Combining the best of Georgian and Harberger taxes

by Yair Halberstadt14 min read12th Aug 202117 comments

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EconomicsFutarchyWorld OptimizationWorld Modeling
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Epistemic status: this probably would be a bad idea, but has some really nice theoretical properties that I hope somebody can find a way to preserve whilst making this a good idea.

I find both Georgian land taxes and Harberger taxes to be fascinating proposals to improve the way we tax land. I'll start off with a brief overview of both, then discuss benefits and advantages of both, suggest a model to combine some of the benefits of both, and analyze the combined approach. Finally I suggest areas for future research.

A Brief overview of Georgian Land Taxes

As seen on AstralCodexTen.

The key principle of Georgian land taxes is you tax natural resources at a rate such that their market price is 0.

In other words, if I own a piece of land, and build a house on it, then the government taxes the value of the land, but not the value of the house - so two identical pieces of land in the same area with different buildings on them get taxed at the same rate.

How high is that rate? At exactly the rate such that if I'd built nothing on the land I would be neutral between:

  1. Giving it away to someone else for free so that he will pay the taxes on it instead of me.
  2. Building a house on it and charging people rent to live in the house.

This feels right from an ethical perspective - you put effort into building stuff on the land, and you should reap the rewards of your labour. But the land belongs to everyone, and we should all share equally in natures bounty - so any benefit you get directly from the land should be given back to the people (or in practice, the government).

However it's also got a lot of economic advantages too:

Economic Advantages

  1. Unlike all other taxes, the supply of natural resources is fixed, and so taxes on them do not distort the market at all - supply of land remains exactly the same, and willingness to buy land does too. The tax to the government over time exactly equals the previous interest adjusted cost of buying the land, so the cost of using land remains exactly the same as it would be if there were no taxes. Thus you can replace a certain percentage of current market distorting taxes with this distortion free tax, increasing total production.
  2. There's no incentive to hold onto land for investing purposes, since the price of land is fixed at 0, no matter if the area becomes more valuable. This encourages land to be used, rather than left fallow for 20 years till it can be sold at a profit.
  3. Relatedly everyone pays the same rate of tax, ideally at the market rate for renting the land, no matter how they use the land. So only those with ideas for how to use the land that are more profitable than the market average will be willing to hold onto the piece of land, encouraging land to be held by those who would make the best use of it.

Disadvantages

  1. The main disadvantage is the difficulty of assessing the value of the land. There's no market for land in this scenario, so it has to be done manually. This may be expensive, and will also not be perfectly accurate, preventing us from reaping the full theoretical economic benefits of these taxes.

Harberger Taxes

As seen on Overcoming Bias (lots of blog posts, follow the links from that one to read them all).

Harberger taxes require all citizens to declare a price at which they're willing to sell the property they own. Anyone can offer to buy the property at that price, at fixed terms and conditions for all properties. In order to encourage people not to set the price of their property arbitrarily high, property tax is set as a percentage of this self evaluated price, meaning you have to trade off reducing the chance of your property being sold against minimizing your tax burden. Assuming taxes are reasonably high, and the market is reasonably liquid, the ideal level to set your house price is the approximately the one at which you actually value the house.

This has a number of economic benefits:

Economic Advantages

  1. The property market becomes extremely liquid, meaning its easy to buy up a large cluster of buildings to build something that requires a lot of land (e.g. a road) - something that's almost impossible in urbanized areas today.
  2. Property prices accurately reflect property value of the house, allowing them to be used as a market for futarchy (see Overcoming Bias blog post linked above).
  3. The person who values a property the most will end up owning it, as he will buy out anyone who undervalues the house, and set the self evaluated price higher than anyone else is willing to pay.

Disadvantages

  1. High property taxes distort the market, discouraging improving the property as it will increase the property tax.
  2. It's not obvious what is the optimal level to set the taxes.
  3. Imagine a decision is being made which will hugely impact the price of your house - e.g. a company is deciding whether to build a sewage treatment plant in the neighboring plot. The moment the decision is announced the value of your house will shoot up or down. If it shoots up and you don't make the adjustments in self evaluated price before an automated bot snaps up your house, you will have to pay the full difference in price between its previous price and its current price to buy back the house. This could easily destroy peoples lives, and keeping abreast of all potential such changes so you can change price preemptively is extremely difficult. An insurance market might be able to solve this.

