A guest post on Georgism by Lars Doucet
I feel like this whole series could benefit from an injection of public choice theory. There are many potential points of conflict between landowners and the government. In theory it shouldn't matter what level of government we are talking about but in practice it does.
For instance with the argument about corruption, with current property taxes if you bribe the local assessor to undervalue your property then you benefit yourself and hurt the local community. Local democratic control of the assessor will work against this sort of corruption and push towards fairer land values.
With a Land Value Tax going to the national government, the incentives are all messed up. The local assessor hurts the faceless suits in Washington when he undervalues your land and helps out his friend in the community. Local democratic control of the assessor pushes towards systemic underappraisal of the land.
To counteract this you need to impose centralized standards and make the assessor an agent of the national government. But then you lose out on the local knowledge.
The same thing applies to discussions of zoning. Currently restrictive zoning rules pit two local groups against each other. Those who want to use the land intensively lose out from restrictive zoning while those who want to use the land less intensively (low density housing or dinghy apartments) gain from it.
With a Land Value Tax you lose the local stakeholders in favor of intensive usage with generic national interests. That means that to the extent zoning decisions are made locally they will be even further skewed against development.
To be honest, Georgism sounds like a dystopia. As far as I can see there it works as follows. Firstly, the government either expropriates all land or buys the land from the current owners. Then the government acts as a landlord, with the caveat that there are no renter protections and the government squeezes the rent as high as it can go every year. If there is someone who will pay more, the government gives the land to them.
This sounds like the very worst behavior of evil landlords. I suppose you could try to ameliorate this by allowing renters to have some protections, but once you do that, you have just re-introduced land as property, as really, what is the difference between owning something for 100 years or forever.
You could hope the government was not completely heartless and sometimes gave people a break rather than thrown them out on the street, in which case all you are asking for is corruption.
All the benefits of Georgism come, as far as I can see, from two aspects. The first is the government taking all the land. If the government gets this for free, this is obviously a win for them. If they don't this is only a win if land continues to increase in value. The best estimate of the value of a piece of land is its current price, so I don't think this is necessarily a great bet.
The second aspect is the flexibility of land use it introduces. The right development will be done as someone will buy out the land and put it to better use. The problem is that we have an installed base of people who live there who don't want to be inconvenienced by the change. They are the people who stop developers from building. This flexibility if great for increasing the utility of land but you could get the same benefit by just allowing landowners the right to build whatever they wanted. If landowners chase profits which is a good initial model they will build exactly what maximizes profits, the same uses that Georgism would build.
Georgism seems based on the hope that land will rise in price forever, and is currently undervalued. If this is the case, why isn't land worth more? If secondly imagines a wild west level of development that happens nowhere outside Yellowstone (the TV show). No one can seriously imagine poor tenants being evicted every year because their building is on land that could be better used for some other purpose.
Is there another benefit to Georgism other than the government getting the upside to land appreciation (if it exists) and the added flexibility? I suppose one benefit is the feeling that landlords are being screwed. The problem is that this exchanges landlord with the government, who is probably just as bad. The dream is that landlords would continue to exist, between the government and the people, to be continually drained of money. The tenants would pay the same amount while the government would demand more, and Mr. Moneybags would take the hit. What happens is Mr. Moneybags is taken out of the equation and the tenant rents from the government? It sounds dystopian - every increasing rents. What happens is Mr. Moneybags is an LLC? It goes bankrupt and there is no one to shoulder the cost, and the tenants themselves renting from a bankruptcy court that can't sell the building as it is worth less than zero.
Some questions for Georgists?
1. Will land prices go up forever(faster than inflation)? If so, why are they not higher now?
2. The government owning all land seems the same as charging 100% land value rent. If the government does own all land, will they give tenants any rights beyond 1-year rental? If a restaurant needs 5 years to establish itself and make money, would the government consider committing to a fixed rent for 5 years? If 5 years, why not 10, 100, or 999 years leases as in London? These leases could be non-transferrable, but without restricting on sub-leases, they would still act as property. Will the government ban sub-leases?
3. Most people will expect reasonable tenant rights to continue to exist, like the right of a tenant to stay in their home. How will this work in a world where landlords can have their building seized by someone who pays more to turn it into a golf course? What happens to the tenants?
I still wish there was a market mechanism.
My landlord doesn't have to have had the property appraised when they decide what to set the rent. I mean they do get it appraised (or at least compare to similar properties in the area) to give them an idea, but it's not crucial that they get it right, and it's not the final say. It's self-correcting: if they set it too high they get no tenants, and if they set it too low they get a lot of applicants when it goes on the market so they know they could charge more. They aim to set the rent at whatever the market can bear. Should the government not do the same when deciding the tax rate for properties? Isn't that what correctly valuing the property would mean?
In the previous threads there was some discussion of how bad it would be if the government set the tax too high - in excess of 100% of the value. The badness that would result (people abandoning their properties or being unable to pay the tax) would presumably be visible to the government. And, as argued, it is bad for the government's income stream if this happens. So, like my landlord, their selfish interest ought to be in favour of setting the tax rate "correctly", i.e. at the rate the market is willing to pay, which is by definition its value.
I wonder if the government could essentially just charge whatever they like, like my landlord does. It would be *informed* by appraisals I'm sure, as a good initial guess, but then they'd use the feedback of the market - how long it takes a property on the market to sell etc - as feedback to adjust it. It would ultimately just be their call to set it, and you could complain, but their word would be final. Your complaint would actually just be advice to them that they might be shooting *themselves* in the foot. Which I hope they'd notice, but you might be able to give them some advanced warning.
If it is indeed in their selfish interests to get it right, then there's no need for the appraisals process to be sacrosanct, it would just be one factor, an initial guess to a feedback process. Like my landlord, they would just be trying to extract maximum income however they can.
I'm sure three seconds' thought raises issues with this. But I still want a market mechanism, even if the government is the only "seller", and it seems tantalisingly close to being possible given these arguments that over-appraising would actually hurt the government's income stream.
Hm, so this series didn't respond at all to Bryan Caplan's argument against the LVT (https://www.econlib.org/archives/2012/02/a_search-theore.html), that it disincentivizes looking for new *uses* for existing land? (E.g., looking for oil.) Any thoughts on that?
I did force myself read these three essays, after being shamed about being driven off by the applause lights.
And while I did, two things kept blaring in my head as I read the essays, and more more while I read the comments: 1) Goodhart's Law is as unyielding as thermodynamics and harder to work around, 2) Public Choice Theory is true, and 3) it was enragingly difficult to read the comments because as soon as someone started talking reasonably and intelligently about transition fairness, someone else snarked moral equivalence between people who own their own houses and slaveowners. I have only so much spare assumption of goodwill, and this exhausted ALL of it. Marxbro was easier to swallow. And I bet someone could do an analysis on the comments, and accurately determine who owns their house, and who pays rent.
Me, I will sit back on my 9 acres of forest with no neighbor sightlines, my trees slowly growing back after being clearcut three times in the past 150 years, and wish nothing but malice on this idea.
"repeal of real estate non-disclosure laws"
Sounds like yet another tool for deplatforming, and for sending a howling mob of paid lumpenpoles to riot as someone's home. I'd prefer real estate non-disclosure laws to be tightened up, instead.
But then, I would guess that Georgists are also fans of the recent proposal that every bank be required to send your entire checking and savings and loan account transaction history to the IRS every year. "For transparency" from "tax cheats".
I think there is an interesting question that goes unmentioned in this series, which is, what is LVT today?
We can tax every component of national income: labor income, income from capital (dividends and interest), and land rents (implicit or explicit). Here in California, labor is subject to a 50%+ marginal tax rate (state and federal), although your average rate is probably closer to 30% even if you have an above average income. Taxes on capital income (dividends, interest, etc) is maybe in the same vicinity, it’s trickier because you have two layers in many cases.
Ok, what is the effective tax rate on income from land? We care most about land in the really expensive urban areas, the red dots on the first map. California is a good place to look - although note that the high value parts of New York are similar.
I would submit to you that a high estimate of the current LVT in California is 0%. If you live in your property, no matter how palatial, you are exempt from tax on (imputed) income from that property - that is, the rent you saved. (You might be subject to some tax if you are a corporation but you have depreciation allowances and 1031 exchanges and other exemptions so it’s not so terrible even then.)
You are responsible for property tax, but because of Prop 13, that is effectively 0 for a large percentage of homeowners, because it is pegged to the original price from decades ago. (You can verify this by clicking around on Zillow - it’s all public info.) Even if you bought your property more recently, it is not terribly high. So 0% + 0% = 0% (granted we are rounding).
