. I would be unable to remortgage or sell the property unless I inject c£200k to reduce my LTV to a reasonable level. Precisely because land represents a significant percentage of all bank loans, a sudden reduction in its value would cause major financial problems.
It's not really helping me with this problem to say that I'm now in receipt of a citizen's income: at best that's defraying the annual LVT payments, but it does nothing about the sudden deterioration in my asset position.
This causes two problems. Firstly: it's unjust. We can argue the merits of wealth taxes, but taxing one particular category of wealth at 100% fits no sensible view of how the burden of taxation should be distributed.
Secondly, and perhaps more importantly, very many people (probably the majority) are in a similar position to me, so LVT is politically impossible.
A possible solution would be to compensate the existing owners. In the case, you would still get the economic benefits of the tax, but you raise no income. The amount of compensation paid is equal to 100% of NPV of rents, so it's equal to all the money you'll ever raise. Actually, you benefit a bit because the state's discount rate is lower than the owners' discount rate, and you only have to pay the owners' NPV. My 5-year interest rate is 1.19% and the UK government's is 0.54%. I think the difference between those numbers should be the net income received, but of course other owners will have different discount rates.
One thing missed in the math is that if you tax land exclusively, the value of land will drop. If you put a 5% tax on Tesla stock then much of the investment in Tesla would move into other(untaxed) stocks and the price of Tesla would fall (possibly plummet). This suggests that the expected income available from taxing land may be grossly overestimated.
This is fascinating; great work! Look forward to consideration of dynamic effects, which I'm now entirely convinced are the only relevant ones. You've sold me on land taxes in a static world.
Possible dynamic effects this made me wonder about.
Could generate more sprawl; if people concentrate more, they build more on the same land. Rent value goes up, but, in Georgist-land, so do taxes. The tax minimization strategy is (I think; haven't fully thought this through) actually to disperse as widely as possible such that land is rendered less valuable.
General principle: isn't a land-value tax inherently a tax on concentration of people? And concentration of people has a lot of benefits. And you indicate that this is going to reduce sprawl, but seems to me that the opposite would happen.
Dynamics of high land prices in cities is mainly driven by scarcity of land near lots of other people and lots of jobs. There are more people that want to live in SF than there is land for them. The typical urbanist solution is more density / anti-NIMBY laws. But now more density results in increased rents and increased taxes. In the extreme Georgist case, there's zero marginal value of increasing density, because you're just increasing your rents, which get eaten up by taxes. Unless the claim is that the density gains are accounted for by structure-value, not land-value. But as you point out, almost all the value in urban construction is in land. So I do think this is a problem for the narrative. There's some fun economics implied as to whether this would push construction to be way, way more expensive. E.g. build Burj Khalifas with huge structure value on minimal land-footprints, although this would also increase the value of the land.
Related: what would this do to incentives to build large, expensive buildings? Part of the reason such things get built is because of the rents they can extract over the long-term. Slashing those rents by 50%+ might push down incentives to build big and increase sprawl (more small buildings > fewer big buildings).
General principle: there's a lot of positive between property value and land value, especially in urban areas, and it's tough to completely disentangle. Building certain kinds of valuable, rent-generating things on land tends to make the land more valuable.
Isn't LVT implemented in Denmark? IIRC, the rents are still pretty damn high there.
I'd really like to hear opinions (multiple) from academic economists on this.
I'm heavily biased in favor of Georgism, but acknowledge my lack of understanding of macroeconomics.
I have heard almost nothing from professional economists about it (and I've bee listening for 20+ years). I suppose that's probably because (a) they think it's obvious nonsense or (b) they think it's obvious sense (c) or they think it's professionally dangerous to talk about.
Given that we have some retired economists around here (David Friedman, I'm looking at you), probably it's not (c).
Continued silence makes me think it's probably (b), since economists are usually quick to attack perceived stupidity. But I'd be reassured to hear from them.
How about extra tax for all ginger people? It also carries zero deadweight loss.
What would a world look like in which every parcel of land was being utilized for its maximal economic output? My intuition is that I wouldn’t want to live there.
"By George" 6 times
It was cute and clever the first time, but by the end it's like a child who knows one joke and keeps on shouting it over and over
I've been aware of Henry Grorge in a casual way for over half my life. I will read your essays with interest.
