Last year, Astral Codex had a series of interesting posts on Georgism. The claims felt very counterintuitive to me, so I dove into it until I could at least sort out the theory. And I emerged with a better understanding, which I think would be useful to share here.
- In theory at least, Georgism is correct that a land tax will not cause rents to rise.
- Land will become cheaper to buy, and there will be more pressure to use it in an economically viable way.
- The economy as whole will benefit.
- However, a land tax will not cause rents to fall, either. Indirectly, the better economy may cause them to rise, in fact.
For those who are deep into economic models, you can see a Georgist land tax as causing a deadweight loss in a situation of perfectly inelastic supply - ie no deadweight loss at all, and all the tax will be paid by the inelastic supplier. For a longer explanation, here's the rest of the post.
Marginal rents and taxes
Adage: If you want less of something, tax it.
Quick quiz: if you tax cars, does their purchase price go up or down?
Well, if you put a sales tax, paid when the car is bought, then the price will go up. If you put a road tax, paid every year by the car owner, then the price will go down (since it’s now more expensive to own the car, hence less interesting to buy it in the first place).
Second quiz: suppose you have a nice community of a hundred renters, in identical homes. The rents are reasonable, and everyone renting is much happier to live here than anywhere else. What will happen to the rents?
They will rise, of course. As long as everyone renting prefers to live here than anywhere else, then they will continue to stay here even as the rents rise. And so, rise they will. And they will continue to rise until... until someone living here finds them too high, and moves away. At that point, they stop rising. So the rent price is determined by the person who is just on the edge of moving away. In economics, this is what they refer to when they talk about the “marginal buyer”: the gal or guy who thinks “this is not a very good deal; I could go either way on it”. That unsatisfied marginal renter is the one that determines the price.
And, once the prices have reached this level, the landlords can no longer raise rents. Maybe I pay €1,000 for a rental that I value at €1,500. Then the landlord might be tempted to charge me, say, €1,250. But if they do so, then I can just go to another landlord and offer them €1,125, which they will accept. Because of this, my landlord will not raise my rent. If we ignore transaction costs and moving costs then the same will happen if my landlord increase the rent to €1,002: I’ll offer another landlord €1,001.
So if my landlord wants to have anyone in their house at all, they have to price it at €1,000, like everyone else.
What happens if we charge a yearly tax to all the landlords in the community? Well, some of them will decide to move out of the rental business, there won’t be as many rental properties, rents will rise and...
Ok, what happens if we charge a tax to all the landowners in the community? Then landlords won’t move out of the rental business, as that doesn’t gain them anything. And they can’t raise rents. Those are still determined by the marginal renters: if the landlords increase rents, their properties will stand empty.
Ok, so rents won’t rise. What about land prices? These will fall. Just as with road tax example above, if owning land is less profitable, then it will be less expensive.
I haven’t said anything about the level of this yearly tax. You don’t want it so high that the landowners just abandon their land; but any amount below that will do. This is where the “ground rent” tax comes in: over the long term, the amount you can tax without causing people to abandon their land is based on the value of the land if there were nothing build on it.
Georgism in theory
If you’re like me, then at this point in the argument, you’d be highly suspicious. The argument seems to work, as far as it goes, but the conclusion is very counterintuitive. What is the trick that makes the magic happen?
One “trick” is that, in the tradition of spherical humans on airless frictionless infinite planes, we’re making simplifying assumptions and assuming everyone is rational, informed, and that there are no transaction costs. And I’m going to mainly keep that assumption, because I want to see how Georgism could possibly work in theory, which is already counterintuitive enough, before worrying how it works in practice.
So, if I did the argument above with, say, car rentals, then it would be false. Even if I raised a road tax paid by any car owner, then car rental prices would go up (everything else being equal). Why? Because there would be fewer car rentals available. Why? Because there would be fewer cars. Why? Because cars are less valuable to own and won’t sell for as high a price, so people will produce fewer cars.
And that’s where land differs. Georgists often say that land is special because you can’t make any more of it. Another way of looking at it is that you can’t make any less of it. You can tax it to whatever extent you feel, without causing any of it to disappear. As long as you tax the land itself, and not any development, change, rental, or anything associated with the land, you’re good.