But that’s not all. If you own urban land, you get tons of public subsidies that are not readily apparent. For example, the mortgage interest deduction allows homebuyers to pay more for a house than they otherwise could have - and economic theory dictates that this government money just ends up in the pockets of landowners, since supply is fixed and so homebuyers just ending up using the money to bid more for the properties available.
More importantly, landowners today control how much housing can get built - they can veto their future competition, new construction. If you own a burger joint and say that you would like power over how many other burger joints get built in the city, you will get laughed out of the room. That would be a huge public subsidy to you, because of course you will say that zero other burger joints can ever get built so you can gouge the hell out of anyone who wants a burger. The public subsidy goes directly from the diner to you in the form of inflated prices, without ever passing through the government, but it is clear it is a public subsidy - the government is making a special allowance for you to steal extra resources from society.
I hardly need to point out that big city local governments are controlled by wealthy property owners who (surprise surprise) determine that the optimal amount of future housing construction is as close to zero as possible. (I realize development restrictions are bad for some subset of landowners with underdeveloped properties, but I think you can see that development restrictions are extremely good for landowners *as a whole*. That’s what you see with Rognlie’s chart that shows housing rents as a % of national income going from 3% - 10% as development restrictions came into place.)
How much are these subsidies worth? Again, very rough estimate, if Rognlie thinks that rents doubled as a % of national income, can we say that conservatively, government policy has doubled rents going from society to landowners? Surely in California it must be true. So maybe LVT is -100% on the lowish side? (Keep in mind these future subsidies are capitalized into the current price of land the same way future taxes would be if they existed - so the current observed price of land is really present value of land rents + present value of land subsidies.)
The marginal tax on labor is 50%, and the marginal tax on land is maybe -100%. The question I have is that as a democratic society, how in the actual f**k did we get here? Landowners? Who don’t do anything? They’re not building electric car companies or anything, they just bought a piece of paper.
What's crazy to me is that the discussion so far seems to imply we are considering going from like 45% to 85%, not from -100% to 85%.
Yet people just kind of accept what they’re told by landowners? “Oh, local control over development is great, there’s no conflict of interest.” “You know what causes high rent? Developers. Yes, just as surely as wet streets cause rain.” “Oh look, we’re building 5 units of affordable housing and preserving valet parking, we’re doing everything we can.”
I actually kind of buy everything in this series. We will be able to calculate land value (if we want to), LVT generally won’t get passed to renters, land is valuable (although be mindful that the current observed value includes future subsidies vs. the underlying land). But to me it’s much more interesting to understand how we got to a place in our democracy where we are still funneling so much public money to wealthy landowners, all the while enduring a housing crisis they caused by preventing housing construction.
(And full disclosure, from time to time on my linked blog I discuss things like this, but this is the general jist of it.)
My cliff note summary of my reaction to this set of articles (and even more the comment responses):
One: The eminent domain example is not as useful as commenters pretend. Partly because it requires compensation, partly because it's extremely rare and partly because any attempts to use it for economic development have produced massive backlashes. Yes, the Supreme Court upheld the right to do so in Kelo, and then the President signed an executive order saying 'we won't do it at the federal level' and 45 states passed laws saying they won't do it at the state level. People don't appear to agree that this sort of action is in fact moral.
Two: Despite the many problems with the current housing market, approximately 65% of Americans live in houses owned by a member of that household. It therefore seems likely that people are not going to support this in large numbers, or at least in any actual majority.
Three: I realize Georgists appear to really like the abolitionist analogy, but it doesn't work and is deeply stupid/offensive to normies (and, hey, me too).
>So if the public accepts your valuations, and new market signals match your assessments, then they can be said to be accurate.
Feels like a big leap. People see their homes every day, invest into repairs, maintain them, are proud of them etc. Land valuation is a much trickier concept to somebody who bought a house 20 years ago, does not work in real estate, and likely barely understands the formula to begin with.
One general question about Georgism that I don't think I've seen an answer for:
At the end of the day, don't landowners make up the communities that their land value benefits from? If a thousand people build up a town on their own small plots, their land becomes more valuable, but each put in a small fraction of the effort that gave all of their neighbors' plots more value. Why should that be taxed?
I get the impression that Georgism want to tax away the valuable communities, business areas etc. that landowners, business, residents, and such because land is natural, but doesn't this land value ultimately derive from the labors put in by the community to build it?
I think I just fundamentally disagree with the moral premise here
The www.gamedatacrunch.com link appears to be broken.
Why would people invest in large scale area development under Georgism? Such development will often raise the value of land itself, and importantly, the land around it, which has no inherent value absent the uses it is put to. Take the example of Gurgaon, a sort of suburb of Delhi, India. A bunch of real estate developers bought up large parcels of land that were essentially worthless, invested huge sums of money in creating office complexes and infrastructure in approximately 30-40% of those land parcels, and used the appreciation in the remaining areas to recoup their investment and make a profit. As far as I can see, this would be entirely impossible under Georgism, and seems to raise a significant problems for the dynamics of growth and accounting for externalities.
Fun fact -- readers from the comments who speculated about setting up LVT on Mars will be pleased to know that the elusive article by Hagman cited by Wyatt in part 2 that I couldn't find has been sent to me by an intrepid reader, and it starts off with some fairly bizarre fan fiction of Henry George III being directed by the Secretary of Space under orders of the president himself to go build the city of New Chicago on the planet of Mars at a location scouted out by Colonel John Glen II. We are given records of the correspondence as George III lays out his plans for Martian land tax policy.
I am not making this up.
A couple of questions from reading the essays and comments (and apologies for anything that’s been asked and answered - the comments are piling up faster than I can read).
1. Many people seem to be assuming that the main (or at least significant driver) of housing costs is under-developed land. This seems implausible at least to the extent that the underdevelopment is blamed on landowner choices rather than governmental limits on development (zoning, building permits, environmental approvals, historic preservations, etc.). After governmental limits on development, I’d guess financing difficulties/bankruptcy and estate tax/step up in basis account for most of the rest of what folks see as under-development. If it’s accurate that LVT advocates blame high housing costs on landowners willfully under-developing property, what the evidence for this? I recall one example being an abundance of urban parking lots. I suspect folks are either underestimating how profitable parking lots are or are unaware of some legal restrictions that incentivize parking lots as opposed to parking lot owners being in sufficiently profit motivated.
2. I’ve read a lot of claims that a LVT has no deadweight loss and is non-distortionary alongside claims that an LVT will have significant effects on land use. It seems to me that if the first is true, the second would not be true almost by definition. What am I missing? (This may just be another way of asking the first question).
3. There are a lot of references to real estate ‘speculators’ (usually with the scare quotes) mostly in the comments and with the clear (often explicit) sense that these folks are engaged in some immoral enterprise. Is the idea that real estate investors are somehow less moral than other investors (or at least engaged in a sleazy business) inherent to Georgism or is Georgism just attracting folks who think real estate investors are bad?
4. The value of a particular plot of land depends on many things some of which are known, some of which are unknown until someone takes a risk and invests the money to discover the unknowns. Like other entrepreneurs, real estate developers make (and lose) money taking risks on those unknowns — whether it’s the outcome of a simple perc test, a rezoning application, or even market demand for a type of development. Assuming accurate assessments, a close to 100% LVT, and land value being a high percentage of total value, isn’t the incentive for making the investments needed to ‘discover’ the hidden value of the land at least greatly diminished if the discovered value gets taxed away? Wouldn’t this result in less rather than more ‘best and highest’ value development?
Smoothing: The biggest driver of a parcel's tax assessment is the sales price of those parcels near it. If I build an attraction (say, a sushi restaurant), I increase the value of those parcels and, by smoothing, the value of my own parcel. LVT ends up taxing me for a good chunk of improvements.
Multivariate regression (I had always referred to it as hedonic regression in the specific case of land/housing regression) can compensate for this by changing "proximity of the nearest sushi restaurant" for my specific parcel to the nearest *other* sushi restaurant.
Fundamentally, the incentive is to ensure that nobody near me can enjoy anything I build!
For homeowners I suspect this would be a mostly tertiary effect (though your neighbor is never cutting their treetops so you can have a view, that's for sure!). For large parcels--especially destinations like a supermarket-- I suspect it could be very significant. We don't want to disincentivize the creation of locations other people want to be near.
Should I dump some oil drums onto the parcel near mine? When I was performing hedonic analysis of land prices ~15 years ago, I had to throw out all the ecologically damaged sites like former gas stations and industrial facilities because their residuals were so large and negative that they were throwing off the whole analysis.
(Our published paper was not designed for the level of accuracy you are looking for here, more looking at total land value in large metros.)
My fear here is you are essentially comparing an ideal land tax system to our actual income tax system. If you gave me a team of economists and a blank sheet I bet I could design a system of taxes that taxes undesierable behavior (internalizing externalities) and purely positionsl goods  and in so doing actually has a large positive effect.