Right off the bat, however, would you also discuss Universal Basic Income which I am powerfully interested in. Apparently George also advocated something like this.
Do you advocate UBI?
I assume you are still advocating for LVT, so perhaps you think both are necessary. Why both?
If you use the method discussed to evaluate land, would this result in monopolization of land?
You figure out how much my land is worth by looking at the empty lot near me. You subtract away the building value to discover the land value. However, being in proximity to buildings is desirable. That's why people want to be near cities and towns. If a person bought a massive amount of land in a remote area and built an entire city, the land around it would be worthless. Therefore, the land owner wouldn't pay much in land value tax. If it was sold off and a bunch of little pieces of land, then there would be plots that could be evaluated but since it is one massive piece, you have to compare to the area around it.
If literally all your taxes are coming from land value, then I imagine this might save people substantially. People might move to these areas or at least try to live in large plots of single owner land outside cities or something. Is this plausible?
There is a book you might be interested in reading called Radical Markets. They have a chapter in which they propose something like this and a way of evaluating the land. The owner prices his/her own land and the government can choose to buy it. The land owner prices things fairly cause they don't want the government to buy it. Worth a look.
Isn't the argument that you can get enough taxes from land simple and doesn't have to involve the valuations? People cannot avoid living on land. Therefore, you can tax them as much as you want. You could tax land value 150% or 300% or 400%. It doesn't matter how much the land is worth. No?
I share the concerns about what it would mean to implement a Georgian approach suddenly, and how disruptive and confiscatory that might be. People do make plans given a certain set of laws and taxation schemes, and suddenly changing those would create hardship that can't be shrugged off by the equivalent of saying "Well, if they own land then they're probably rich anyway"
I do have a subtler concern as well, with regard to how land is valued, and entrepreneurial and speculative activities around land. I'll drive it with a real-world example.
I own shares in a very small company that is essentially just an owner of a large amount of low-value land. (And before you get out the pitchforks, absolutely no one in this story is conspicuously wealthy.) Historically the land has been leased at about $2 per acre for cattle grazing. Several years ago some visionaries (not me) began to realize that the land had serious potential for renewable energy development, which might eventually command lease prices of $300-$500 per acre. So they began the speculative and entrepreneurial project of 1) buying shares of this company's stock, 2) lobbying the management to pursue renewable-energy opportunities, and 3) beating the pavement to find renewable-energy developers who might be interested in siting their projects there. If they succeed in creating a lot of new revenue from leasing to renewables developers they will enjoy appreciation in the price of the stock, which is really just a proxy for the value of the land that the company owns.
At this point I would like to ask Georgians what a Georgian account of this activity, including its profit motivation, might look like.
Firstly, how do we value the land itself - is it valued based on a lease value of $2/acre or more like $300/acre? Who decides that and when?
Secondly, is there a way that this entrepreneurial activity (which by the way plays a role in supporting renewable-energy development, commonly thought to be a Good Thing) would still be profitable, given that it's intrinsically focused on speculation on the value of land (in part by increasing the use value of that land)? Note that it's not as simple as separating out the value or the cost of the structures built on the land (solar arrays, short-distance transmission lines). There is also the work of identifying value in the first place, assessing suitability for renewables, business development with producers and consumers, all of which in the end have an effect of increasing the intrinsic value of the land.
Does profit-driven entrepreneurial land speculation exist under a Georgian regime? And if not, how does grazing land get turned into solar/wind land? I hope that the answer is not "central planning".
There's a lot of sentences like this that are causing me real problems:
> The cost to replace your building with a new one of identical design is on average going to be a lot more than what your old building is actually worth, even after factoring in depreciation. That's because the market doesn't care what you spent to build it, it only cares how much value it provides under current conditions.
I can't internalize this at all, and I feel like I'm being Euler'd or some bait-and-switch is happening. Some game is happening with the fragment "actually worth," and I can't tell what.
Would appreciate a response to this article that is critical of Georgism, with regards to land development, new land uses, gives example of oil exploration
"They also don't apply any estimates for how much land values would rise if restrictive zoning ordinances were removed."
That seems like burying the lede. How much of what you're talking about is just legalizing building and how much are you really talking about is really about Georgism?
Most of land speculation is speculation on zoning rights. That's easy to remove!