In another universe, where cars were indestructible artefacts left by a long-dead alien civilization, and you could reclaim land from the sea at trivial cost, the equation would flip. Georgism would apply to cars and not to land.
Georgism doesn’t hurt OR help rents
This brings me to the most surprising part of my analysis. When people talk about it, Georgism often seems to have a moral dimension, contrasting the lazy rent-seeking landlord with the oppressed tenant. And while land taxes would hurt the landlord, they wouldn’t help the tenant at all.
Why? Because the supply and demand argument runs in reverse. A land tax will not make landlords raise rents, because the supply is constant and the demand is unchanged. But it won’t make them lower rents... because the supply is constant and the demand is still unchanged.
So Georgism won’t help tenants directly. It would help the economy, by redirecting taxes from inefficient sources. It would help governments raise revenues and hence provide services without distorting the economy. But it would not lower rents. In fact, if it makes the area more economically viable and a better place to live, it will end up raising rents, because the demand will rise.
So if you want to reduce rents, all the usual methods apply – remove restrictions on land use, encourage higher density housing, and all that jazz. Georgism is not a shortcut through that problem.
Real road taxes are only paid if the car is used, but we'll ignore that detail here. ↩︎
Unless someone else moves in and is willing to pay the increased price. ↩︎
Marginal renter, in this case. ↩︎
This is the picture for identical properties. For non-identical properties, it’s more complicated, but ultimately is still the marginal buyers that determine the rent levels. If everyone is very happy with their rents, those rents are too low, and will rise. ↩︎
You might think that, with rents the same but land prices falling, more renters will instead buy rather than renting. But remember that this property now has a yearly tax on it: it’s cheaper to buy, but more expensive to live on. The effects will tend to cancel each other. ↩︎
I assume you are implicitly bracketing out all of the slower and more indirect benefits like switching NIMBYism to YIMBYism, deadweight loss, compounding growth and so on, but even so, there are immediate, direct benefits to renters: the revenue must be spent, and it cannot be transferred to the landlord class because that would just constitute a second rent to tax away again; so it must be spent on renters (there is no one else it could be spent on since a human either owns or rents) - such as by a 'citizen's dividend' or by lowering or eliminating taxes like income/sales/excise/capital gains taxes. That's one of the most appealing features: since the tax of landrent must be paid to someone, why pay it to private rentiers who simply consume it for private pleasure and idleness, rather than to the government to do useful government things or at least reduce the burden of how much it taxes to do those things?
I was putting all those under "It would help the economy, by redirecting taxes from inefficient sources. It would help governments raise revenues and hence provide services without distorting the economy.".
And we have to be careful about a citizen's dividend; with everyone richer, they can afford higher rents, so rents will rise. Not by the same amount, but it's not as simple as "everyone is X richer".
Which higher rent will then get taxed away, and which too then must be spent.
So I would argue that when Stuart says Georgism wouldn't lower rents, he's missing the differing effect on the urban core and the urban margins around that core. Georgism should raise the desirability (and hence rental value) of core regions by putting land there to its highest and best use. This means apartments/etc (and one of my geo-economist friends should have an article coming out in the future partially dealing with how Georgism incentivizes YIMBY and other removals of restrictions on highest and best use). But on the other hand, this also means that development won't be pushed out in the form of sprawl bc of vacant lots and severely underutilized land in the core. People and capital will be able to migrate to better lands in the core instead of being forced onto worse marginal (or even submarginal) land. This would mean that the rental value of existing marginal areas would actually fall as demand lowered.
This dynamic was fundamental to how Henry George argued that Georgism would enable true full employment. It would essentially recreate the frontier (except better, much more sustainable, and not dependent on ethnic cleansing). Theoretically, marginal land right around the core would be so much less in demand as to have a rental value of 0. This would mean that people would be able to eke out a decent living there free of rent and taxes. No man would feel the need to wage-labor under a boss for less than they could get in being self-employed at the margin. This would be a boon to the average unskilled worker currently subject to the "law of wages" that drives wages downwards. Employers would be competing for workers instead of the other way around, just like what happened in the early days of the historical frontier.
The problem with our current system is that the land right around the productive urban core is taken up by sprawl. It still commands rent and it's still taxed. This means that people have to travel very far to extremely crappy land if they want to find land that's cheap and "rentless". This land in turn is so far away and isolated that it's too crappy to viably self-employ on.