What seems more relevant is some sense of how it will work in practice. There is simply no chance that universities and hospitals are going to have to pay this full tax. First time a uni is turned into a shopping mall because it can't cover it's yearly tax you'll get an outcry and they'll get some kind of exemption and then leverage that to make money as landlords etc..
Secondly, I fear the details of the uniform assessment process are a perfect place for shenanigans. People have a rough intuitive grasp of the idea of marginal tax rates on income and can have some sense of what that means in terms of extent of wealth transfer etc and while special interests get deductions voters can exert a fair bit of pressure to limit this. I fear that the politically influential could manipulate aspects of the assessment algorithm with less transparency.
Finally, I have to wonder how often the assessment process produces undesirable answers without hand adjustment. If a piece of property is unusual in having no space to build something reasonably sized on how does it get taxed? What if local ordinances bar development of that property? etc.... How u handle the edge cases (percent of income can't go too far off) really matters as you don't want lots of ppl caught up in long litigation.
 things like fancy watches where the value consists in having something better/more expensive than X% of ppl and actual features don't matter or designer clothes.
Thanks Lars, you've done it, by George! Three beautifully argued and closely analysed pieces, and I now feel I know so much more about LVT than I'd ever dreamed possible. I'm off to join Common Ground, and by the way, are you any relation to the legend that is Lyse Doucet, the BBC's chief international correspondent?
And the influential won't game the system by just bribing a local assessor. They'll do what they always do: first raise genuine concerns that complicate the system and *then* use the complexity and opportunity for discretion that creates to advantage themselves. My intuition is that this system would make that worse but I admit it's just a vague gestalt sense.
The question is not whether land value CAN be appraised accurately.
It's whether land value WOULD be appraised accurately.
And the answer is: If land value appraisal is put in the hands of the state, the aim of land value appraisal will be to serve the state, not to accurately appraise.
If it's going to be a land tax, let it be a land tax -- a flat tax per acre or portion thereof, and an acre is an acre is an acre, whether that acre is planted in corn, or is some family's retirement abode, or is the footprint of a 60-story high-rise, or is covered with oil derricks. Set the tax per acre low enough -- and therefore keep the state small enough -- that it's not a huge imposition on even the poorest user of the land.
To be blunt, this seems to be the weakest of the four instalments.
1) The author repeats several times the argument that in some jurisdictions that assess land value the assessments are seldom challenged, hence accurate assessments under LVT are quite feasible. The low frequency of challenges may be due to two factors: a) systematic undervaluation and b) low cost of overvaluation to the owner. LVT proponents intend to correct issue a) and their whole plan is to eliminate b). If I am a land owner, my incentive to challenge the assessment declines quickly with the cost of overassessment and with the likelihood of a lower assessment with additional scrutiny. So the current rate of challenges says nothing about the current precision of assessment and gives a very rough lower bound for the 75% LVT regime rate of assessments.
2) It is not realistic to have simultaneously "limited exemptions" and an "easily accessible relief program" and a simple cheap assessment regime for a program redistributing >20% GDP in the current political setup. All the political and legal resources that currently target tax law and application will be rationally thrown to fight for exemptions, reliefs, and quirks in assessment regime. LVT is less based on actual cashflows and market prices than e.g. income and capital gains taxes, so, by definition, it is more dependent on legislation and implementation details, and thus is more vulnerable to these attacks.
3) The more impressive your multi-level regression model diagrams look, the larger is attack surface for manipulation and the less reliable is such a model in the field. The only way to have a reliable market value assessment is to base it on frequent market transactions for land alone and these are not that frequent for an asset which is as granular and quirky and illiquid as land. So the whole section about fancy models looks to me as a strong argument against LVT.
I'm not convinced by the assertion that a large LVT is a non-deadweight tax.
I'll start with the assertion that investment is risk averse, any source of uncertainty about future costs or payoffs dissuades investment in potentially valuable improvements, and so any unncessary extra uncertainty is a deadweight cost on the economy.
Popular examples of such uncertainty creating a deadweight cost include an unreliable legal system, unclear political borders, unclear property rights, and unclear long-term tax perspective.
In that regard, someone considering to make a long-term investment in improvements (e.g. buildings) on some land - which, according to George, is something we definitely want to facilitate, will consider their long-term costs. Existing experience demonstrates that the willingness to make such improvements depends on the long-term control they have over the land, and this is one of key reasons why societies have considered it valuable for land to be owned by people using it, because e.g. a few centuries ago farming tenants were not motivated to improve the farmland but freeholders were. A system where people making improvements are certain to retain the value brought by these improvements facilitates making these improvements, so the best case for that is people building improvements on the land that they fully own, and in the long run historically this has had a big difference in productivity of land (although, historically, this has mostly been about farmland or pastures, perhaps the modern case where 95% of value is in urban land is different). Arguably this is one of the things that Georgism wants to improve by adding a disincentive for non-user landlords.
So for someone considering building (or investing in) some valuable improvements, the long-term certainty of land matters. If they have a short-term rental of that land, it is a strong discouragement to building improvements (since they can't move these improvements afterwards, and would be either forced to pay whatever rent is requrested up to the full economic value of the improvements themselves, or abandon them), and this discouragement IMHO would be a significant deadweight cost. Tenants in short-term rent conditions simply do not invest in proper improvements. If they have a long-term rental of land (e.g. in some jurisdictions 99 year leases are a thing), that's better, but then it depends on the expected *cost* of that rent - if the rent is fixed, then the effect on investment is similar to a perpetual ownership, but if the rent can be changed, then it's closer to a short-term rental. If we want to encourage effective investments in improvements of land, then we need the ability for would-be investors to obtain a fixed long-term cost/rent of land which is often achieved by outright ownership of the land.
And my argument about a large (e.g. rent-equivalent, Georgian) LVT is that it does add uncertainty to making improvements of the land, essentially being equivalent to a long-term rental with a short-term price renegotiation (since you're always be paying "market rent" for your land and you can't fix it), because the LVT can and will change significantly without your involvement - I mean, that's a core assertion of Georgism, that land prices are often significantly increased because of external factors. With a Georgian LVT, there is suddenly no option for someone to obtain a long-term certain cost of the land they would be using to build a very expensive buildint.
Georgian proponents have previously used an example in discussion of a hypothetical underdeveloped land plot with a single-story home next to a skyscraper, which is not being developed by building e.g. a 5-story building because the landowner is speculatively waiting for someone to buy the land to build another skyscraper, and the suggested effect is that a large LVT would motivate the owner to build a 5-story building to capture at least some of the potential value. My counterargument is that in a similar situation where both plots are still empty and the skyscraper is yet to be built (and thus the LVT is currently at a level where a single-story building makes sense), people would be discouraged to improve that land by building that single-story home, because if the neighbour builds that skyscraper, their LVT will rise to punitive rates essentially ensuring that a 5-story building will get built, and they will have to abandon or tear down that home, losing all their investment in the land improvements, and not gaining any benefit whatsoever from the increase in land use value (since all that increase of value is captured by the LVT), so the building of a skyscraper would cause them a significant cost, and the *potential* for a future skyscraper next to your house creates a significant extra cost/risk to building that house that is essentially a deadweight cost.
Essentially, every single improvement that might get later 'outclassed' by future land value increases requiring it to be replaced by a different, more intensive improvement carries that risk. You might have cheap land in a backwards town. If you build a large factory and large warehouses on that cheap land, there is a certain likelihood that the town will 'boom' (no matter if it's caused by you creating lots of jobs or not - Georgism and LVT doesn't measure that) and the then the land value all over the town will increase - including your own land, and you have the risk that you will suddenly have to pay a much larger LVT than before. That future risk is a real cost to consider today when deciding on building that factory/warehouses, and whenever that consideration causes someone to build less factories/warehouses, that turns out to a deadweight cost to society. One could argue that it's low, or perhaps outweighed by other benefits, but because of this argument I'm conviced that the deadweight costs of LVT are not zero.
A couple of methodological points:
"The cost to build something isn't necessarily the same as what it would sell for in today's market. Therefore, this approach tends to overestimate building values and underestimate land values." Most things are worth more than their construction cost, or people wouldn't bother making them. Also, with buildings as with everything else, depreciation is an accounting simplification which bears little connection to the way value actually changes over time. To take an extreme case, if you depreciate a building over a 60 years, you conclude a 60 year old building is worth nothing. But in fact something like half of UK dwellings are over 60 years old, and those buildings clearly continue to have some value.
As was pointed out previously, it can't be right to apply the same capitalisation rate to land and buildings, when one is appreciating and the other depreciating. Also, your income approach looks at net income, which is right in theory but very difficult in practice. It's easy to find out the market rent for a property, but nobody other than the landlord (and often not even him) knows the expense rate. It's complicated by the fact property expenses are really lumpy.