Actually, that's a socially acceptable lie. The truth is that most land speculation is speculation on connections with the zoning board. Maybe we should just have transparent, enforced zoning laws, rather than corruption? If we can't enforce the laws we have, why are we talking about new laws, rather than how to have law at all?
Friedman wasn’t a conservative, he was what we in Europe call a Liberal, similar to what you call Classical Liberal.
"But if you accept that you live in a society that occasionally taxes things..."
We live in a society that occasionally doesn't tax things.
I apologize in advance for asking questions that may be FAQs, but I got really confused reading this last night, and think I need to step back and ask something really basic. But also get a question about any possible transition to a Georgist regime off my chest.
It appears to me that a 100% Georgist system is functionally equivalent to nationalizing all land, and having those who use that land pay rent to the state for their use of it. The renters would then be able to own property (e.g. buildings) on that land, and control the use of both the land and any structures on it. (The rent would be called "tax", but that's a distinction without a difference.)
First question - am I correct in this?
Now I note that it appears that 100% Georgism is not desired. I don't know why, but one obvious reason would be that e.g. an 85% tax on a Georgist model allows room for the markets to provide information about actual land values, beyond the blunt instrument of increasing the deemed value, and thus the rent charged, until people start choosing not to use ("own") that land, eventually even abandoning structures they own on it, as not cost effective for them.
But I'm going to use 100% Georgism for my questions about transition, because it's simpler/clearer.
Second question - what is the Georgist answer to this? So far, all I've seen is what amounts to "people like me - and probably you too - will gain from this transition". The corollary, of course, is that those who lose aren't as worthy of consideration as we are. ("Democracy is 3 foxes and a hen voting on what to have for dinner"?)
Suppose we switch to Georgism tomorrow. For people whose wealth is entirely in land, this amounts to complete expropriation. People whose wealth is entirely in other investments only have the risk of losses due to the economic disruption caused by the transition, which might actually turn out to benefit some investments.
This seems to me to be extremely unfair.
Drawing the process out over years or even decades gives people time to prepare for expropriation, and try to unload their land at a discount, to people expecting to get some returns in the time remaining before complete expropriation. Or they can simply extract as much value as possible from the land they own, in the time before it gets expropriated. Land prices can expect to converge on the expected value of the income stream from the time of the announcement until complete expropriation.
This looks better, and at least allows those stuck with land when the process starts to buy some other investments that will continue to provide an income stream after the transition - though a significantly smaller one than they had previously expected. But it's still a significant loss, and experienced only by those whose wealth happens to be in the wrong assets.
Now as it happens, I count as a person likely to do a lot worse in such a transition, without being at even a 1% level of wealth. I live in a major metropolitain area on a US coast, and am approaching retirement with a fully paid off house. Most of the value of my little old house is in the land it sits on. This probably focusses my thinking somewhat.
To some people, people like me doing worse would be a benefit. Or alternatively, you can't make an omelet without breaking eggs, and I'm just unlucky to be in the path of making things better for the average person. Is that where you are coming from?
Overall, do you have any answer to the problem of severely unequal impacts, even on people of equal wealth?
Also, what is your response to the observation that this requires significant expropriation of existing wealth?
My problem with more land tax is that more tax reduces the value, if you get to the stated goal of 100% tax and zero selling price land value. WTF 100% of zero is zero. X% land tax makes the land ~x% less valuable. If the rate of return on land investment is decreased from 5-8%, to some smaller value, then the price of land will drop. You get less tax. I pay ~2.5% property taxes now, if it was twice that... dang why are you trying to get me to sell my land?
What if I open a coal plant and pollute so much no one wants the land next to me and the land is worthless. Do I pay no taxes? Seems like you would need to tax externalities to prevent people from trying to reduce the value of the land in their proximity.
I want to ask about what I see as both a logical difficulty and a normative flaw in the idea of the Land Value Tax.
The normative objection is that the actions of a third party shouldn't create an obligation on me. When a Wal-Mart opens next to my plot of land, the value of my plot increases due to the proximity to Wal-Mart. Why does that decision, by the people owning the plot next door, mean I need to start paying a fine?
(I'm aware that the economic answer is "because the goal of policy is to generate the maximum possible development on every plot of land everywhere, so you need to be fined until you either play along or give up the land to someone who will build a strip mall". Give me a normative answer.)