Can we do better?

Georgian land taxes and Harberger taxes have almost opposite benefits. One has a really strong ethical basis, the other doesn't have much of one, and risks significant harm to the average person. One reduces distortion in the market and discourages speculation, but doesn't have a strong way of evaluating prices or increasing liquidity. The other increases distortion, encourages speculation, but gives every property a price, and makes the market extremely liquid.

Can we get the best of both worlds?

The obvious first step is to make a market for Georgian land taxes. Essentially this means that the government rents out the land to the highest bidder. At any point, whoever is willing to offer the highest rental rate to the government for use of the land gets it immediately, under standard terms and conditions.

This seems to offer all the benefits of Georgian and Harberger taxes, without any of the disadvantages (we'll go through them in more detail later). However it obviously wont work as is - what do you do if somebodies already built on the land? The highest bidder rents the rights to the land itself from the government, but has no right to the property built on the land.

The next step is to say that whoever rents the land has to buy the property rights from the previous owner. But the previous owner will just charge the highest price he can, offer a land rent of 0, and we're essentially back to where we are today. We could have somebody assess the property and calculate the fair value of the property, but then we essentially have the same problem as with Georgian taxes - how do we make sure that the assessment is accurate?

The proposal

Once again all land is owned by the government, and you have to rent land from them. Whoever offers the highest rent is given the land automatically. The exact details of the market can be hashed out separately (e.g. how soon do you get the land after offering a higher rent, how often can you drop/raise your bid, etc.) and will likely evolve over time.

Anyone who rents land has full rights to the land, but not to the property the previous owner built on that land. He can either buy/rent the rights to the property from the previous owner, or he can destroy the property, returning the land to a state no better than its base state, and rebuild whatever he wants on the land.

At what price then will the property be sold? The seller can't charge higher than the cost of rebuilding the property + the cost of demolition, since otherwise the buyer will just destroy the property and he'll get nothing. Any amount under this price is pure profit for the buyer, so assuming a competitive market the price should settle somewhere slightly below this mark, or about the cost of building the property (assuming demolition costs are much smaller than building costs). The rental price in a competitive market will then be value of using property - cost of building property = value of land, exactly as desired.

Analysis

Now the sharp eyed reader might have spotted a problem - this works well if I happen to want exactly the same property as you've built on your land. But what if I would want a slightly different property? Then I would be willing to pay a slightly lower amount before I decided to rebuild the whole thing from scratch because I gain slightly more from the rebuilt property than the current one.

In fact, what if I planned to build a skyscraper where you've built a house, and I need to knock the whole thing down anyway? Then I wouldn't be willing to pay you a penny for your property - you would lose everything you invested in that property!

I would argue that this actually makes a lot of sense from an ethical perspective. The land, as argued earlier, belongs to everyone. If I want to build a skyscraper on it, and I'm willing to give the most back to the rest of the people in return (pay the highest rent), I should be able to, and the fact that you grabbed the land before me and built a house on it shouldn't stop me. Bad enough that I have to pay to demolish your house, I should have to pay you the value of the house which I don't even want too? It's not your land that you should be able to force other people off it by building something there before they get to it!

But what about from an economic perspective? Doesn't this hugely increase the risk of building property?

Well in most cases you wont lose very much at all. All you have to do is offer a slightly higher rent than the market rate, and the potential skyscraper builder will move on to the neighboring plot of land instead, which he can get at market equilibrium price. The only person willing to offer a higher rate than that will be somebody who actually wants your house, and he'll negotiate a lower price from you for the house in return for the higher rent. Eventually though, as skyscrapers get built on every free plot of land around, the market rate might get so high that it's greater than any benefit you get from the land. However this is at exactly the point where it would be economically beneficial for you yourself to knock down the house and rebuild a skyscraper anyway - your house is purely a liability at this point. In other words, you stand to lose exactly as much money as the amount of harm your bad investment decisions (building a house where a skyscraper would be more beneficial) cost the economy.