A teardown property isn't a pure land sale: you should add back the cost of demolishing the existing building to establish the value of the vacant plot. I imagine that would be a simple adjustment.
The cost of assessing land values isn't the total cost of administering an LVT, since you also need to collect the tax. Most of the IRS's 0.36% operational costs will be collection, since they outsource the assessment to taxpayers (I think: that's what happens in the UK at least). In some sense you have an obvious remedy for non-payment of an LVT: you repossess the land. That ameliorates a potential problem with tracing the owner: you could just staple your tax demand to the front door and you don't really care who pays. But repossessing properties is expensive, so I think your total overhead may be quite a bit higher.
It seems obviously wrong to assume that two adjacent properties have "essentially identical" value due to location. The value of a plot fronting on Oxford Street will be much higher than the value of the plot to its rear.
Georgism feels attractive and repelling to me for the same reason: it will introduce capitalism to landowners that could previously avoid it. Formally, "competition" might be more accurate than "capitalism", but capitalism has the right associations for me.
If you are currently a landowner, then you can do with your land whatever you want. If you want to make profits, you do that. If you want to use it for your own house, you can do that. If you are a do-gooder and you want to use your land to offer social housing with less-than-I-could-squeeze-out-of-you rent, or you want to grow a forest to fight climate change, you can do that.
With LVT, you can't do this anymore. You have to pay the hypothetical profits of optimal land usage. If this optimal usage is a skyscraper, then you have to pay the yearly income of a skyscraper (only the income of the land, not the building). You would still need to pay that hypothetical profit if you grow a forest on your land. This would ruin you in no time, so growing a forest is impossible.
This means that any landlord is exposed to the competition of using the land in the most profitable way. No room for slacking. No option to just use it for your own house, or for social housing.
Is this good or bad? It basically introduces capitalism/competition to a niche which was not exposed to capitalism so far. Capitalism has been very successful. It is extremely good at optimization and produces incredibly efficient solutions. Putting land to its optimal usage is a good thing.
On the other hand, capitalism has downsides, because it optimizes only for a single value, profit. This is not the only value that we care for. For example, unbounded capitalism caused severe collateral damage on human rights or on the environment. These can be held in check by regulations, but it requires a huge body of regulations and a strong state.
Likewise for LVT. If it goes unbounded, I can imagine a scenario where all forests in a country are cleared due to LVT (because agriculture is more efficient and CO2 is not yet part of the incentive system). Now, it is not impossible to avoid this. The state can decide that only forest is allowed in some regions. Then growing a forest there becomes possible. A well-designed carbon tax might also make it possible. But this requires explicit intervention, and the state might not be good at it.
I have said that landlords will be exposed to competition/capitalism, and lose the privilege to do whatever they want with the land, because their "grow forest" dream needs to compete with the "build skyscraper" option. But this is a similar situation of *non-landlords* right now. If you *don't* have land and want to grow a forest, then you need to *buy* the land first, and in this auction you have to compete with the skyscraper companies. It's not exactly the same because in the current situation you only need to win the competition once. (Which is sometimes possible by saving for a long time, but it's hard. Ask any millenial.) With LVT, you need to win the competition *every year*. Here you can't compensate by savings or anything. If you are less efficient, you are out.
This doesn't sound like a pleasant world. On the other hand, capitalism also didn't sound nice (and wasn't) to workers in the 19th century, and still turned out pretty good after all. But only after a long time of misery. If something like that would be the price for LVT, it might be too high.
Of course, I am a bit melodramatic. I have been assuming an LVT of 85% or 100% or whatever. An LVT of 20% would give a much milder competition and would have less impact. But on both sides: on the potential negative effects, but also on the positive side.
My personal conclusion would be that LVT seems pretty worthwhile in dense urban areas where we are desperate for efficiency. No wonder that the bay area twitter cloud likes Georgism, because a city like San Francisco is exactly the kind of place where the argument "but I want to use the land for my own family cottage" should lose to the overwhelming public desire for efficient land usage. But elsewhere, where the public interest is not overwhelming, we might want to live in a world where the first argument wins. I would be afraid that the side effects of a country-wide LVT could be huge and unexpected.
I just scanned through and I spotted
> machine learning
No, just no. No.
Machine learning is a good fit for tasks where you occasionally classify turtle as a dog and systematic classifying groups of people as gorillas is not a problem. (both are actual problems)
Or where existing classification is not working at all or terrible and anything would help.
Just no for solutions that would end in cases like "algorithms told us that you should pay 10 billion in taxes, noone knows why, sucks to be you".
Machine learning has no place here at all.
It's a lovely theory. It's a beautiful, shiny, gleaming theory that promises infinite money to the local and national governments and infinite tax cuts to we the people, plus the bonus of "the rents charged will go down because Magic Pixie Dust - that is, by the power of GEORGE, landlords won't hike up your rents to cover having to pay the LVT and they won't hike up the rent to compensate for having to pay twice the old going rate for the land, since Georgism assets land is always undervalued; no, because the cost of the buildings and improvements are separate from the cost of the land, the value of the buildings will go down and the value of the land will go up, and thus the rent for the less-valuable building will consequently decrease!"
Spherical Cow Tenancies, in other words. No landlords like this in the real world!
I am in complete agreement that this needs to be tried out in practice and not theory. Some city run it on a test pilot basis for five years, and see what happens.
Because I think beautiful, shiny, gleaming theories turn out to be a bit rubbish in practice. But I would love to be proven wrong!
I think Georgist theory (1) was great for the late 19th/early 20th century, when cramming people into tenements was acceptable practice, and industrial development mean 'put up a factory or sweatshop on this lot' (2) works best in cities, so is going to be a problem for suburbs and agricultural land to assess and (3) will mitigate against single-family homes.
Now, I know a lot of people will say "Great!" for that last, because we've had debates on here about "what is so bad about bed-sits? relax the regulations about so much square footage per person, let people rent out less salubrious properties to single individuals at cheaper rents, this will help the housing squeeze" and "ban all single-family homes on lots where they could at least be putting up duplexes or multiple-unit residences".
Which in effect means "city living is for single people or childless couples" because when people have families, they need more room (hence moving out to suburbs) and conversely, what stops young urban couples from having kids is "we don't have enough room". Sharing a flat or house with other people means one bedroom of their own, they simply can't have a baby, much less two, unless they can afford to rent or buy a house of their own.
So the logic of the Georgist tax, which seems to have been the impetus for it at the start, is "make the most productive use of land" which in a city is "apartment buildings for multiple occupancies, or businesses and manufacturing units". The kind of group house living (for Scott, for example) would, in Georgist theory, be better replaced by an apartment block so everyone has their own individual unit and you can get a lot more people living on the same square footage of land. Ease the housing shortage, provide more units and thus reduce rents!
What a nice solution. So long as you're not planning to have kids. Because the reductio ad absurdum case is that the maximisation of productive use means smaller units for each tenant so you can fit more in. After all, if a block of fifty flats is good sense to provide more housing, a block of eighty flats is even better! And since land is the limiting factor, as we have all agreed, to fit more in on the same land, they have to be smaller. Tenements were the most Georgist-efficient properties, it would seem.
And what about those wasteful suburbs? We want to combat sprawl, don't we? So again, no single-family houses where instead you can put up multiple-occupancy units on the same plots. I never thought I'd ever consider a semi-detached house a luxury item, but if you want some (wasteful extravagance!) bit of back garden or front lawn, then you better be rich enough to afford such unproductive luxury.
I really would like to see this tried out. If it works, great! But I think the proof of the pudding is in the eating, and this might be a tough morsel to chew in practice, where real people and unintended consequences are involved.
Btw, the translation of "Richtwert" is literally "orientation value", or "guideline value". I.e., it is a guideline without direct legal consequences. ("Richtung" = "orientation").
Boden = land (also "floor" or "ground").
Bodenrichtwert = orientation value for (the price of) land.
The Bodenrichtwert is meant as a service that can be helpful when you want to sell/buy land.
This all makes some sense for cities where most land is not owner-occupied, and it helps explain the existence of a wealthy land-owner class in New York. However, I would have liked to see some discussion of the impact on typical homeowners in suburban America. If the American dream is (was?) to own your own home, with 30 years of mortgage payments and that home’s rising value being your best (or perhaps only) investment, then Georgism threatens the current home-owning middle class with a loss of their retirement savings.
I suppose this is under the out-of-scope heading of “Transitional Politics”.
> Unfortunately, the Russian authorities went with Harvard Professor Jeffrey Sachs' "shock therapy" instead, and the rest is history, as anyone who lived through the post-Soviet chaos can tell you.