But this philosophical objection actually extends into a logical contradiction. The more you aggregate land together, the lower the total land value is. The problem here is that the Land Value being taxed does not include the improvements made to the Land being assessed. But it *does* include the improvements on other nearby Land! So that empty plot in San Francisco has a Land Value of two million dollars. And the plot next door to it has a Land Value of two million dollars. And ten plots like that in nearby areas have total Land Value of twenty million dollars. There's a lot of San Francisco, compared to those plots, and that's what the value of the plot comes from.
But the Land Value of San Francisco is much lower than the sum of the Land Values of the plots that make it up. Maybe all of San Francisco has a Land Value of twenty million dollars. Because at that level, we need to exclude all of the improvements that already exist in all of San Francisco, and they were responsible for nearly 100% of the Land Value in each smaller plot! So we just lost nearly 100% of the Land Value.
The obvious implication is that land must only be owned in truly gigantic quantities. If you own a storefront in San Francisco, you owe an earth-shaking Land Value tax. But if you own all of San Francisco, and all the stores have to rent their space from you, you owe barely anything. Is that what we want?
There is an annoying motte and bailey going on with the land value tax discussion.
There is a theoretically optimal no deadweight loss LVT which values land according to its value as farmland. That tax has relatively few theoretical problems, but isn't worth all that much money (NYC is worth ~$1 billion as farmland).
Then there is a LVT which incorporates the improvements of the surrounding area. That tax can raise a lot of money but has large potential deadweight losses. You can patch a lot of these losses (development tax credits, regulations or special taxes on destructive uses) but then you are losing the theoretical justification for the tax.
I don't have a ton to say about Georgism besides how much I'd like to see a pilot somewhere. Even in a video game. But I always loved the way economic theory was so interesting as far as EVE.
As someone who untapped a massively valuable resource in EVE in a pretty unique way the fact that EVE has gone so far downhill sucks. If I hadn't had to quit EVE to focus on some real life stuff I would currently be one of the top 100 wealthiest players if not much higher. I ran ~120 characters at my peak. Would have been producing about 250 billion ISK a month without market trading.
The economic aspect of EVE was basically my favorite part. As an industrial innovator who convinced a very serious nullsec corp to let me, and my 119 other characters, in based on an understanding of the economics of EVE no game has really ever captured that feeling.
Even ATITD isn't really the same as EVE despite the crafting/economics focus.
If only the people running EVE were smarter, and took the economics stuff more seriously in the current era, there's a lot of cool stuff that could be done.
Some of the arguments for collective partial ownership of land seem to extend too far. For example, I could say:
All commodities are derived form the land of the earth. Nobody deserves to have iron or corn. When you use iron, you exclude others from using it. Since people have collective entitlement to all of the land, they should have collective entitlement to the fruits of the land. Likewise human beings are created from food derived from the earth which all people are entitled to. Everything is partially collectively owned if land is collectively partially owned. From this, we can say that we can tax anything we want.
a point of clarification
the basic george policy is that the state owns all the land and the state leases the land at what would be the market rate for the undeveloped land
have I got it right ?
Apart from logistics there is also a rather large elephant in the room. Suppose we can perfectly assess land value and disassociate improvements from spillover effects (from surrounding development), and let’s suppose that the government is highly competent at using the tax revenue, and that there really is zero deadweight loss. And suppose the public is cool with the government seizing all land value.
Even then, efficient does not mean good, and it does not mean that economic growth is maximized. One of the “benefits” of 100% LVT is that it punishes inefficient use of land. But this means actually bankrupting and/or forcing out the least profitable businesses in areas with high land value. Or forcing people out of their homes. There are real societal costs from this constant relentless turnover.
There are two rules of a financial system:
(1) Rapid change is bad.
(2) See rule number one.
Going to a Georgist system might be a net positive (I'll withhold judgment until the whole series is complete, but I am sympathetic.) But path-dependence matters, and it would be necessary to phase-in a Georgist system.
Also, I'm skeptical that you can get buy-in for that. The powerful aren't going to accept a system that makes it difficult for them to evade taxes, and they're the ones who have political power.
Here's what I don't understand - one thing Georgeism is expected to solve is land speculation, which drives prices up to wild heights.
But all these calculations you're doing about the value of land is in the current speculation-heavy environment.
