Review
Review
A Step Against Land Value Tax
14Pablo Villalobos
5Jiro
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1Blog Alt
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9Brendan Long
2MalcolmOcean
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The arguments you make seem backwards to me.
All this to say, land prices represent aggregation effects / density / access / proximity of buildings. They are the cumulative result of being surrounded by positive externalities which necessarily result from other buildings not land. It is the case that as more and more buildings are built, the impact of a single building to its land value diminishes although the value of its land is still due to the aggregation of and proximity to the buildings that surround it.
Yes, this is the standard Georgist position, and it's the reason why land owners mainly capture (positive and negative) externalities from land use around them, not in their own land.
Consider an empty lot on which you can build either a garbage dump or a theme park, each of equivalent economic value. Under SQ, the theme park is built as the excess land value is capture by the land owner. Under LVT, the garbage dump is built as the reduced land values reduces their tax burden. The SQ encourages positive externalities, LVT encourages negative externalities.
This seems wrong. The construction of a building mainly affects the value of the land around it, not the land on which it sits. Consider the following example in which instead of buildings, we have an RV and a truck, so there is no cost of building or demolishing stuff:
There's a pristine neighborhood with two empty lots next to each other in the middle of it. Both sell for the same price. The owner of empty lot 1 rents it to a drug dealer, who places a rusty RV on the lot and sells drugs in it. The owner of empty lot 2 rents it to a well-known chef who places a stylish food truck on the lot and serves overpriced food to socialites in it.
Under SQ, who do you think would profit from selling the land now? The owner of lot 2 has to sell land next to a drug dealer that a prospective buyer can do nothing about. The owner of lot 1 has to sell land next to delicious high-status food, and if a buyer minds the drug dealer he can kick him out. Who is going to have an easier time selling? Who is going to get a higher price?
Now, suppose there is a LVT. If the tax is proportional to the selling price of the land under SQ (as it ideally should), which owner is going to pay more tax?
The case of the theme park and garbage dump is exactly the same, with the added complication of construction / demolition costs. An LVT should be proportional to the price of the land if there were no buildings on top of it (and without taking into account the tax itself), so building a garbage dump is not going to significantly reduce your tax payments.
In such a way, a land value tax has a regularisation effect on building density, necessitating a spread of concentration.
There are several separate effects here, if you are a landowner. Under LVT:
- You are incentivized to reduce the density in surrounding land
- You are incentivized to build as densely as possible within your own land to compensate the tax
Under SQ:
- You are incentivized to increase the density in surrounding land
- You are not incentivized to increase density in your own land
The question is, which of these effects is bigger? I would say that landowners have more influence over their own land than over surrounding land, so a priori I would expect more density to result from an LVT
This seems wrong. The construction of a building mainly affects the value of the land around it, not the land on which it sits.
That brings up the splitting question.
If two people owning adjacent parcels of land each build a garbage dump, they will in fact reduce both of their taxes since they each affect each other's.
And if we're going with "the government tracks such things and does calculations to prevent splitting from mattering" then it should be possible to build it on your own land and still get the tax reduction.
Well if a person wants not to pay taxes so much that they are ready to split part of their land to another owner and make sure that garbage dump is built on both their pieces... why not just sell your land to someone who would use it more productively to beguin with? There is no incentive to simply occupy land under LVT. And as long as LVT is not above 100% using it productively is more benefitial than trying to decrease its value as much as possible.
why not just sell your land to someone who would use it more productively to beguin with?
Because the market price of your land is zero.
Its zero only with 100% LVT, and usually people are proposing something like 85%.
But even assuming 100% LVT and zero price of the land. Why not give it for free to someone who would use it more productively? This is more economically sound than keep paying taxes for the piece of land you do not use.
You're also stuck with the land since you've got some buildings on it and you can't move the buildings, so selling it has huge switching costs.
Of course, you'll need land to build the garbage dump on, but the garbage dump can affect the property values of a larger sized area than the actual dump. Also note that the garbage dump unequally reduces the value of different uses of the land, so the querstion "doesn't the garbage dump reduce the value of the building by enough to make up for the tax savings" may not be a yes. In some cases, the building that's already on the land may even produce a garbage dump as a side effect--consider a factory, for instance.
I feel that you are loosing track of the conversation.
The initial example was about an empty lot and the incentives of the owner what to build there. Now you are suddenly talking about already having buildings on the land.
We can talk about this different case, of course, but first lets finish the case we started with. Do you concede that LVT does not, in fact, motivate to build garbage dumps on empty lots more than SQ?