Post hoc ergo propter hoc.
What's the evidence that the collapse of Russia was any of
1) the lack of LVT,
2) related to the orthogonal policy of getting rid of price controls rapidly
3) not related to the massive amounts of pre-existing corruption?
Does anyone have thoughts on what impact LVT would have on open spaces? There are large tracts of private open land currently undeveloped. Landowners have such low taxes on this property that they are often satisfied using it for hunting and fishing, or just letting it be, using the deed as a store of value. The land does, however, have significant LVT if cleared and used for agriculture or building. This is not done today because of the activation costs and risks associated with clearing and permitting, but with a high % LVT, the owners would be forced to develop to pay the tax.
Lars seemed to be pleased about this resulting pressure to develop land according to its most efficient use, but as a lover of the natural world, I want to see our wild places protected from development.
LVT would be so much more marketable if it’s proponents settled for something a bit less extreme - replacing property taxes with with LVT. It’s so easy to market: “we shouldn’t punish people for making improvements to their own property”. But now that the well is poisoned with talk of the government seizing all land, good luck ever getting an LVT in the US.
And then once LVT gets passed and implemented, then you can talk about adjusting the rates in future legislation.
Very much appreciate the exposure to something I hadn’t seen before. There are 2 things I’d like to see in follow ups. First, a potential expansion with respect to what a lot of people see as a bigger problem than land, that is virtual property. For example, even though Facebook created the “land” of Facebook, the value is brought by all the people being there, like a city. Does Georgism have anything to say about that?
Second, I would like to see the public choice critique; what happens when actual people are executing this? What are their incentives and how does that have to be accounted for in the plan?
Thanks for this series. I am definitely more Georgist than I was a few weeks ago (mostly because I've only ever heard arguments against Georgism).
I also dig the Kabbalistic implications of George - Geo, a common English prefix meaning earth. Orge is French for barley - one of the very first grains ever cultivated by humanity. Note that in his name, the symbol for earth comes immediately before the symbol for wealth cultivated by man. These roots share a letter between them, this is also not an accident - it symbolizes that land and wealth are inextricably linked. My interpretation of the name George: Land is a necessary antecedent for wealth, which emerges from human labour upon it.
George was the perfect man to put forth the theory that all wealth comes from human labour being applied to the earth.
I think my biggest conceptual / ethical / moral issue with Georgism is that it seems to conflate land value with rental income.
If I buy a house on the fringes of town on the cheap, and then a bunch of other people move in, build amenities, and create jobs, my lands gets more valuable and my quality of life may go up through no *effort* of my own. Unfortunately for me, the government doesn't accept taxes denominated in quality of life -- they demand money. But I can't monetize the increased land value unless I sell it or rent it to someone else, so I may very well be saddled with a tax burden that I can't pay through no *fault* of my own. How is that fair?
This is the problem with gentrification in a nutshell. I do *not* want to prevent people from moving to and improving a new area, but also don't want to penalize the people who are already there. Both traditional property taxes and LVT seem to do just that.
> Pretty much everybody agrees on the basic algebraic formula for deriving land value:
> Total Value = Land Value + Improvements Value
Only for a definition of land "that" is the full bundle of everything tied to the property's current use. Which includes zoning, air rights, easements, etc.
That's how you get things like the value per acre of a 1 acre lot being a lot more than that of a 1.5 acre lot, in an area with a 1 acre minimum lot size: They both get to only build one house. The value of being allowed to build massively outweighs the actual incremental value of more land, in areas where land value is very high.
But that dynamic's going to enable gaming the LVT. Buy a 3 acre lot, split it inefficiently into 1.5 acre lots, build only 2 rental homes, get a much lower tax than someone who did the efficient thing. While ultimately being able to still sell the whole 3 acre lot to someone trying to build condos later. Reenabling land-speculation, in exactly the same way as before (buy lot, make inefficient use of it, knowing the true revenue comes from a later sale).
I should add that I enjoyed this series, I'm impressed by the amount of work you put into it, and I would like to see more. You convinced me that land is a big deal (though I didn't need much convincing to begin with), and that there are probably good-enough solutions out there to the challenge of assessment, at least in theory. I'm not sure how to feel about the ability of landlords to pass an LVT to tenants. The role of public choice in Georgist policy and responses to some of the philosophical objections might good topics for future posts.
"A city doesn't have a huge incentive to repeal restrictive zoning policies because it isn't hurting their tax base. According to Georgists, a city whose tax base is land value has well-aligned incentives."
I struggle with this argument. Right now, the general structure of property taxes in the U.S. is that they go to local government entities (school districts, cities, counties, etc.). And, because structures/improvements are also part of property tax valuation, there's a clear and easily explained link between new construction and increased local property tax revenue.
I have a concern that I freely acknowledge isn't particularly well-addressed in the current system, but I'm left to wonder about the implications a Georgist system would have.
In the face of significant wealth inequality like we have in the US today, without affordable housing guarantees, it seems to be generally more profitable to build a few large expensive homes rather than many small homes. The reason is that a sufficiently wealthy person will likely pay more than ten times as much as ten poor people for a house that takes up ten times as much land as ten smaller residences.
If we eliminate all taxes except LVT and then only tax based on the amount of land used up (in a linear fashion), I suspect developers in general will probably be more incentivized to hunt "whales" rather than build smaller affordable housing. In urban centers, without affordable housing requirements or some sort of super-linear (in terms of space/person) land tax, I imagine sooner or later everyone who isn't in the top 10% of incomes gets priced out of being able to live there. And this is not because there just _isn't enough space_ but because developers are incentivized to build residences for fewer, wealthier people.
Assuming we don't want the bottom 90% to have to commute into the city every day, how do we address this?
I've previously seen an objection to Land Value Taxes that rural households (especially farmers) have a disproportionate amount of their wealth tied up in land, and shifting our tax system from mostly income tax to mostly LVT tax would be really bad for them. I don't remember whether this was raised as "and therefore LVT is bad" or as "and therefore LVT is not politically viable outside of cities". Is this a legitimate critique of Georgism?
It seems possible that rural land values are low enough that a LVT is actually not very impactful, even to rural households with a lot of land. Or if they're not currently low enough, they will be as LVT drives down the value.
Or, it seems possible that the Georgist response is that the LVT is intended to discourage people from holding land and not deriving much income from it, and so the incentive it creates for rural households to sell their land is a feature, not a bug.
Or, there's some other counterintuitive way in which a LVT is actually good for rural households and/or farmers, despite increasing their tax burden.
Or, there's some exemption that it makes sense to carve out for a LVT so that it doesn't enrage farmers, either to make it politically viable or to protect rural households and small farms.
I was hoping this article would be less about the practicality of running all the assessments and more about the theoretical hurdles in separating land value from improvement value in the first place.
Like, linear regression gives a list of factors that create property value, and you say that we can just sum up the boxes that correspond to land value. Which boxes are those? You mention proximity, but that's kind of a can of worms. If I own two adjacent lots, a house and a garden, then the garden gains value by being next to my home and the home gains value by being next to a garden, both are land value. If I combine them into one lot, all that value becomes improvement value. Are there any non-proximity based factors that count as land value?
A post on r/themotte mentions that pollution is a negative improvement, how do we deal with that?
I've read all four of your posts and I don't think I fully believe that land value is a coherent ontological category. I'm eager to be convinced though.
In other words, do the methods of assessment you mentioned here capture the ideas proposed by George himself? Or were his definitions incoherent, and the "Land Value" as defined by regression analysis is not properly called Land Value and instead captures something like "value of adjacent lots" which is beneficial to tax for unrelated reasons? Are all the land values you mention and measure in these four articles the same? If two Georgists argue over whether a feature should be included as land value or property value, is there a way to determine who is right?
In an age of alchemistic, chimerical assets, it is salutary to be reminded that we are three dimensional beings living in a three dimensional world needing three dimensional assets to live our lives. That doesn't make me a Georgist, but it makes me happy. Thanks for all your hard work, Lars.
I wonder at what rate Land Value rents are already taxed (via a combination of Property Taxes and indirectly via Income Taxes and Capital Gains Taxes) and how that varies by jurisdiction and whether we can see effects from that. It sees like indirect taxes on Land Rents are pretty substantial or is there some reason to think of that differently.
I guess anit-Georgism would be expected to raise land values (certainly seems the case in CA with prop 13 which is basically the opposite of what Georgist's would recommend so that checks out).
"If Georgism is true, and the only thing standing in the way is being able to pull off accurate assessments, then let's just get better at doing that. We're the species that split the atom and travelled to the moon. Surely we can handle this."