If people are still worried about the risk of losing everything, and so unwilling to invest, I presume that insurance may offer a reasonable solution to this problem.

The next problem is that people will deliberately build their houses out of impossible to destroy materials so that destroying the house becomes prohibitively expensive. The simplest solution is to simply make this illegal, with steep fines if it can be proven that you deliberately built your house in such a way as to make destruction expensive without any other benefits. An alternative is to split the cost of demolition between the two parties in some fashion, so that the builder also has an incentive to keep costs down.

Comparison With Georgian Land Taxes

Let's go through the 3 benefits of Georgian land taxes and see whether we still get them:

  1. Supply of land is fixed, so imposing a rent on it doesn't distort the market. Great.
  2. You can't own land, so holding onto land whilst not using it is just purely paying rent for no benefit.
  3. The person who offers the highest rent for the land ends up owning it - i.e. the person who's able to make the best use out of it.

It also solves the disadvantage of Georgian land taxes - the land rent is now set by the market so it doesn't need to be assessed manually.

So we keep all the advantages of Georgian land taxes, without the major disadvantage.

Comparison with Harberger taxes

Let's go through the 3 benefits of Harberger taxes and see whether we still get them:

  1. Land becomes extremely liquid. Buying the property rights on the land still requires negotiations, but since you can always just destroy the property that will usually not be a showstopper.
  2. Land rents accurately reflect the value of the land, enabling them to be used as a market for futarchy. For example you could have people bet on which zoning policy will most raise lend rents, and pick the one which does best.
  3. The person who most values the piece of land will offer the highest rent for it and own it.

So we get most of the benefits of Harberger taxes but with slightly different details - the benefits all apply to the land rather than the property. It's not obvious which is better - for example would a futarchy based on land rents suggest better policies than one based on property prices? I'd expect them to be pretty similar, unless they effect the cost of building - a policy which increases the cost of building would increase property prices, but decrease land rents.

What about the disadvantages of Harberger taxes?

  1. There's no property tax, so we don't distort the market that way. On the other hand we distort the market differently - people will be worried that they'll lose their investment if somebodies rents the land at a higher price and destroys the existing property. This encourages people to make improvements that are likely to be universal improvements, rather than ones which are specific to them. It's not obvious if this is a bug or a feature.
  2. The land rents are set at the market rate.
  3. If somebody offers a higher rent than you for your land, you can just outbid them, so you don't lose anything if you don't proactively raise land rents. In fact this is a bit of a problem since current renters have no incentive to raise their bid until somebody else outbids them. This could be solved by suitable market strategies - e.g. fining people if they raise their bid in response to someone else's bid rather than organically, or by just assuming that in a suitably competitive market, there will always be someone bidding on your land. On the other hand you stand to lose in a different way - if somebody offers a higher rent for your land than you can afford and destroys your property.

So here it's a mixed bag. We solve the disadvantages of Harberger taxes, but replace them with some disadvantages of our own. It's not immediately obvious which is better.

Areas for future investigation

  1. How can we make this more stable? How can we encourage investment when your entire investment could be destroyed at any moment.
  2. How exactly would the market for land be structured?
    1. How soon do you take over land if you offer a higher bid? What if the current owner counteroffers? What if someone else counteroffers before you take it over.
    2. How do you prevent someone offering a high bid to take over land, and then immediately dropping it to 0? Any time someone outbids him he does the same thing, thus keeping the land forever and paying no rent.
    3. What are the terms and conditions under which you can use the land?
    4. Do you have to return the materials from the property to the previous owner when you destroy it? If so are you required to take care to keep them in good condition?
  3. I mentioned that insurance markets might protect your investment if your property was destroyed. What would those insurance markets look like? How would they distort the market by changing incentives?
  4. How would this affect construction? I would expect modular housing which can be moved from location to location to become hugely popular, since that's an obvious way to protect your investment if somebody takes over the land. This might in fact be one of the major benefits of such a policy!
  5. How could we create such land rent markets today without being unfair to those who currently hold the land? Whilst those who've held onto land for years have already more than reaped the benefits of their investment, those who recently bought land could end up millions of dollars in debt. Banks which have sold mortgages backed by land would collapse, bringing down everyone who has money in those banks.
  6. How do we prevent malicious actors destroying your property not for personal gain but to damage you. E.g one company could destroy another company's factory. (Asked by Richard Ngo).

