Land Value Tax as a panacea

[dcfirefighter]

Land Value Taxes (LVT), also known as Site Value Rating in some circles, is expected by economists to improve a variety of social, economic, and environmental conditions. Some of these predictions are validated by real world experience in jurisdictions who have invoked such taxes, though usually in a limited sense.

Economic
It is expected that a significant LVT would suppress or eliminate real estate speculation, which is generally considered the cause of boom & bust cycles in the real estate market, as well as being the overall cause of recessions and depressions.

LVT is neither a direct nor indirect tax on productivity. If it is used to replace taxes on productivity, productivity should increase. LVT shifts the payment of economic rent from landowners to the taxing authority (usually local or state government).

Land Use
Because it suppresses the expected returns to real estate speculation, it encourages building properties to highest and best use. As such, valuable urban and near suburban sites would be built upon to a greater extent than they are now. Urban areas would become more attractive and more affordable, increasing their density and the overall portion of the population that lives in urban areas.

Suburban and rural areas typically currently have fairly high land values. As urban areas are developed, the speculative value of rural areas decreases – there would be little demand for new suburban development if everyone wanted, and could find, a house in the city.

Agriculture
Due to reduced rural development pressure, land values in rural areas would decrease, making rural land more affordable to competing farmers. Decreased tax advantage to mechanization would tend to relatively favor more labor-intensive farming methods, including local market gardens/farms, as well as sustainable organic methods. In short, current tax laws induce agriculture to maximize returns while minimizing labor inputs, requiring greater land, energy, mechanical, and chemical inputs. A full shift would induce agriculture to maximize returns while minimizing land inputs.

Employment and Labor
LVT increases the availability of desirable sites for development as a place of work, increasing the demand for labor. If LVT is used to reduce taxes on employment, such as the payroll tax, or state & local income taxes, the cost of labor decreases. Currently, tax laws favor income to machinery & capital over income to labor. Reducing such taxes on productivity reduces the artificial advantage capital has over labor, increasing the use of labor as a factor of production.

Manufacturing
While a shift to LVT decreases the tax advantages capital has over labor, it also decreases the tax advantage land has over capital. If we correctly consider capital, as a factor of production, to mean buildings, machines, equipment, etc, rather than money, land, or natural resources; shifting taxes off of labor and capital and onto land relatively lowers the cost of labor and capital. As labor is taxed harder than capital, reducing such taxes gives a greater advantage to labor. Such a shift in taxation would increase the use of, and returns to, labor and capital.

Taxing capital as defined above, is an indirect tax on labor – reducing potential returns to labor (employment and wages).

Inflation
Much of inflation is caused by too many dollars chasing too few goods and services. However, the production of goods & services can increase, stabilizing prices. However, the production of land cannot, leaving prices to rise. LVT reduces these prices by suppressing speculative values, increasing the availability of desirable locations, and by exchanging current sale prices for future tax payments. Professional economists who support LVT believe that it would allow for non-inflationary full employment.

Energy
Developing larger and denser urban areas reduces the distances required for transportation, as well as increasing the economic viability of mass transit and rail freight. Currently, transportation uses roughly a quarter of our energy, and most of our oil. Urban residents use much lower energy per capita than suburban and rural residents. Reduced rural land values make more land available for alternative energy production, encouraging the use of renewable energy sources, which tend to be fairly area intensive.

Transport
Local investments in transport infrastructure are typically associated with large increases in local land values – values that are currently enjoyed by local landowners. LVT recaptures these values, more than paying for the costs of transit investment. A similar situation exists for the creation (and value capture) of urban parks, libraries, schools, museums and other public investment.

Environment
In addition to reduced energy use, LVT benefits the environment by allowing for larger greenspace for carbon sinks, surface water and atmospheric bioremediation, and species biodiversity. If LVT theories are extended to atmospheric natural wealth, allowable pollution levels can be auctioned for public gain. Currently, pollution regulations limit the amount a polluter can emit, typically with much stricter limits for new competitors – giving established polluting producers an unfair advantage over upstart competitors. Leveling the playing field against foreign producers would require similar programs in other countries or tariffs for imports.

Water Use
If LVT theories are extended to water use, it would be impossible for private entities to monopolize water rights for profit, ensuring that water was used economically, and that everyone had access to fresh water.