With respect, there's a difference. Atoms exist. The moon exists. The value of land which isn't actually unimproved does not exist in the same unequivocal sense. There isn't a 'true' objective split of property value (even conceding that the overall property might have an objective value, e.g. market value) into the sum of land vs improvements part. There isn't even necessarily a split we can arbitrarily choose that won't cause economic damage if used as a tax base.
The moral case for Georgist's policies seems fairly questionable in the United States at least. A 100% LVT (or close enough to it) seems roughly equivalent to the government owning the land (or at least the entire beneficial economic interest). But the governement did own almost all the land in the United States (especially out West)! And fairly recently too! It still owns huge amounts of land (a good place to experiment with Georgists policies? the feds don't seem to get a huge amount of economic value out of the 28% of the country they own). Nevada is >80% owned by the feds yet I bet something like 95+% of the land value is in that other ~15%. Nevada is pretty much all worthless desert so it seems like this should tell us something about where land value originates.
The capitalization argument would seem to run both ways. If the LVT is fully capitalized then it should be perfectly reasonable for the governement to sell that stream (by selling the land) much like a perpetual bond (a thing governements have sold) or lease it for extended periods of time (like regular bonds). And indeed the governement has sold off a lot of land, both for cash and other considerations. Is the argument that government got a bad deal and should get a do-over? A lot of that land was specifically given to incentivize / pay for infrastructure development to make the land more valuable (the railroads for instance were given alternating blocks of land as inducement to build the railroad with the governement keeping the other half and in that case it's pretty clear where the value came from, and it wasn't the government, if anything the government was the land rentier in that case). So do Georgist's support the government selling land? And if not, why not? Should policy instead focus on leasing? iirc much, though not all, of Singapore is public owned and leased for extended periods of time, like 99years and I think all the land in China is treated similarly. What do Georgist's think of that kind of situation? Is that Georgist? China doesn't seem immune to expensive property and certainly not to speculation...
How does Georgism deal with restrictive covenants and other mechanisms that separate out various aspects of development rights from land? I guess this is somewhat similar to zoning, though privately mediated. I know there's a lot of land around where live, for instance, where various development rights have been separated from land ownership and sold off to various charitable organizations / trusts / foundations and as such the land can only be used for limited purposes (generally either 'nature', recreation or farming; sometimes allowing a very limited set of mostly pre-existing structures). Or the complicated NY air rights / setback / overhang rights. Would charitable organizations be taxed (prob. yes? though that's not going to be popular, for ex. most universities famously don't pay property taxes on their campuses, though in a few cases like Cambridge, MA the universities dominate the city so much and so reach the city has strong-armed them in to making 'voluntary contributions in lieu of taxes' or some such, though at ~85-100% LVT expect some fighting around this).
I think the idea of gentrification driving up taxes for homeowners is a legitimate concern but can't that be solved by insurance? The homeowner pays premiums then if the land value increases by more than e.g. 5% per year, the insurer covers the difference for the next 5 years.
There is an old, existing, fairly widespread, very well studied, example of a 100% land value tax.
Except, it isn't a tax - but the issues *as regard to assessment* are identical.
I'm thinking of the British (and elsewhere) concept of a 'ground lease' where a private party owns the land and receives rent based on 100% of the (frequently reassessed) value of the hypothetically bare land. Often the land-user (the ground lessee, and owner of the improvements) has the perpetual right to develop, trade, and use the land (subject to paying ground rents) - so this is EXACTLY the valuation split that Georgism envisions. (Different because the money goes to a private party, not 'society', so I limit the equivalence to the assessment problem.)
There is quite a bit of literature on this. I'm not a valuer/assessor, but I've had reason to dip into it a bit. My short impression: it's a real mess, there are no agreed on answers, and in any particular market something convention or other seems to get settled on. Lawsuits and assessment fights are commonplace; lawyers are happy. The trend in most places is to slowly move away from ground leases because of how difficult they can be. Indeed, if it comes to market, the land is often much more valuable to the ground lessee than anyone else since it offers him the chance to end the fights, extinguish the ground lease, and make the land + improvements package "normal" (and so much more valuable).
None of this matters much if your actual land value tax is at one or two percent so I would question the relevance to Georgism of empirical data that looks at such regimes. But when it approaches 100%, we do have experience of how well the assessment situation works. My skimming of the literature says: awfully. I may be completely wrong about that opinion, but, regardless the facts are out there in the 'ground lease' literature.
At the moment i see kind of two versions of policies that get mixed up. Perhaps i misunderstood Georgism, or the term land value tax is misleading not only for me but also for many other commentators.
1) Georgism as i understood it from the original book review is about all rent (as profits from land) should go to the community and nobody should profit from only owning land. Private profits are totally OK if they are coming from the use of the land or from improvements/investments on the land. I will call this LPT for 'land profit tax'
2) Land value tax (LVT) implies a amount of money to pay per year calculated as a percentage of the current market value of the land. This is independent from what you actually currently do with the land, it only depends what somebody else is willing to pay so he could use the land. I will call this LVT from now.
This is a big difference. LPT is about factual received rent that George wanted to tax 100%, LVT is about is potential, not manifested value.
Let's make an example and to see as many aspects as possible lets assume I own 2 similar small houses in the same neighborhood on the edge of a small town. The town is not very attractive and there is no city around so the land value is quite low. In 'house A' I live with my family, 'house B' I lease to some tenants.
What is my profit from owning the land:
A: I live here, this gives me practical profits: paying less rent, not having to deal with a landlord, access to community infrastructure.
B: financial income: my tenant pays me, that is partly for the building(improvement), my service(work) and partly for the the land.
The idea of Georgism is that this profit should be taken from me by a tax to give it back to the community. So lets assume in this starting situation a LVT would equal these profits and be about the amount of current property tax.
Now what happens if there is a new disney world or a new giga factory build in town? Suddenly there are a lot of people coming in to work here and perhaps even a lot of tourists. So the prices of housing and the demand for land raises and so does the land value. Now i have basically four possibilities what to do:
1) I could just try to ignore all of this and live my live as if nothing happened.
2) I could choose to profit by raising the rent of my tenant. If he asks why my answer would be: "Well, because of demand and there are people that would pay that much, this is just the usual price today."
3) I could replace house B or both houses with a apartment blocks to feed the demand for housing and to earn even more. But this is only an option if I'm rich already or if I get a huge loan from the bank.
4) I could sell my house B for a multiple of the amount it was worth just years ago, making big financial profits.
How would these options play out under different tax rules?
In the system today all 4 options are no real problem. The property tax would rise a little, but i could pass it on to my tenants so nothing changes much in variant one.
With LVT in place somebody could build apartment blocks instead of my houses, this sets the market price and my LVT just quadruples. This makes options 1 and 2 basically impossible. I would be forced to build apartment blocks or sell my land to somebody who does. Of cause all my neighbors face the same problem until the apartment market is saturated. Than the apartment blocks are barely profitable any more, but LVT would still be too high to live in a single family home with a big garden.
Now imagine there is a LPT taking away exactly the actual profits i get from the land.
I could still decide for option 1, the practical profits stay the same. On one hand i could profit from better infrastructure and better job chances as the town grows. On the other i am annoyed by more traffic, have a longer way if I want to enjoy nature and I have a higher risk that some big building is blocking my view in the near future. So let's call it a net zero.
I could still raise the rent for my tenant, but i have no incentive to do so as the rise will completely be taxed away.
I could opt for 3), this increases my income from building and service, but the tax would also raise to eat exactly the land component my tenants pay.
If i sell a house, i can keep what the building is worth and what I payed for the land, but any increase in land value I would have to give to the tax office. This way, I get the same money I sell it sooner or later and speculation doesn't make any sense. If i don't get any income from managing the house(work) there is no financial incentive to sell or keep the house.
So my conclusion is that an LVT would enforce the most profitable use of any land, while LPT leaves me with all my freedom, just stopping me from getting unearned income and making speculation impossible.
Some say enforcing the best utilization of land is a good thing. I strongly disagree for several reasons:
- personal freedom and security are very important. Both get violated if you suddenly can't afford any more to live in the place you love and lived for many years because of reasons outside of your influence.
- the most profitable use of land is usually not the best for the local community.
- This would destroy all places that get their value in part because of 'inefficient' use of land. Imagine you have a area with many small houses and farms in a lovely landscape. This is discovered by tourists, so there is growing demand for hotels, restaurants and other tourist infrastructure, so the land value will rise. Now the small farmers go bankrupt and nobody can afford to have a private house because of the high LVT. Even families living here for generations are driven out. This would not only destroy the lives of many people, but also make the place less attractive for tourists, bringing everyone in trouble who invested in tourist infrastructure.
- LVT based on the possible values would make it impossible not to use any natural resource. Imagine oil is discovered on your farmland, than you have to pay LVT based on the profits possible extracting the oil. Nobody could ever afford not to extract it for whatever reason (you like farming, climate protection, leaving some oil for future generations).