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Suppose my competitor has just built a factory on land they are renting for $X. I offer $X+1 rent for a day, then demolish their factory, then give the land back to them to rent for $X.

You mention that the exact details will need to be hashed out separately, but I don't think that they can prevent this problem, because it derives from asymmetry between renting being temporary but demolition being permanent.

For example, you might say that the original owner can just outbid me. But I only need the land for the shortest available unit of time in order to destroy their factory and drive them out of business. Suppose that if this happens, I'll gain 20% of the profits my competitor would have earned. So they'll need to pay 20% of their profits for each time period that I can bid on the land.

Insurance doesn't solve this either, because my competitor will still be paying the same cost in expectation, just to the insurance company.

This reminds me of the difficulty in doing any kind of Harbergerian transfer of domain names in cryptocurrency-related DNS or identity systems: the value to a malicious attacker of a domain name can vastly exceed any amount that the legitimate owner, who creates that value, can afford to pay. An attacker could afford to spend millions of dollars to seize 'Coinbase.com' for an hour (so as to MITM accounts+passwords, and thereby steal billions in account balances), while Coinbase itself cannot afford to spend millions per hour securing a domain name. The system operates as designed in transferring the domain name to the user who can extract the most value from the monopoly over the name, but that's not the same thing as creating social value...

I think this can be resolved by working in terms of packages of property (in this case, uninterrupted ownership of the land), where the value can be greater than the sum of its parts. If someone takes a day of ownership, they have to be willing to pay in excess of the difference between "uninterrupted ownership for 5 years" and "ownership for the first 3 years and 2 days", which could be a lot. Certainly this is a bit of a change from Harberger taxes / needs to allow people to put valuations on extended periods.

It also doesn't really resolve Gwern's case below, where the value to an actor of some property might be less than the amount of value they have custody over via that property.

That's an interesting point I hadn't considered at all - malicious destruction. The obvious answer is to "make that illegal", which is a bit vague, but works well enough for things like insider trading.


An alternative would be to make a bid last a minimum length of time. So if I offer a ridiculous temporary price for the factory in order to destroy it, I'm going to have to pay that for an entire year, which will in most cases stop that being worth it.

I definitely need to think about that more!

The thing is, it doesn't have to be a "ridiculous" price, it just needs to be more than what the competitor is currently paying EDIT: can sustainably pay. Imagine the cost to Apple of not being able to produce any smartphones for a year because a competitor had snatched a crucial factory - it's probably orders of magnitude greater than the rental cost of all the land they use. And remember that the attacker only has to remove one piece of the supply chain, whereas the defender has to ensure that they maintain control over every piece of infrastructure needed.

Given this disparity, you wouldn't even need malicious destruction, you could just snatch pieces of land from under them and wait it out.

(Re tit-for-tat, see patent wars - these things do happen!)

it just needs to be more than what the competitor is currently paying

It needs to be higher than what the competitor is willing to pay since they can always counter offer.

You could also require that a bid to take over a piece of land stands for at least a length of time equal to K * (total value of current  property / bid rental price)  for some K, meaning that a takeover would have to be serious before you risked doing this, as you stand to have to pay an amount of money equal to K * total value of current  property if nobody outbids you.

It needs to be higher than what the competitor is willing to pay since they can always counter offer.

Agreed. My previous comment was incorrect; it should have been "it just needs to be more than what it's sustainable for the competitor to pay". The underlying problem is still that the cost of disruption may be far higher than the sustainable price to rent each piece of land. So if I gain a billion dollars from Apple's supply chains being cut, then I can bid up to a billion dollars for each piece of land used in their supply chain, and the only way Apple can stop me is paying a billion dollars of rent per piece of land.


You could also require that a bid to take over a piece of land stands for at least a length of time equal to K * (total value of current  property / bid rental price)  for some K

How would we determine the total value of the current property?

