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.
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:
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:
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:
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?
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.
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.
Let's go through the 3 benefits of Georgian land taxes and see whether we still get them:
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.
Let's go through the 3 benefits of Harberger taxes and see whether we still get them:
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?
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.
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...
My proposed solution to both your problem and Richard's, explained further in a separate comment, is that payment and transfer be separated by enough time to vacate amicably, or sue to enjoin transfer.
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.
where the value to an actor of some property might be less than the amount of value they have custody over via that property.
I don't think those are separate things? The value of a roof is the value of everything underneath it when it rains.
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.
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 think in the typical Harberger scheme, in order to compel transfer of property rights, you pay the entire capital cost of the property, not some portion as a temporary rent.
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.
If anything, it'll be more common for the previous owner to trash the place on their way out with some excuse for avoiding legal damages.
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.
I think you can just drop the 'zero notice' part, add something like a 90 day delay between sale and transfer, and things would be a lot more workable.
There's another problem that your comment makes me think of - in a lot of cases, the easiest and most profitable thing to do will be to just buy the property and offer to lease it back to the previous owner at a higher rate than they were last paying in Harberger tax. With capital accumulation, you'll probably end up with giant extractive leasing company monopolies practically owning unwilling renters with no outside options - not sure what to do about this.
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.
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.
I disagree about the transfer costs making Harberger tax unworkable, that gets priced into the self-assessed property value. You pay taxes on the use value of the property to you, not the market value, which is typically lower. When you want to sell, you'll offer at the lower market rate.
But this actually points to an even larger problem. Harberger taxes as such would be incredibly destructive to communities. The stronger the community, the higher the use value, meaning the higher the self-assessed tax rate would have to be in order to reflect the worth to you. But the value from community is uncashable, meaning that there's an unjust tax burden for having a better community. And people are usually only liquid to a minute proportion of the value of the intangible things in their lives.
Thus, people likely have to assess below their use value, which means the community can be eroded by compulsory sale and eviction. This already occurs in rent-paying communities, which are destroyed when property value goes up and they can no longer afford to rent there.
Tbh, you probably end up fighting this by having your neighbors in the community firebomb the property which got bought out from under you.
There is no calculation problem whatsoever in appraising land, which is commonplace today. It's only influenced by uniform application of the same formula to every enrolled parcel, so the comparison will vary a bit, but remain generally fair. It's not at all essential to arrive at a 'perfect' number, it's just an administrative decision. It's just the method of arriving at standard equivalence, otherwise it could just be $5,000/acre across the board
If you don't like the assessment it's immediately appealable through the administrative process, and then into the judicial courts. That's how it works right now, the innovation of Henry George is taxing only the land value, and ignoring the improvements.
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?
This isn't a great way of thinking about intangible value, since most people are far less liquid than the value of the things in their lives. If your mom needs life-saving treatment for $10,000 and you can't afford to pay it, does that mean your mom is really worth less than $10,000 to you? No - her existence might contribute hundreds of thousands of dollars of devotion, emotional support, and sage advice to you. It's just that nobody will accept those things as collateral for a loan.
The Colosseum doesn't have as stark a value proposition going for it, but by a similar argument it's easy to imagine the public benefit of some building being greater than the amount of money that can be raised to support it. Personally, I think the Colosseum is mostly only valuable to the Italian state for the legitimacy that it buys it, a little self-justifying scheme of wasting taxpayer money to manufacture taxpayer assent.
You write that "the supply of natural resources is fixed, and so taxes on them do not distort the market at all". This is entirely incorrect. The land value tax at it's full theoretical 100% rate is indeed neutral and does not distort the market, however any other rate does in fact distort the market. Lower land taxes or not taxing land at all results in a market distorted to incentivize land speculation, because of the positive externalities conferred on the land by the surrounding area.
Taxing natural resources you'd find on the land, like say unmined minerals or coal or oil or whatever, does distort the market to disincentivize extracting those resources. Those resources have no such positive externality conferred on them like the land itself does, so taxing them anything above 0 is distortionary.
I don't buy the traditional Georgian rhetoric around the idea that land is morally owned by us all. That's just nonsense. They're basically asserting that it's the most ethical because land wasn't owned before there were humans. First of all, that itself is debatable given animal territorialism, but also, how nature is or was at some point isn't fair or just or ethical, its just how shit randomly happened through evolution, not from some moral superiority. What matters is the economic correction of externalities, not some subjective idea of what's ethical from a state of nature.
Property owners are only going to assess their property for tax purposes at perceived market value if they're ready to sell. Otherwise they'll assess it higher, factoring in moving costs. The Harberger buyer is usually overpaying.
For this reason, I think most Harberger extortion is easily avoidable by adding a sufficient delay between sale time and transfer time. For example, for most categories of residential and commercial real estate, a reasonable expectation for compulsory sale would be perhaps 90 days between purchase and transfer. (This is already the custom for foreclosures, I think.) The compelled seller, having priced in moving costs, will have time to decide how to put their new liquidity to use and make the proper adjustments or sue to enjoin the transfer if maliciousness such as repeat harassment is suspected.
This leaves the problem of sudden price changes. One solution is to make compulsory sales begin as blind auctions. If someone submits a blind bid for your property at or above your self-assessed tax value, you get a short period of time to submit a reassessment, and if your bid is higher you pay back taxes on that reassessment within that tax year, otherwise they buy from you at their assessment. I think this scheme gets both bidders to bid their true rates, and discourages holdouts approximately the same amount? It makes the market slightly less efficient but keeps the same tax efficiency.