Nice house you got here, it would be a shame if my regression analysis will happen to it.
Regression analysis or not but Georgism will certainly create situations where people are forced out of they homes because they can’t afford paying taxes for it. There is this popular movie plot with a thugs bullying family to sell they home so more expensive real estate can be built instead of it. Well, with LVT you don’t need those thugs.
Also you mention that there is small amount of complaints about property assessments. But it might be because property is usually highly undervalued. If you will get to your 85% you will get tonnes of complaints. And this channel of communication will favour companies with huge lawyer stuff.
One thing I keep wondering about while reading this... How do we deal with the incentive to lower one's land value, and by extension land tax, by being as obnoxious as possible and discouraging everyone else from living nearby? (Pigovian taxes, I know, but how do we calculate them? It may be tempting to make them insurmountably large, but that might discourage operation of useful, or even necessary facilities.)
My intuition tells me not to put too much trust in market value, and that land tax should probably be at least partially detached from it. Not sure how that squares with the whole theory, though.
I don't know if it's been said in some other comment(s), but personally I really feel like some discussion of the consequences of what examples of LVT have existed (and especially those which have been abandoned) are warranted. Basically I want an answer to the question: if the LVT is so great, why isn't everybody doing it? And if its effects are there even for incremental advances, why haven't countries with LVT gradually increased the LVT rate (presumably while lowering other rates)?
I thought a bit more about the LVT and think that if it becomes federal tax, avoidance is trivial. Consider a wealthy city surrounded by fields. Each plot in the city has a large unimproved value because it is next to other plots in the city where many people live and work, so each plot is taxed a lot. Now the landowners setup a new company City Inc, swap all their plots for shares in this new company and setup company governance to replicate their old rights. All the land in the city is now a single plot owned by City Inc. This plot is surrounded by fields. Now, the unimproved value of this single plot is pretty low, all the network effects are fully internalised to improvements of the plot and are not part of its unimproved value. So City Inc pays very little in LVT.
The model inputs based on open-market sales of nearby comparable properties seem like the soundest, and most important. Wouldn't a 100% LVT destroay these inputs? And wouldn't even an 85% LVT degrade their quality significantly (by magnifying distortions and overheads)?
Lars, thank you for your hard work in writing this series. It was very illuminating!
Have you come across the other 19th century economist Silvio Gesell in your research? He was sort of a German version of Henry George, but came up with a slightly different, and IMHO complementary attack on economic rents. His land reform proposal involved the government taking possession of all land and operating annual auctions for their use, which as far as I can tell is the game as georgist LVT but with more steps and assessments done by auction.
But perhaps more interestingly, he also found that there was a huge untapped source of economic rents in the financial sector due to monetary policy, which causes there to be a gap between the obtainable interest rate of a loan (say, 10%) vs the actual calculated risk (say, 5%). The difference is an economic rent making the wealthy get wealthier through no action of their own. At the turn of the 20th century, Gesell was writing about precious metal currencies, but it still holds just as true of fiat money today, except the seignorage is now captured by banks. Like Henry George, he suggested a 100% tax on this economic rent in the form of demurrage--a holding cost to money, which then trickles into all other financial instruments.
I think there's a good chance that a georgist LVT plus a gesellian demurrage money-holding tax would together provide enough government revenue to replace deadweight taxes. (Quick estimate: there is $20Tn M1 dollars in circulation. A 3% demurrage rate would generate $600bn per year. Enough for medicare at least. But like LVT there's arguments that taxing this wealth holding rent will generate more economic activity in a positive loop, and 3% was a conservatively low rate.)
Would LOVE for you to research Silvio Gesell and add his monetary reforms to your series.
I sort of believe in aspects of Georgism, in that a tax on land or at least wealth is fairer than most existing taxes.
But I actually think this article missed the point. It isn't that its mathematically difficult to assess the value of the land, it's that the value of land is instrinsically tied to the developments on and near it.
If I create a data model which says "proximity to high quality employment", "proximity to famous businesses", "proximity to people with high incomes" is valuable, and note that this model says "the land under Google's offices is super valuable", and then use this to level punitive taxation on Google, in what sense am I taxing the "land"? All I am really doing is levelling a tax on Google and companies like Google, and all this in practice would mean is those businesses move offshore, or at best geographically fragment themselves to regions where it's almost impossible to assess their land value granularly enough to catch them out.
Combine this with the comments about expropriation of landholders being necessary because they are the moral equivalent of slaveholders, and this starts to look less like a proposal for efficient taxation, and more like warmed over authoritarianism. "Oh yeah unlike a traditional authoritarian regime, we won't take all your stuff, we'll just escalate taxation on your landholdings until the point the land is worthless and the level of taxation bankrupts half the businesses unless they move"
I have not read all the comments, apologies if this idea was already mentioned. But there is evidence that property tax valuation can be made "self-enforcing."
The Value of Self-Enforcing Protocols
August 10, 2009
Here is a self-enforcing protocol for determining property tax: the homeowner decides the value of the property and calculates the resultant tax, and the government can either accept the tax or buy the home for that price. Sounds unrealistic, but the Greek government implemented exactly that system for the taxation of antiquities. It was the easiest way to motivate people to accurately report the value of antiquities.
A couple challenges I think the author could take more seriously:
- Property purchasers will be incentivized to bifurcate their purchase price into two. One for land, one for improvements. They'll game the system. This is important because the ones most capable of doing it are the existing institutional landlords.
- It's possible to improve land without building something that is considered an "improvement" (e.g. environmental clean-up) and it's bad public policy to disincentivize those improvements. Presumably the value of the land, and therefore the tax, goes up once money is invested into "fixing" land.
Phase it in gradually, sell it as a fairer property tax (don't punish people for improvements, by George!), perhaps limit it to cities and you've got a stew going.
At the part where you said assessors use (lack of) complaints to decide they're doing a good job, I was thinking: Well, that would go a long way towards explaining chronic under-assessments! You have an error signal that squawks when you're too high, but not when you're too low.
On what questions a follow up should address (if they haven't been addressed already—I haven't read the series in full):
(1) How a LVT would be free of deadweight losses if city land is taxed at based on its market value, rather than at the much lower value it would have as farmland. The reason a LVT that taxes the agricultural value of land is, in theory, free of deadweight loss is that human activity doesn't affect the tax, and it thus doesn't change incentives (a fixed head tax is another tax with this property). However, taxing city land at much higher rates means that human activity affects it, and that means it can disincentivize that activity, and it's no longer free of deadweight loss. (Many comments have asked similar questions.)
(2) Would the extra LVT from city land (above what the tax would be for it as farmland) go to the city government, redistributed in some form to the residents of the city, or to a higher-level government (county, state, national), and redistributed also to people outside the city? I see major problems with both approaches (deadweight loss in the latter cases, spiralling rents and taxes in the former). https://astralcodexten.substack.com/p/does-georgism-work-part-3-can-unimproved/comment/3984715
(3) Would the owner of any plot, however small or large, be taxed based on the value it would have if it were unimproved, but surrounding lands were developed as they are in reality? Would a company town pay LVT based on the value of the land as farmland, but if it's sold off as plots, would the new owners pay a much higher tax? (The City Inc. question, asked by Long Disc. It's the most relevant if the LVT would go to a higher-level government.)
(4) Would investors trust that no other asset class would be effectively expropriated with some excuse/argument, after lands are? If investors don't trust that, there would be a huge deadweight loss.
I think I understand the problem of Georgism. It thinks the land has value beyond the improvements. If we take for example Manhattan, a very expensive place to live, and remove only one improvement - for example, a functioning sewage system, the value of the lad would plummet.
Georgism solves the issue of Free riders, people who do nothing and gain from the improvement of others - the owner of an undeveloped land in Manhattan is rich even if he didn't do anything but hold the land.
But it hurts the collateral actions - as a group, land gains value because of improvements, for the entire region. What makes Manhattan expensive is that it has lots of buildings and a Metro and bridges and electrical net and everything else that makes life in Manhattan Good.
It is not the land itself.
So Georgism solves the individual free-rider problem, but taxes the very thing we want - land improvements.
We get those by Good governance, well thought laws, inducing industry and builiding good infrastructure.
Georgism is basically a Tax on all of these.
Why would people build a Metro, if it will raise taxes on them?
There are a few comments concerned about accuracy of valuing land on a large scale. I don't really have anything to add on an intellectual level but, as the article mentions, Australia happens to be a place where this is done for the purpose of taxation, and a lot of the data is freely available for perusal. https://qldglobe.information.qld.gov.au is a GIS representation of a bunch of things for one Australian state, and Layers -> Add Layers -> Economy -> Land Valuation will let you browse around any property in the state and see the latest official land valuation. My lived experience as a homeowner is that it's a reasonable estimate, but is a bit slow year to year in responding to property market shifts.