There is an interesting paper from 1978 called "Sectoral Shift in Antebellum Massachusetts: A Reconsideration" which seems to agree with Henry George's view. It argues that in the early days of settlement, the American frontier worked as advertised. Land was readily available to the average person a short distance away and employees had a viable alternative to working for an employer (as founding fathers like Benjamin Franklin pointed out). But as the land was gobbled up by speculators/etc, the frontier as a whole moved westwards, continually increasing the transportation/settlement costs/risks. This meant that there was a growing amount of poor people in the East due to imperfect labor mobility.
In terms of how this would function in the modern day, it might be instructive to compare the situation in the early 20th century when improvements in transportation briefly opened up a pseudo-frontier of cheap but still decent land around urban centers:
"Another example Ward provides is Walter Southgate, a former street corner agitator and founding member of the Labour Party. Southgate first built himself a carpenter’s bench, and then constructed an 8-by-16 ft. two-room hut, finally hiring a Model-T to move it in sections to the concrete foundation he and his wife had laid on their 2.5 acre site. They taught themselves brickwork in the process of building the chimney. They bought the land after the First World War, began construction during the General Strike of 1926, and completed the home in 1928. During the almost thirty years the Southgates lived in their home, they “produced every kind of fruit and vegetable, kept poultry, rabbits and geese, grew a variety of trees including a coppice of 650 saplings and in fact made their holding more productive than any farmer could.”
Ward considered the Southgates typical of dozens of people he investigated who, “with no capital and no access to mortgage loans, had changed their lives for the better.” For example Fred Nichols, who bought a 40-by-100 ft. plot of land for ten pounds in 1934, and—starting from a tent where his family was housed on weekends—”gradually accumulated tools, timber and glass which he brought to the site strapped to his back as he cycled down from London.” He sank his own well in the garden. Elizabeth Granger and her husband, who bought two adjoining 20-by-150 ft. plots for ten pounds (borrowing a pound to pay the deposit); like Nichols, they stayed in a tent there on days off, gradually building a bungalow with second-hand bricks. They raised chickens, geese and goats.1
Ward quotes Anthony King, in The Bungalow, on conditions in the first half of the twentieth century:
"A combination of cheap land and transport, pre-fabricated materials, and the owner’s labour and skills had given back to the ordinary people of the land, the opportunity denied to them for over two hundred years, an opportunity which, at the time, was still available to almost half of the world’s non-industrialized populations: the freedom for a man to build his own house. It was a freedom that was to be very short-lived.2"" -Kevin Carson, Organization Theory http://www.mutualist.org/sitebuildercontent/sitebuilderfiles/otkc11.pdf
I was confused and suspicious of Georgism before and I'm slightly less confused and suspicious about it now. The concerns over georgism in practice remain, but I found this explanation helpful for getting a handle on what had previously seemed like a sleight of hand to me.
Glad to help. I had the same feeling when I was investigating this - where was the trick?
The following two points are contradicting each other:
I believe the 2nd is correct, whereas the first one isn't. The extra pressure will result in real rents rising. If the land is under-utilised today (e.g., empty, or a garden where nice big house could stand) the maximum possible rent is not being charged. Possible reason might be that the current land-lord can't make the required capital investments (building the house) needed to extract the market rent, yet he might not want to sell (speculation on future prices).
This will result in following two effects:
The tax should, in fact, cause some landlords / landowners to just abandon their land. This is a critical piece of Georgism; the idea that land is being underutilized, in particular as an investment which is expected to pay off in terms of higher land values / rents later, but also in terms of things like parking lots, where the current value of the use of the land may exceed the current taxes (which include only a portion of the value of the land and the improvements combined) while being lower than the Georgist taxes (which include the entire value of the land and none of the value of the improvements). In particular Georgist taxes should eliminate current incentive structures which "reward" things like keeping an apartment building empty of tenants.
The point of indifference is not the point of indifference in the current economic system, it is the point of indifference in the Georgist economic system.
I'm confused about the distinction between land and housing, and the assumption of fungibility of land. There's a whole lot of land that could support denser housing, but the current owners and regulatory agencies prefer to leave it available for other uses (parks, barbecues, nice views, etc.). There's a lot of land that really is unsuitable for more density (due to terrain or other constraints).
