A Pitch for Land Value Tax
A pitch for Land Value Tax
Today’s political discourse basically revolves around the ideological battle between socialism and capitalism. People tend to fall into two camps: are you pro labor or pro business? Surely you can’t be for both, you are either for workers or bosses and they must be in fundamental opposition. This is a flawed way of thinking and yet people continue to flock to it in a effort to explain the age old problem: why is it that the more advanced our society gets, the harder it is to survive. The problem is essentially that this economic model completely ignores a third vital factor in our economy: land. Let’s examine why privatization of this third economic factor has led us into this Progress and Poverty paradox.
Let’s first look at free markets. In a competitive market, the price of a product should be driven down close to the cost to produce it. If a company attempts to charge significantly more than the cost to produce, another company can step in and undercut them, creating a race to the bottom in price that benefits the consumer. This is the promise of free market capitalism. However if a company can gain a monopoly on supply of a given product, they can charge far in excess of their cost-to-produce for access to the product. That excess is not profit at all but rather extortionate pilfering, also known as “economic rent”to economists. So now let’s consider land. With land, the cost to produce is zero, therefore any charge by its owner for access to it must be economic rent. Land owners collectively have a monopoly on supply of land. No competitor can enter the market because no new land can be produced. Land owners will collectively charge the highest price the market will bear for access to their land. Since the land owner has no costs this is entirely economic rent that the landlord derives risk free. Instead of a race to the bottom that capitalism promised, we get a race to the top. This is because land is unique from other forms of capital in that it is necessary for all human activity and more can never be produced. Because land is inherently different from all other forms of property such as buildings, currency, stocks or goods, it must be treated differently with respect to ownership and taxation.
A land owner’s land title is effectively a government granted and enforced monopoly. Or think of a land title as a patent of infinite duration on a given location of the earth. This monopolistic land ownership model serves to concentrate high value land in the hands of a smaller and smaller percentage of the population over time. It also breeds incredible inequality, known as the “progress and poverty paradox”. The remedy for this is to increase the holding cost of land to approximately equal to the rent that the market will bear for access to the land alone. Now the situation mirrors that of other market products, where the landlord must strive to improve their land to the highest use if they want to charge rent that exceeds their holding cost and make a profit. This can be done by applying a tax to the land and using the funds for the betterment of society. The beauty of this model is that it creates a perpetual virtuous cycle where revenue from land tax funds public improvements (parks, roads, bridges, schools, utilities, hospitals, transit… whatever). These improvements serve to elevate the value of land near them, thereby increasing the revenue of the tax funding more public improvements and so on… Contrast this to no land tax: The elevated value of the land due to public works is entirely pocketed by the land owner even though the wealth was created by society’s collective efforts and funded by societies collective tax dollars. The land owner must exert no effort and accumulates wealth regardless.
You might be thinking, “don’t we already have land tax? It’s called property tax right?” Property taxation is actually two taxes rolled into one. A tax on the value of land, and a tax on the value of improvements. It has been said that property taxation is a combination of the best kind of tax and the worst. Taxing land generates virtuous results but taxing improvements does the opposite by discouraging efficient use of land and rewarding leaving land under used. Property taxation therefore represents a very weak form of land tax but its flaws prevent realization of the full benefits of land taxation.
New competitors cannot enter the land market because new land cannot be created, but can competitors buy existing land in order to join the game? If someone wants to buy some land for the purpose of renting, they will find that the current land owner will not sell cheap. They know how valuable the land title is in that it grants the owner permission to collect guaranteed perpetual land rent. Therefore they will demand a large sum upfront which the buyer must raise by taking out a loan with a decades long term. The buyer effectively now owes the land rent to the previous owner in the form of their payment. The new owner can now develop the land to increase their collected rent, but they will owe a portion of the value of the building to property taxes in perpetuity. The new owner effectively is paying nearly the full land rent to the previous owner, a portion of the building rent to the government and interest to a bank on the loan for the land purchase. The only way the new owner can tap into the lucrative land rent is if the land appreciates after having purchased it meaning the land rent increases over what they retroactively owe the previous owner. Since the new owner has no control over if the land appreciates or not, this amounts to speculation. Even worse, if the market already believed the land rent would increase, that extra rent may have already been priced into the sale, meaning the land must appreciate beyond that expected increase to net the new owner excess land rent. We see that simply knowing about the unfair model of land ownership does not necessarily allow an individual to take advantage of it unless they have a crystal ball telling them what the future land rent increase will be. As before, we also see that a new player entering the market changes nothing for the end consumer other than who is extorting them for land rent.
Today’s model of land ownership leads to a “prisoners dilemma” that discourages cooperation. It is in the collective land owners best interest to individually develop their land and collectively fund public improvements because it will create wealth for all participants by raising their land value. However they will not do so under their own free will because any one land owner can simply not participate and pocket the land wealth generated by others activity regardless. Exacerbating the problem would be a tax levied on buildings instead of land. Now any land owner that develops will pay an ongoing penalty that is used to fund the improvements that benefit all land owners. Those that do not develop pay no penalty and thus do not contribute and yet reap the same benefit as all other land owners. Land tax fixes the dilemma by rewarding those who make use of their land and punishing those who do not. An appropriately levied land tax will end all land speculation because the unearned land appreciation would be fully offset by the tax.