A couple of possibly dumb questions:
1) My impression is that the primary thing public land assessment affects is property taxes. If true, doesn't that mean that landowners have every incentive to make their assessments as low as possible? If that's the case, then I wouldn't expect "low rate of complaints" to be a good predictor of assessment accuracy.
2) What in the world does it mean to put a p value on a regression? What's the null hypothesis? That there's no structure at all to the data? Wouldn't that basically always be false?
You should look into Glen Weyll and Eric Posner's book Radical Markets and their COST; that's what introduced me to Georgism. The really elegant solution for any form of a wealth/property tax (including LVT) is self-assesment with a robust market with negligible transaction costs. Imagine a system where your house and land are permanently listed on an exchange. You set a price for what it's worth and anyone who pays that price (or some small percentage e.g. 5%) above it can immediately buy it no questions asked. You are then taxed based on a fixed percentage of what valuation you listed. This has a couple of benefits. 1) Accurate pricing. Lowering your taxes incentivizes you to undervalue your property, BUT if you value it too low someone else will just buy it off of you and you'll lose your property. This forces a system whereby you always want to accurately price your property such that you won't be overpaying in taxes, but won't be forced to sell your property for less than what it's worth. 2) Utility/Resource maximization. Differential preferences make the world go round. Each person is taxed according to what his individual value is for an asset, and if someone else has a higher value, there will be a transaction. Now the person with the highest utility gets the property and we've increased gross utility/productivity in our economy. Whoever has the best use for the property will naturally get it.
One thing I think should also be touched on is mass purchasing of properties by the likes of Blackstone and others. Given the financialization of real estate and mortgage markets the natural buyer is always the entity with the lowest discount rates and borrowing costs. At the end of the day what matters most isn't the purchase price of the house but the yearly cost of ownership = mortgage + taxes + maintenance + utilities. Large institutions can borrow at much lower rates, can perform maintenance much cheaper through economies of scale, and can sometimes use market power to negotiate special tax abatements. This leads to a scenario where BX's personal "cap rate" is 3% but individual landowners is 6%, so they buy all the housing offering a 5% cap rate to the property owner's joy and then jack up the rents once they have a monopoly.
>> Pretty much everybody agrees on the basic algebraic formula for deriving land value:
>> Total Value = Land Value + Improvements Value
Can I put up my hand and say that I think this is utterly, miserably wrong.
The very notion of "land value" implies a degree of fungibility that simply does not exist in reality. As a rational economic actor I am expected to be indifferent to two parcels if they have the same value (or profit potential maybe?). Suffice to say, this is not how most human beings behave or feel.
In modern society, the largest component of "land value" is not a property of the land itself, it is a property of the local human infrastructure (i.e., community). This is complex and two-way. Residents themselves both derive value from and contribute value to their community. As such, residents are not fungible in the value calculation. Any model of society and economics that does not include some notion of the value of community is going to be at best useless and at worst is going to have downright evil consequences (hello supercharged gentrification!).
While I am sure that there is a fantastic transitional plan to be really gentle about evicting people from their communities to reallocate the places they live to more efficient uses, I doubt this plan would survive the ensuing riots. So yes, while I am sure that it is a far more efficient use of Silicon Valley land to bulldoze every single family home and replace them all with high-rise apartments for 25-year-old tech workers, you would need to have a communist level of disregard for the damage you would do to the community by making it impossible for the people who currently live here to raise families without moving away.
Something that just occurred to me is that I already have a somewhat explicit valuation on the improvements part of my house, in that I need to figure out a number to put on the insurance for full replacement value. I would guess that the vast majority of urban homeowners have this too, wouldn't this be a good way of determining improvements value? Then add it to the total sale prices which are already fairly well estimated and you're left with a good valuation for the land only.
I feel like this has probably been addressed and I forgot but has there been discussion about using harberger taxes to assess land ? It would be difficult to implement since the improvements would need to be excluded but maybe there's something there.
I'm basically a georgist, and don't think the valuation problem is intractable, for most of the reasons you've described.
However, I was surprised that you didn't seem to cover in much detail the fact that in a world where 85% of land rents are taxed away, land values are roughly 15% of their untaxed value, so presumably the noise in any market-based valuation estimate goes way up (land worth much less relative to improvements).
I think the solution to this is probably estimating land rents directly (which would need better public data on rents) or a self-assessment mechanism.
I think you can solve all of the problems of assessment by just doing what apartment/condo owners do. Target 95% occupancy (or whatever number you like), and increase the price when occupancy exceeds the target and decrease the price when it is under the target. You can do this *entirely* algorithmically so there is no room for corruption. Either someone is paying their land tax (set by an algorithm) or they aren't and anyone can move into the property.
The algorithm would weigh nearby plot occupancy based on the square of the distance (in a perfect world infinitely so like gravity, in reality up to some finite distance). You can have a limit on how much the tax can increase in any given year to protect people from being suddenly overburdened with taxes, and you can have the tax rate determined at the start of the year and paid at the end so people have a year of knowing what their tax rate will be (thus time to move if it is too high).
This will result in the government extracting the maximum rent possible (something governments like) without being such a burden that no one wants to live there (so no Detroit problem). This aligns incentives (as indicated in this article) because they explicitly want to attract people. If your policies are driving people away, your income to enforce those policies is driven away at the same time and those willing to stay pay less as their peers leave until equilibrium is reached.
What I *really* like about this style of assessment is that the implementation costs are essentially as low as is possible for any kind of taxation. The amount you pay is defined by an immutable algorithm that has no human influence once it is launched, there is almost zero room for gaming the system by any actor, and the overhead cost of collection/enforcement is incredibly low (if tax goes unpaid, title transfers to first person who shows up and starts paying rent).
I have a business investing in vacant land, so I can chip in a little info regarding data quality in most of the US: it's terrible.
There are 2 basic sources of real estate sales data: the Multiple Listing Service (MLS) used by realtors, & county data. Many (most?) land transactions don't go through realtors, & so don't show up on the MLS. (Neither do any commercial or industrial properties - the MLS is just for residential real estate). And county data is typically awful, for a couple of reasons:
First, because land sales are much less likely to involve banks, they can be much more informal. Grandma sells her grandson a piece of land for 10% of market value to get around inheritance tax. Or you buy a piece of land for $1000 + a pickup truck - the $1000 shows up at the county as the sales price, but not the (say) $20K truck. Or the seller finances the land to the buyer, which allows them to charge a higher price than they could have gotten for a standard cash sale.
The other big issue is multi-parcel sales. Say you sell 10 lots for $100K total. Some counties will record the sales price of each lot as $100K, thus over-estimating values by an average of 10x. Some will just divide evenly & show the sales price of each as $10K - which will be fine if they're all the same size, quality & location. But what if one of the lots is 0.1 acres in the middle of nowhere, & another is 100 acres in a prime location? They're both showing up with the same $10K sales price.
Finally, in most areas, there are a lot less sales of land than of buildings, meaning the raw amount of data points is limited. This further means that all of the above distortions will have an outsized effect on the small data pool.
It also means there may not be any truly comparable properties to base a valuation on. Consider a hypothetical 50-acre tract, the last large parcel in the area, surrounded by 10-20 year old housing developments. The only nearby sales in the last decade are quarter-acre lots in subdivisions. The closest 20-100 acre sale was 3 years ago & 30 miles away, in another town with totally different characteristics.
It is generally accepted among land investors that land cannot be accurately valued, given the poor data available. Instead, everyone just ballparks it & buys at a big enough discount to cover the uncertainty. The same problems plague appraisers. And Zillow - if you check you will see that most houses have a Zestimate, but land almost never does. They're not very accurate on houses, but they don't even try to price land.
I wanted to learn data science, so as a project I pulled all the real estate data from a local county with good, publicly-available records, & used python packages to build a regression model. It was mediocre - mostly it was close to my manual estimates, but unacceptably often it would be off by a factor of up to 10x in either direction. Even above-average county sales data just isn't good enough to build an accurate model. Others people with way more skill in both investing & data science than me have reported the same thing.
With respect to scraping data from Zillow - people have done so, and been immediately & permanently blocked from accessing the site. There are some applications out there that streamline a manual copy & paste process, but you wouldn't want to do the whole country that way. Besides which, as noted above, the sales data would still be woefully inadequate for making accurate valuations.
Correlational analysis, whether linear or nonparametric regression, seems like the wrong tool here. We want to know the *causal* effect of size, age, number of bedrooms, etc, on land value. That requires causal inference, not predictive modelling.
Why not just use Harberger and make it the property owners' problem?