Yes, good for you for getting to the heart of the issue immediately. Though to clarify, renting location should be a revenue neutral activity. Renting something that is the product of your labor or capital investment (house renovations, warehouse with new equipment) should of course be compensated.
In addition, such a tax on ground rent should replace our familiar taxes on labor, capital, and economic productivity.
> renting location should be a revenue neutral activity
> Renting something that is the product of your labor or capital investment … should of course be compensated.
Land ("location") is a scarce economic good, with different locations being valuable for different purposes. Rendering it revenue-neutral would lead to misallocation. Land is also capital—a durable good used to produce other goods—so land ownership is a form of capital investment, and a tax on "ground rent" is a tax on capital.
All economic value is the result of human action. When the scope of "improvements" is properly understood to include all human activity relating to the land—not just obvious things like builidngs but everything done to deliberately or incidentally increase the value of the land—there is no "unimproved" value left to tax.
I honestly can't comprehend how you are talking about a tax on land being a tax on capital. The owner of the land didn't create it, taxing the owner of the land doesn't discourage his production of additional land.
If you were to introduce a 100% land tax no land would disappear as a result, instead the value of the land would shrink until people can afford to pay 100% of the value of the land every single year.
As people who can use the land more productively can pay a higher land tax they would outbid anyone who intends a less productive use of the land.
> I honestly can't comprehend how you are talking about a tax on land being a tax on capital.
"Capital" in economics is a fairly broad category. One definition from Merriam-Webster would be "accumulated goods devoted to the production of other goods". Land is at least as qualified on that score as a manufacturing plant or a home (creating goods such as "shelter" and "storage") or machinery or hand tools or any other durable property used in the production of other goods.
> The owner of the land didn't create it, taxing the owner of the land doesn't discourage his production of additional land.
Being created by the owner (or by humans in general) is not a necessary qualification for status as "capital". Still, it is important here to distinguish between "land" in the colloquial sense and what economists would refer to as "land" (unowned resources). While land might not be created through human action, property is. You are not taxing the land, you're taxing the conversion of land into property—the act of identifying useful, unowned resources and claiming them for human use. And when you tax something you naturally get less of it; in this case there is less incentive for people to go out and discover new resources. A 100% LVT would nullify any economic motive to expend effort locating new sources of minerals or suitable farmland (etc.) since 100% of the value of whatever you discovered would be taken by the LVT.
That's assuming the LVT is limited to the hypothetical value of a bit of land in isolation. It gets worse when the scope of the LVT is increased to include the economic value of "location" with respect to other human developments—for example land inside a city being taxed more than physically equivalent land in a rural area. At that point you're not basing the amount of the tax on the land at all, but rather the capital investment and expenditure of human labor in the surrounding area. This form of "land value tax" is deceptively named; it should really be referred to as a tax on gross external benefits received. Which has some obvious flaws, for example that the property owner has little control over external benefits others may unilaterally choose to create, and also that one pays extra tax on any contribution one makes to one's own community which has the effect of raising property values. (In fact, under a LVT system unilaterally contributing to the community and making it a nicer place to live might well be considered harmful since it raises everyone's taxes…)
Land is not a good, because it cannot be produced by human labor. A good is something that is created by humans using natural resources, i.e. the productive output of land infused with labor.
> what economists would refer to as "land" (unowned resources)
I have never come across this definition of land anywhere in economics. A more accurate description would be "unproduced resources". It is anything that exists in nature independent of human activity, and a distinct factor of production from capital and labor.
> You are not taxing the land, you're taxing the conversion of land into property
This is a total misunderstanding of land value tax. LVT taxes the monopolistic holding of land in order to collect rent. It does not tax any property developments or improvements (mines, cafes, farms, factories) on that land.
If a landowner expends labor to extract resources or improve the value of his land, those are improvements, which logically are untaxed. A LVT in lieu of other taxes would encourage the development of land into property, not discourage it.
> the act of identifying useful, unowned resources and claiming them for human use.
Again, it only taxes holding resources without using them -- it explicitly has zero taxation on productive economic activity such as mining, farming, or operating a business on land.
Furthermore, I contend that the act of identifying useful resources and claiming them only, is not a valuable activity, and can be taxed. It is the actual utilization of the resources to produce goods or services that adds value -- merely laying claim to land without productively utilizing it is the definition of a rentier economy.
> And when you tax something you naturally get less of it; in this case there is less incentive for people to go out and discover new resources. A 100% LVT would nullify any economic motive to expend effort locating new sources of minerals or suitable farmland (etc.) since 100% of the value of whatever you discovered would be taken by the LVT.