It is interesting to note that the cost of a land tax cannot be passed along to the end consumer (the tenant) for the same reason a tax on goods must be passed along to the consumer. Common goods in a competitive market are already being sold at near the cost of production. Any tax applied to the producer must be passed to the consumer or the producer would go out of business. The increased end user price due to the tax will decrease demand for the product which the producer will react to by decreasing supply produced. This lose-lose situation for the economy is called “dead weight loss”. Land behaves exactly opposite, the landlord is already charging the highest possible price a tenant will pay. The cost of any tax applied no matter how high must be eaten by the landlord while continuing to rent at whatever they can get. If they attempt to raise rent in reaction to the tax, another landlord can undercut them who is willing to pass along less of the tax (finally our race to the bottom). At worst the tax causes the land owner to lose interest and either sell or abandon the land. In such a case, because the land does not actually vanish, a consumer wanting to use it rather than gate-keep it is now free to directly buy or claim the land, covering the tax themselves. Unlike the goods, taxing the land has no effect on supply so it cannot impact consumers (tenants) and there is no dead weight loss. This principle also applies in the short term to a tax on buildings because the supply of buildings does not immediately change after enacting the tax. However such a tax discourages new buildings which limits supply in the long run meaning that a property tax will mostly be passed along to consumers eventually and does create dead weight loss.
The benefits of land tax are numerous. Land tax can be so prosperous over time that it can come to supplant other regressive or economically inefficient taxes that create dead weight loss (sales, income, cap gains, property…). Land tax also cannot be evaded by the wealthy like other taxes, since land cannot be moved. The title holder of the land must pay the tax or else eventually forfeit their land to society though they will be compensated for the value of their improvements. Land value tax is also a natural choice to fund universal basic income received unconditionally by all citizens, serving as an automatic and trivial safety net and contributing to the end of poverty and homelessness. Since humans did not create land, taxing it is morally just as well because it does not take something that they created from someone (like their income). Like a local man stringing a chain across a river and charging a toll for passage, the landlord is merely a gatekeeper of the natural produce of the earth. The earth was here before any of us, therefore if an individual wants to permanently deprive society of a piece of it, they should be required to compensate society on an ongoing basis proportional to its value.
Land tax encourages uniform urban density to naturally develop. With no k and tax, productive cities tend to form high density office cores surrounded by ever sprawling suburban residential with the suburban residents closer to the city accruing wealth faster than those farther out. Each new suburban is land owner hoping their land becomes more valuable in the future as people are forced to occupy land farther and farther away. The “productivity” value of the suburban lot is in its relative proximity to the location of jobs. In the extreme this leads to a city of pure affluence with daily working class people who make the city run living far away and commuting in daily as they cannot afford to compete for the fixed supply of close homes. Alternatively the less affluent may live within the city but only in a large apartment block erected on the land considered undesirable for single family (freeway or arterial adjacent). In essence, suburban development is simply a covert vessel for normal people to engage in land speculation and rent seeking. Instead, a land tax forces all land owners to pitch in. Single family lots slowly and naturally become duplexes, townhouses or middle density apartments instead of remaining fixed in amber. Current residents need not be supplanted in this process, or even lose ownership of their land. They can fund the development themselves with a loan against the elevated value of the new property, which now generates rent thereby covering the land tax. Or they could simply sell a portion of their lot to someone who wants to develop, thereby lowering their tax burden. Lastly it could make sense to return an unused portion of a large lot to the city to be used by the public. The density encouraged by land tax means the city grows to use current land more efficiently instead of growing outward which spares rural and wild land making a land tax inherently “green”. The land density encourages walkability and the tax funds transit, reducing dependency on cars making the tax even more green. Urban freeways would be highly disincentivized because they consume high value urban land and devalue immediately adjacent land thereby taking a serious bite out of future tax revenue. Green transit like subways are highly incentivized as they use nearly no land and massively boost adjacent land value, thereby increasing tax revenue and effectively paying for themselves.
Land value tax is levied as a percentage of the theoretical rent that can be attained from the land alone. Calculating this “land rent” is a crucial part of implementing land tax and must be done unbiasedly. The tax itself can be levied at up to 100% percent of this land rent. The actual market value of the land will fluctuate as the tax is adjusted with a tax of 100% of the rent theoretically driving land prices all to $0. In this sense the tax is levied on this theoretical land rent rather than the lands market value. The higher the levied percentage, the greater the collective societal benefit. Land tax proponents often suggest 80-90% to be a good target for land tax. For example 1% of market value land tax currently levied by existing property tax in Seattle might be equivalent to a very roughly 15% land rent tax. So we have non zero land tax now but not nearly high enough to trigger the virtuous cycle and made worse by being paired with a counter productive tax on buildings. A proposed 4 fold increase in land tax may sound eye popping but paired with an elimination of building tax, average homeowner may see more like a 2x increase in their bill. This sounds even better if it is paired with elimination of sales and income tax or if some of it comes back to you in the form of UBI. Such a large shift cannot be enacted overnight and instead land tax must gradually be raised as building tax is gradually lowered over the course of years or even decades. The benefits of land tax can only be seen with a long term mindset that looks ahead to a more equal world multiple generations in the future.
“Free trade, free land, free people”