No, I don't concede that. Even for an empty lot, the guy who owns it presumably owns it for a reason. Like buildings, it's plausible that this reason 1) cannot just easily transfer to a new piece of land, and 2) is not reduced in value so much by the garbage dump that building the garbage dump isn't worth it.
Also, if he sells it, someone else can build a building on it, thus increasing the taxes he has to pay on the remaining portion. And if he builds a garbage dump, it discourages other people from building nearby and raising his taxes; selling doesn't do that.
I mostly disagree with your example (the use of RV's is nice, although I think it changes the equations too much) but I can grant you (and Malcolm Ocean) the point:
>Yes, this is the standard Georgist position, and it's the reason why land owners mainly capture (positive and negative) externalities from land use _around_ them, not in their own land.
Might we agree that positive externalities outweigh negative ones as evidenced by high land prices? If we take this position at it's best, at the end of the day, how is taxing the capture of a positive externality (LVT) any better than the taxing the creation of value (SQ)? (Given that the positive externality already exists and would be captured for free under the SQ.)
>The question is, which of these effects is bigger? I would say that landowners have more influence over their own land than over surrounding land, so a priori I would expect more density to result from an LVT
The effects you've identified I think are fairly comprehensive. However I think that "Moving to a less dense place" is actually a method to reduce density in the surrounding land i.e. picking up all the skyscrapers and spreading them apart (the regularisation effect over density) and is a decision which landowners frequently make.
Might we agree that positive externalities outweigh negative ones as evidenced by high land prices? If we take this position at it's best, at the end of the day, how is taxing the capture of a positive externality (LVT) any better than the taxing the creation of value (SQ)? (Given that the positive externality already exists and would be captured for free under the SQ.)
Taxing creation of value leads to existence of less value. Taxing capturing of value by land leads to less value been captured by land. The latter is much better outcome because both having more value is generally good and land capturing value is generally bad - its the source of huge amount of problems with the economy.
There is one case where land capturing the gains of economic actvity can at least seem fair. A Disneyland scenario - where you own a lot of land in close proximity and create all the economic activity on it. But in absolute majority of cases your land is capturing the fruits of labour of other people. Other people create businesses and amenities around you and you benefit from them twice - both by consuming the products and amenities that you want without needing to travel and by having your land increase in value without you doing anything. This creates opportunities for rent seeking behavior. And land speculation, which itself leads to even greater land prices. And therefore progress is followed by poverty.
"Moving to a less dense place" is actually a method to reduce density in the surrounding land i.e. picking up all the skyscrapers and spreading them apart (the regularisation effect over density) and is a decision which landowners frequently make.
You seem to be confusing citation and the referent for "surrounding land".
Let's say that you live in land A0, surrounded by land A. You would rather move to less less dense neighbourhood, to land B0, surrounded by land B. When you do so, you stop calling land A as "surrounding land" and start calling land B as "surrounding land" and can say that the density of the surrounding land has decreased. But actually, the density of both A and B stayed the same.
Regarding, "Land Values ARE Property Values", I initially thought LVT advocates were doing a motte-and-bailey (LVT is better because you tax land not improvements; oh actually all improvements are Land), but I think it's more that "land" is defined as everyone else's improvements. So, if I build a casino in the desert, my Land is just land but everyone else's Land around the casino includes proximity to my casino.
I think this causes different problems though, including the one you mention with garbage dumps, especially once you take merging and splitting properties into account.
If Alice and Bob build casinos next to each other in the desert, Alice's casino benefits from being on Land near Bob's casino and Bob's casino benefits from being near Alice's casino, but if Alice buys Bob's casino, she transmutes Bob's casino into an untaxed improvement.
If Bob owns a factory with a toxic waste pool, he can transmute the toxic waste pool into (negative-value) Land by giving it to someone else. Or he can save money on taxes by intentionally creating a toxic waste pool and giving it to someone else.
(And I don't think it's possible to prevent these things without turning your LVT back into a normal property tax)
1The bit about merging the casinos... in the limit, you've got an entire town/city in the desert that is completely owned by one owner, who pays nominally zero land value tax because the property itself isn't worth anything given there's nothing nearby. But it seems plausible to me that having an equation for tracking a multiplicity of independent improvements on a single nominal property and taxing the whole situation accordingly... would be relatively easy compared to the other LVT calculation problems. (I have not done the math here whatsoever.)
The splitting and merging thing is a great point. I sense that @Blog Alt is continuing to missing the point about the "everyone else's improvements" by how they frame it, but once you take splitting and merging into account...