Creating and destroying land is slow enough (though it does happen) that rounding it to "constant" doesn't bother me. I am suspicious of the analysis in "no impact" on rent, as land prices fall. This requires a belief that if land were cheaper, landowners wouldn't use more for themselves (private use) rather than creating and renting more usable housing.
Why would they do that? They still have to pay the land tax at the same rate; if they don't rent, they have to pay that out of their own pocket.
Land is cheaper to buy, but more expensive to own.
ah, fair point.
That is a bit of a misleading statement. Land is never bought under a Georgist system, it is only rented. The rent is the taxes paid to the governing authority.
I think use of the word "rented" there is a bit misleading.
Some central distinctions between renting property and owning it are that there are lease conditions imposed by the owner, much greater restrictions than ownership on how the property can be improved, and the option for the owner to decline renewal of the lease at their sole discretion. Georgism has none of those.
It's a land tax, and the only real difference between Georgist land taxes and current ones is the magnitude.
Okay, that is fair, my use of "rented" was sloppy. The land user is paying the economic rent the location commands back to the community/society. That is not the same as your typical lease arrangement.
But clearly no ownership right that allows an owner to decline some offer, not matter how high, to transfer that control of the item exists with land (nature) under a Georgist system. So no one is actually buying, or owning, land in that system as understood under the current private ownership currently in place.
The real difference in the Georist land taxes is the alternative concept of land ownership and process for setting tax rates, not merely the magnitude of the taxes that are levied.
I (largely) agree with the statement made that "buying" land is cheaper and "owning" more expensive. However, it does gloss over the fundamental changes related to property rights in land (nature) at the core of the system.
Hmm, I'm not sure how large a category this is, but I think there are some properties which are non-rental investment properties. [The classical example is the empty lot bought by a Georgist as a advertising campaign, but I think this sometimes happens with houses and apartments.] Under a Georgist system, those would no longer be a good idea, leading to an immediate increase in the supply of housing (probably a tiny fraction of all housing, but housing in areas that the market things are more likely to increase in value, i.e. the best ones to add to the supply).
And then later you say:
I think that in my mind (and that of many Georgism advocates), one of the many benefits of Georgism would be that the increased pressure to use land in economically-optimal ways, will probably create increased incentives to build higher-density housing and increased political motivation remove economically-destructive land-use restrictions. This admittedly is a more convoluted path to YIMBYism than just advocating for YIMBYism directly. Nevertheless, Georgism & YIMBY-ism seem like natural complements, where each encourages the other.
I"m not sure about that as I think a lot of the land value is driven entirely by network effects related to the density of economic and social activity.
Why wouldn't Georgism drive more "NIMBY" to keep the rents down -- and so possible drive up various externalities (e.g., factories locating in low rent areas resulting in high travel for both workers and products?
[Edited to put the scare quotes in -- I don't think Georgism would be a strong driver or NIMBY activism by locals but could create the incentives to produce a pattern of activity that looks very similar. ]
Where's the model?
Deadweight loss of taxation with perfectly inelastic supply (ie no deadweight loss at all) and all the taxation allocated to the inelastic supply: https://en.wikipedia.org/wiki/Deadweight_loss#How_deadweight_loss_changes_as_taxes_vary
I added a comment on that in the main body of the post.
>So Georgism won’t help tenants directly. It would help the economy, by redirecting taxes from inefficient sources. It would help governments raise revenues and hence provide services without distorting the economy. But it would not lower rents. In fact, if it makes the area more economically viable and a better place to live, it will end up raising rents, because the demand will rise.
Georgism is about replacing labour rent with land rent, so it would help the tenants directly as they would have more money left over from their day's work.
My thinking is that an LVT would keep land values lower than they otherwise would've been without one because it discourages land speculation.
'Georgism doesn’t hurt OR help rents'
Disagree. Georgism would reduce rents relative to wages even as nominal rents will probably rise due to the removal of dead weight loss. This is because of the change of incentives to hoard land and hold properties vacant due to price speculation.
Following Ricardo's 'Law of rents' , this would remove the 'rack rent' element of rents caused by artificial scarcity in the housing market which drive down wages to subsistence levels. Undoubtedly upzoning etc would help acheive optimal use, but LVT would do plenty by itself.