How would we determine the total value of the current property?

I don't mind using manual assessment for this, since:

a) the exact value doesn't matter all that much. b) it only needs to be done when you want to drop your bid, and the previous owner claims you haven't owned it long enough. So in most cases it won't be necessary.

I also I expect in practice that kind of thing wouldn't be super common, because the tit for tat nature is such its just not really worth it for anyone to get into such a war. It also would look extremely bad for the company.

So I reckon this isn't going to be very common to start off with, and even some conservative laws to increase the risk of doing this would be enough to stop it occurring basically ever. Sure there'll be that one case everybody talks about, but it wont actually happen in practice.

There is absolutely no capacity for stability under this system, no matter how high rent you pay. This destroys a great deal of value in the economy with only marginal improvements in taxation as a benefit. I do think that a society could perhaps survive under such a system, but not thrive.

It seems like it would be rife with opportunities for government corruption, since only government property would be immune to Harberger disruption.

Nobody is going to build a skyscraper. Builders of such structures can't offer viable leases or property sales when everyone can be ousted with zero notice by a third party paying willing to pay $1 more for a single "assessment period", and nobody is going to invest in such a venture when the risk of losing the entire future income stream is determined by something as fickle as that. There are far too many incentives for property destruction here, even if you somehow manage to avoid the thinly disguised extortion possibilities.

To be honest I mostly agree (although you would only lose your skyscraper if somebody was willing to pay 1 dollars more than you are willing to pay, not 1 dollar more than you currently are paying).

I think this setup has some really interesting theoretical properties, and I think is a good start in working out a better taxation system. The ideal system would look very similar to this but somehow preserve stability. I would like to try and dig further to find that system.

Perhaps it could be vaguely workable if the "assessment period" was something like 20 years or more. It might be possible for a major property development to make a return on investment within 20 years, but not a lot shorter in most cases.

The long-term underlying lease doesn't need to be a major limit. Private sub-lease contracts can cover shorter terms.

One further question is whether there should be any mechanism for voluntary relinquishment. There are serious problems to avoid in both directions.

What about cultural institutions and assets? If all land belongs to everyone (through rents), what’s to stop someone deciding that the land currently beneath the colosseum in Rome would be better used as the foundations of a supermarket? They outbid a heritage organization, demolish the building and start their supermarket? Is this a loss? Maybe not…

Currently we have the opposite problem. For example I went to a school in a random suburb in not particularly exciting buildings a couple of hundred years old. They were marked as cultural heritage and so it was forbidden to knock them down and rebuild even though the school desperately needed more space. So some random people can prevent an extremely successful school from expanding because they've decided they like the building.

Under this proposal they would have to pay to stop that happening, and you'd suddenly discover they value the cultural heritage of the building far less than they claimed.

I would argue that if people across the world are not willing to pool enough money together to save the Colosseum, then for all their claims that culture is important to them, it clearly just really isn't. I'm reminded of https://slatestarcodex.com/2014/04/21/the-economics-of-art-and-the-art-of-economics/

1. How much money do they have is somewhat relevant though.

2. The cost of preserving it indefinitely isn't finite. So...maybe they wouldn't be willing to pay a cost like that because the good they want isn't for sale.

3. In order to afford to keep the Colosseum open it's going to have to be in use. Do you, really want that?

The primary criteria for taxes is to collect money without alienating the payers.  Part of this is keeping rates low, but basing them on increasing income for the payers, so the suckers that pay more are OK with it because they're getting richer.  It turns out that no matter how just or logical, you can't squeeze much more money out of grandma.  You CAN squeeze it out of fancy apartment or building owners.  

I think you're understating the difficulties and overstating the benefits of both of these.  The calculation problem with Georgian taxes is insurmountable - a whole lot of value isn't the land nor the structure, but the network effect of neighboring structures and neighboorhood/district evolution.  This is both influenced by building choices, and by uncontrollable decisions of strangers (and, importantly, the government itself).  

Harberger taxes are unworkable if there are significant transfer costs.  It's easy to expect that it costs multiple year's taxes to move somewhere else, and that's deadweight loss, leading to massive distortion.