You're right in a very narrow sense, hypothetically there is less incentive for unproductive landowners to discover resources in their own land, lest they get taxed on something they have no intention of exploiting. In return for this disincentive, LVT aligns every other incentive for the common good. A 100% LVT and 0% sales, development, income, capital gains taxes would mean you get more of the latter: productive economic activity, because you're taxing it less.
The vast majority of land value in modern economies is well known, because it is not undiscovered mineral resource value, but the value of proximity to labor, goods and services. LA, SF, NY flats don't cost what they do because there's gold under the floorboards. The value of infrastructure, proximity to various labor, goods, and services markets is what makes up the vast majority of land value today. A LVT taxes those who hold land without adding improvements (the unearned increment), and incentivize entrepreneurship and labor (the new office building or high-rise will be entirely untaxed, nor will there be any sales or income tax on the valuable economic activity of its inhabitants).
> This form of "land value tax" is deceptively named; it should really be referred to as a tax on gross external benefits received.
I agree with you here entirely. Another name for gross external benefits received is "the unearned increment".
> Which has some obvious flaws, for example that the property owner has little control over external benefits others may unilaterally choose to create, and also that one pays extra tax on any contribution one makes to one's own community which has the effect of raising property values. (In fact, under a LVT system unilaterally contributing to the community and making it a nicer place to live might well be considered harmful since it raises everyone's taxes…)
These are not flaws. The property owner pays exactly as much in tax as is required to offset the external benefit received, therefore there is no harm done to them economically. There is no free lunch for them either (infrastructure, the cafe next door's productivity, the high quality state run school a block over). Making the area more attractive is not harmful as long as the tax does not exceed the unearned increase in land value received, which it shouldn't, by definition. Furthermore, not every improvement in a community leads to an exactly equivalent improvement in the land value, this would be mathematically impossible if you grant that services, goods, building have value apart from land.
> Land ("location") is a scarce economic good, with different locations being valuable for different purposes. Rendering it revenue-neutral would lead to misallocation.
This is the core of your misunderstanding. Yes, location is a scarce economic good. Rendering the ownership of it (rent collection) revenue neutral, while keeping the utilization of it (productive activity at a location) totally untaxed, is how to guarantee correct allocation. Those who can be most productive at a given location will come to utilize it.
Allowing the monopolistic ownership of location without utilization to be profitable is what leads to misallocation. Those rich enough to bid for a location will collect rent from those who productively utilize it.
> Rendering it revenue-neutral would lead to misallocation.
Rendering ownership of land revenue-neutral does not imply rendering all economic activity on said land revenue-neural. In fact it does the opposite, ensuring that the returns to labor and capital are allocated justly.
> When the scope of "improvements" is properly understood to include all human activity relating to the land—not just obvious things like builidngs but everything done to deliberately or incidentally increase the value of the land—there is no "unimproved" value left to tax.
Sure there is. All natural resources on that land, which existed before humans ever set foot on it, comprise the unimproved value of land. There is also the value of location arising from the community (infrastructure, proximity to labor, proximity to customers) which is not attributable to any improvements upon the land.
Aside, thank you for taking the time to write these comments, in this thread and others like it. This is fascinating and important stuff, and you have a way of putting it together in a way that's easy to digest.
The easiest way to set up such a tax is figure out how much it costs to build a building. Let's say in SF currently there is a house that sells at $1M dollars. But that house didn't cost $1M to build, it might have cost $200k in materials and labor. Once you have that number, you just keep raising the tax on that building until the new market cost is equivalent, or $200k. You now have a Land Value Tax. If the owner of the building then puts in a $200k addition, you adjust that number for $400k. If next year a technology is created such that you can make that same house for $150k, the replacement costs change and that might mean a tax raise.
If a train station is built next door, the demand would go up, which would cause taxes to go up. If nearby a bunch of housing was built, this would cause supply to raise and thus move the supply and demand curve which would cause the price to drop, and therefore taxes would lower.
What's the best thing to do with this tax money? Give it back equally to all as a dividend(similar to [0])! Thus the people who use less than the average amount of housing would actually receive money when this goes into effect.
We need to systematically identify all externalities, and tax according to the externality, and just give the money back to the population. This fixes the incentives. Figuring out where that money is going to go, fighting between political parties as to which company is going to benefit, the corrupting effect of centralization of decision making. Just give it back. Tax externalities and return as a dividend.