If we implemented these taxes, wouldn't the speculation bubble burst and all urban land values drop by, like, 90%, meaning all your calculated revenues from the tax also drop by 90%?
In other words, yes, land is a big deal when we get to speculate on it, in the same way Bitcoin keeps going up and up in price. But is it still a big deal in the world you want to create, after the bubble bursts?
I think it is reasonably well established that Georgism is good in theory. My biggest question is how such a system could ever be implemented in practice.
Answering my own question:
Compensate land owners for their loss in wealth as a result of the LVT. Icky I know, giving rich people more money. But if it actually makes them support the policy, then it's worth it!
I know this is not the point of this write up (which is excellent, BTW), but it always strikes me when I read stuff like this:
Whenever I read about "People lifted out of poverty" and about how good everything is all the time under our current neoliberal hegemons; I consider my childhood, and my time in construction and agriculture, and wonder how people can believe something that's so clearly bullshit.
Maybe I'm the wrong one, but it's hard to imagine.
Regarding cap rates: while these are subject to a range of estimates, the underlying assumption is that blended cap rates observed for land + buildings are a good estimate for the cap rate on land alone.
There's a logical reason that we'd expect higher cap rates on buildings, however. As noted, buildings are a depreciating asset. It therefore stands to reason that the blended cap rate reflects a weighted average of a higher cap rate for buildings and a lower cap rate for land.
I was somewhat positive on Georgism after reading the post. Many of the comments, however, gave me the impression that it's an alternative to communism for those who want to get back at the rich - an alternative that's more marketable due to not being associated with large piles of skulls.
Systemic changes will of course have winners and losers. Sincere advocates shouldn't be shying away from the hard work of taking the latter's possible (or probable) concerns into account. It says nothing good that a number of Georgists would rather hand wave away the notion that there would be losers by dismissing them as immoral, exploitative actors akin to slave owners in the 1800s.
Nice solution, but I see the problem in the transition. The tax would effectively devalue land. Ignoring rich people and corporations, but for many commoners the property is their main retirement asset and even worse for ongoing property debts. Their rates can possibly no longe be sustained and neither be paid back by selling. Making the "middle class" broke and overindebted over night won't get through any legislation. Anyone any suggestions for that?
I don't want to harp too much on one line, but this:
"Furthermore, land, unlike capital, can't flee the country and take investment and industry with it."
While true, it seems like the value of land comes from it's proximity to where people want to be, and where people want to be is driven at least in part by where people can combine their labor with capital to produce value. So if capital were to flee, the land would remain, but the value of that land might go down, even if there are no improvements to it.
If a bunch of capital fled Manhattan or SF, I suspect land values in those urban areas would drop quite a bit.
"If you put ATCOR, the Henry George Theorem, and observations about non-pure-public-goods-spending together, one could postulate a virtuous cycle where government investment is always able to pay for itself without creating a drag on the economy and without any deficit spending or debt."
For that to work, I think you have to assume that the amount government spends on public goods is always less than or equal to the value they generate. In other words, no waste and no bad investments. I don't think that's a realistic assumption. So maybe it's better to say that the government *could* recover *some* of the costs of creating public goods, *if* we have generally good government (plus some luck to account for unforeseen circumstances beyond anyone's control).
I think it's worth pointing out that if you distribute 100% of the revenue from an LVT in the form of a citizen's dividend, then you won't have anything left over to fund defense, other social safety net programs, and all the other stuff government spends money on. So you can't have the tables at the end of Section 1.4 and the conclusions of Section 1.2 simultaneously.
I haven't seen anyone discuss the property tax Assessment Ratio, so I want to point out that the government is NOT drastically undervaluing property for tax purposes. The Assessed Value is not a market value, and it doesn't claim to be. If you look at the NYC page on Assessed Value, it says:
Your Assessed Value is based on a percentage of your Market Value. This percentage is known as the Level of Assessment or Assessment Ratio. Your Assessment Ratio depends on your tax class.
Tax class 1 6%
Tax class 2, 3 and 4 45%
NYC does this so it can levy different amounts of taxes on different tax classes of property, not because they are 'writing down' the value of the property. So we should EXPECT the Assessed Value to be less than 10% of the fair market value - around 6%, in fact.
Most cities do this - Cook County, IL, uses a 10% Ratio for non-commercial property and 25% for commercial property (https://www.cookcountyassessor.com/your-assessment-notice-and-tax-bill).