...well, for people who actually live there, hopefully the presence of a new garbage dump would itself be more costly than the decrease in tax. And in principle, if it's NOT more costly, then it would then be correct to build it! (Maybe it's not a dump, maybe it's something else.) So there's a bringing back in of externalities.
But of course, if someone doesn't live there... maybe this can be solved by zoning? I'm normally suspicious of zoning but "you can't put a garbage dump next to a school in a neighborhood" seems pretty basic.
That still doesn't solve the simple notion of a factory toxic waste pool, but once again, maybe such things should be solved by directly addressing the reason why they're bad.
I’m normally suspicious of zoning but “you can’t put a garbage dump next to a school in a neighborhood” seems pretty basic.
Such zoning would itself raise the taxes you pay on your land.
Sure but ideally it would raise them an amount that's worth it. That's kind of the whole idea. People aren't infinitely incentivized by money and zero incentivized by anything else.
This is a really interesting thought (which I will be using in future) but I think it arises from the fact that the tax incidence has to terminate on someone at the very end. Like say income tax (and a wealth tax), depending on how you cut the pie, there are multiple different options for the set of cash flows and corresponding total tax amounts. Moving the assets / cash flows to a business / trust / a separate business / an offshore business / another person all throw a wrench into the works. When we try reconcile infinitely complex real world processes onto paper, there will be problems.
I think you make some good points. But this part stuck out to me a bit:
You are deciding where to build both a pharmacy and bakery (assume corresponding foot traffic uplift from the other is 0). Under the SQ, you build them next to each other such that you can maximally capture the land value increase of the other. Under LVT, you build them maximally apart to reduce your land value tax burden. The increased land value you obtained under SQ that was partially captured by you is now a cost being bourne out as inconvenience to the public under LVT.
It seems to me that in reality, the effect of business attracting customers to other nearby businesses (through foot traffic, more people moving into the area, incentivizing more transport nearby, etc) is very much nonzero and might cover the whole LVT increase.
That said, I agree that LVT is a nonobvious thing and might be off target from what we really want. The real problem is making sure there's enough low-income housing in cities, it's better to just solve that directly.
I've always been a bit confused by "low-income housing'. Is the plan to make the housing cheap via price capping? Won't that have the usual economic issues and cause demand to continue to outstrip supply forever and ever? Is the plan to make the houses ugly as fuck so that they will cost less than the pretty houses nearby? That won't really work; people will rent a closet for $1000/mo in SF sometimes.
It could be owned by the government and rented out for cheap, but only if the renter uses it as primary residence. Or it could be means-tested.
Seems like you've aggregated lvt with central planning problems. There are multiple proposals to do it other ways.
Consider an empty lot on which you can build either a garbage dump or a theme park, each of equivalent economic value.
I have a problem imagining a situation where this would make economical sense. Theme parks profit from "there are many people around" way more than garbage dumps do, so it feels unlikely that the same place would be the economically correct choice for both.
Also, in general I think that many of your objections can be solved by taxing the land value less than 100%, which I think is what most Georgists want.
The "land values are property values" section struck me as a weird strawman of LVT. A huge part of the point Georgists are making is that the value of a given property depends in most urban cases FAR MORE on what is built next to it, than what is built on it. And thus by making property taxes go up when you build things on a property, you disincentivize building, whereas by making them the same regardless of what is built, you incentivize building. Whether you accept any of the other arguments, this is straightforward math afaict. Thus when you say "Build more 1. houses", if you intend to achieve that by market means and not coercion, then you probably want to get your incentives aligned.
There are a bunch of buildings currently sitting empty in Berkeley, CA and my understanding of why is that if they were to rent them at market rates (which have declined) then the sale price would go down, but currently the sale price is still going up. So "build more houses"...
I am glad that you have discovered Georgism by way of Lars' article. The article has indeed received a lot of attention! I would suggest familiarizing oneself with the extensive literature from generations of economists on the subject whether they are 'Georgists' (i.e. Harry Gunnison Brown, William Vickrey, Mason Gaffney, Fred Foldvary, Nic Tideman, Terry Dwyer) or not (i.e. Pigou/Ramsey on optimal taxation, Hotelling, learning about 'tax capitalization', etc.
A couple pieces in particular that I find valuable, "Taxation: The Lost History" - https://cooperative-individualism.org/dwyer-terence_taxation-the-lost-history-2014-oct.pdf, "Land as a Distinctive Factor of Production" - https://paulbeard.org/files/wealthandwant.com/docs/Gaffney_LaaDFoP.html or "The Philosophy of Public Finance" - https://www.masongaffney.org/publications/G44Philosophy_of_Public_Finance.CV.pdf