>The easiest way to set up such a tax is figure out how much it costs to build a building. Let's say in SF currently there is a house that sells at $1M dollars. But that house didn't cost $1M to build, it might have cost $200k in materials and labor.
Mmmmkay. So you've established a materials acquisition set point for the area, or is this a derived value? Do you have a process for tracking this over time as markets aren't static? We've now got in addition to a land valuation assessment, we've got workmanship/material/ labor value assessment; let's handwave this for now, because I'm pretty sure this is old hat for tax assessors/actuaries, etc...
>Once you have that number, you just keep raising the tax on that building until the new market cost is equivalent, or $200k.
I get lost here.
At T=0, Market value for land+building was $1M, right? Cool. We do our magic valuation of the material/labor cost of the building, and determine the building represents a value of 200k. Cool. Let's implement our tax. Pre-tax (T=0), Market value-wise, you're waiting around for someone with a cool million burning a hole in their pocket. Post-tax(T=1) you're still waiting on somebody with a cool million to come along. The State wants market value and tax basis to converge. So you bought at 1M, they take 800k leaving 200k on your property sale? Seems like you may have shot yourself in the foot, because now only someone better off than you were would be in a position to buy the building at whatever you're selling at for break even or profit, but also to pay the tax liability on the land you now have of 800k based on the hypothetical statute? (This is the buy scenario, not necessarily what we're talking about, because it's a one time thing, but as I understand it, property taxes have something weird going on in Cali in the sense tax rates only change when the property changes hands in a transaction.) Market value, either way, has changed: the set buyers now encompasses only those people with your cool million plus the capability to weather the tax liability? This sounds like a property transfer to the rich.
Let's talk rent. You aren't selling, but you own the land since before the tax is implemented at T=0. Your change in LVT... means nothing, til the next buyer?
Let's say we hand wave that. Let's follow the 1% rule. Market Value is $1M, x.01 = 10k a month (ouch!) Current SF average yearly property tax liability is .55% (approximately 4.5k on $785000 value), or 5500 per million. Cool. T=1. Tax implemented.
Your accountant sits down. Land +building previously was $1M. Building was assessed at 200k. By statute, the rest is LVT. 800k. Property tax has just gone from .55% on land + building (1M) to 800k based on the statutory definition of LVT being (value at time of purchase - assessed structure value = 800k... per year? Over a period time?). Screw it, we need a number that makes sense for rent. Say we stick at 10k a month. Pre LVT, that's 4500 a month you're clearing. 54000 a year. But you're taxing the building on the difference of purchase price and actual material labor cost...
Like, I'm failing to see how your tax actually changes Market value. No one is selling a million dollar property for 200k except to avoid a greater expenditure over time in which case the State becomes the questionable actor here because they are essentially levying an excise on your sale price if too high because they want it lower? What if you charge less than 200k?
Forget the fact that we've got a mismatch between how the tax is collected (LVT implies excise over time, while assessment procedure seems to imply a one time).
This feels like a word problem with half the info missing. Either that or I'm missing some painfully obvious piece of context to the initiated.
Let's go to an extreme, let's say taxes are 100% of the house value per year. 1 million dollar house is 1 million dollar taxes. 10k house is 10k taxes.
It's obvious what would happen, the house price would drop. What would it stabilize at? Roughly the annual rent price for that type of house.
Moving back to my original example:
T=0, where taxes are .55% and market value is 1M, paying taxes of $5500.
T=1, we raise taxes to 1.55%, market auction comes in and offers $800k, where they would pay taxes of $12400.
T=2, we raise taxes to 5.55%, market auction comes in and offers $500k, where they would pay taxes of $27750.
T=3, we raise taxes to 15.55%, market auction comes in and offer $200k, where they would pay taxes of $31100.
STOP.
Balance as necessary.
Those numbers are not real numbers. The numbers will be different, and they will never be perfect. It's likely that you wouldn't have per-house figures, but city averages setting city-wide taxes.
Since so much of our current system's people networth are invested into something, this is not a change that can possibly happen over-night, and would likely take upwards of 50 years to phase in.
Property valuations can be roughly split into land/location value and building/improvements value. By renting location I just mean the portion of the total rent that is attributed to location value, not improvements value.
Yes, those would be Pigovian taxes, the very close cousin of the Georgist single tax. Not quite the same economic elegance, but less bad than taxes on wages, sales, value added, etc.
In addition, such a tax on ground rent should replace our familiar taxes on labor, capital, and economic productivity.