But this does make determining fair market value from tax assessments tedious - you have to know the Assessment Ratios for each city/county in your dataset.
Excellent writeup - thank you for the hard work.
I will note, however, that sociologically/demographically - the people who actually own the land are almost exclusively the ones who are wealthier (and by inference, more influential). Would they ever want such a tax - which both reduces the value of their holding while increasing the carrying cost of same?
I think not.
The homeownership generational gap isn't that troubling. The number of adults living alone has nearly doubled over 50 years, and people are getting married later or not at all.
Someone probably commented about it, but:
The same argument that you use to show that most of the difference in value between real estates in the city vs. rural areas come from land value - can sort of be reversed. Just like it is obvious that the value difference doesn't come from difference in amount or wisdom of investments, it obviously doesn't come from any intrinsic property of the land. It must have to do with the fact that the land is *surrounded by a city* - i.e. externality of the investments of everyone else in the city.
So the whole thing may at most serve as a moral ground for taking high city-level tax - not federal tax (the justice of such a policy is debatable for other reasons).
The main reason land value is so high is its "monetary premium" as a store of value in an otherwise highly inflationary world. A better solution for making real estate more accessible is adopting Bitcoin as the world reserve currency. It won't involve expropriation, won't cause gentrification and more importantly, it won't leave us completely vulnerable to the state monetary policy and the economic ineficiencies that will sure follow without our ability to save the fruits of our labor.
No doubt everyone here is well-versed in MMT, but it is necessary to harp on about it a bit more: taxes DO matter and can only be collected (federally) after spending by the Fed (although individual states must tax to spend). Taxes dampen private demand and create space for further public spending. Particular taxes affect which resources are "freed up" or "released". None of this is incompatible with LVT or Georgism, and I would say they are congruent since LVT releases land (and other scarce natural resources) to the most productive use.
I'd like to attack the "no deadweight loss" claim from an angle I haven't seen in the comments. LVT is effectively equivalent to expropriating most or all land value. Sure, at least some forms of LVT would be free of deadweight loss if it were common knowledge that this new tax system would be our tax system forever, and no other asset classes would be expropriated.
However, realistically, after the government has expropriate land using Georgist arguments, how will investors trust that the government won't make up some excuse to expropriate other asset classes as well? Most voters don't think about dense economic arguments; if an electorate could be convinced by Georgists to support expropriate land, chances are a demagogue can convince it to support expropriating other assets as well.
After all, in theory, an unexpected, one-time expropriation of wealth (complete or partial, some asset classes or all of them) would have no deadweight loss either—assuming investors trusted the government's promises that it would be a one-time event that would never be repeated. But there is no way investors would trust that.
There is a related issue of fairness. Again, a high LVT would be fair if there had always been a consensus that land ownership without such a tax is illegitimate. In that case, even if a government had, for a while, rescinded the LVT, landowners would have to expect a subsequent government to reinstate it. However, we don't live in that society. For millennia, humanity has been treating land ownership as just as legitimate as ownership of anything else. Alice decides to invest her retirement savings in land, while Bob invests them in stocks. We institute the LVT; Bob is fine*, while Alice is out of her retirement savings through, IMO, no fault of her own—having made her investment decision in today's society, which considers land ownership legitimate, she had no reason to expect that land would effectively get expropriated.
* if the evaporation of investor trust doesn't crash the stock market as well, which is a big "if"
Hi Lars, in your original post you said "As speculators leave the real estate market the land tax that replaces his property tax drop will drop".
Apologies if I just missed it, but I can't see where you've taken this into account in your estimates of how much revenue an LVT would raise.
So do cities become further limited to the rich? Or perhaps, the most economically productive at the moment? How would a retiree still live in the same West Village flat that they spent decades in - only by their savings?
I would find a breakdown of current property taxation interesting. For instance, in Portland, OR my home is already assessed with land as the largest portion of valuation (71% of the assessed value is attributed to land) and while the taxed value is about 50% of the assessed value, its a percentage of the total assessed value, not just the “improvements” to the land. So we are already paying, largely, an LVT on residential properties, and still have massive issues because of zoning laws and tax benefits for owners of multiple lots.
If the tax is 100% of the rent, then as a landowner I have no incentive to rent it at the highest value possible. Won’t that lead to massive inefficiencies?