Social and Family Issues
Removing the tax advantages to income natural resource speculation and capital would increase the use of labor as a factor of production, increasing employment. Increased employment forces employers to offer higher wages to attract workers from other jobs, and induce workers to work rather than enjoy their leisure time. Increased employment universally decreases street and property crime. Increased wages allow for families to work less, leaving more time for family. Increased urban density and transit infrastructure allows for less time commuting. Decreased speculative values for real estate, eliminating the interest on the land portion of mortgages, and eliminating the property tax associated with buildings decreases the cost of housing, allowing families to work less, save more, spend more on things other than housing, or some combination of the three.

[eallen]

1. Also known as the Single Tax. Henry George was its primary proponent.

Read about it here:

http://en.wikipedia.org/wiki/Henry_george

[phantom power]

2. If I understand this...

the lynchpin here is "shifting economic rent from land-owner to taxing authority." Reduction of "speculative value," and all these other consequences, all flow from this well.

But what are the mechanics of all this? How does economic rent actually get shifted to taxing authorities? If I'm a landlord, I'm free to charge whatever the public will bear. Any other arrangement sounds like quite a drastic change in our laws.

[dcfirefighter]

5. If you're a landlord, you are free to charge whatever the market wil bear

Of course.

But, if you could sell your land for $100,000 despite future expected taxes of $1000 a year, you might only be able to get $10,000 in the face of future taxes of $5,000 a year.

IOW present value of land is equal to the net present value of future cash flows.

IMO the best argument against LVT is teh effect it would have on those who have worked, saved, purchased their home, and retired. There are several easy solutions to this. More importantly, the first step, a property tax shift, benefits 70%+ of homeowners, as they tend to have well-kept buildings on what property they own.

As for the mechanics of it:
1) local and state governments change their property tax from one rate on buildings & land to two rates - a higher one for land and a lower one for buildings.
2) over time, they keep lowering the rate for buildings until they've got a zero rate on buildings and, usually, a 5-10% rate on land value - a LVT.
3) state & local governments shift revenue from income, sales, and other taxes to the now land-only LVT.
NOTE that this shift would probably take decades - such that very few individuals would be left high and dry by an increase in their property tax, a problem which has alternative solutions anyway.

Federally, there are several solutions. Apparently the Articles of Confederation allowed for the federal government to petition the states for a tax based on land value - I haven't researched this personally.

The federal government could also use such a 'Land' tax on natural resources like federal land use, extraction rights, pollution charges, fishing rights, and broadcast spectrum use. None of these are produced by people - so taxing them doesn't put any one out of business or out of a job. Additional revenue could be raised by pollution tarriffs, leveling the playing field in regards to domestic pollution charges / emission auctions. It's not likely that such taxes pay for all of current level federal spending.

A conservative estimate of how much federal money could be raised with the above fees, auctions, and tariffs would probably be in the $500B range, about 20% of our current spending. Federal spending reductions would be a topic of another thread. IMO, the most harmful tax we have is the payroll tax - it's regressive and it suppresses employment and wages.

Conversely, and I'm only familiar with DC and MD here, states currently have more real estate appreciation each year than they collect in taxes - in other words, despite $4B in harmful taxation, DC real estate appreciated more than $4B last year (and for the last decade before that). Note that land values appreciate, buildings depreciate. It is not unreasonable to assume that at least a portion of the harmful tax cuts would be reflected in higher real estate prices. This does not even begin to reflect the possible amortization of present real estate values, which could potentially quintuple local government revenue, if the LVT were increased to the point that land sold for nominal prices rather than millions of dollars per lot. This of course could only happen at some point far in the future - but this represents a revenue stream currently enjoyed by DC landowners, at the expense of DC residents and businesses.


Personally, and as far as I know no one else supports this, I think that we should assess proportional import tarriffs against countries with a higher GINI index (or similar measure of wealth distribution) than us. I generally don't support protectionist tarriffs, I feel this makes a fairer assessment against 'wage slaves' in foreign countries while allowing third world countries an opportunity to compete and develop.

[phantom power]

7. One thing I've noticed about property taxes.

The taxing authority's assessment of property value is generally years behind the actual value. For instance, our property is taxed assuming a valuation of $160K. We bought it for $200K two years ago, and if we sold it today, I'm pretty sure we could get at least $400K for it.

Now this is Tempe, where we've got bidding wars going on. Yet the same is also true in western NY, where the real estate market is about as depressed as the rest of their economy.

Not that I'm complaining. Come to think of it, this brings up another question. Is an LVT scheme based on market-value of land? Because market value is quite volatile. Is the value of my property "really" twice what it was two years ago?

[dcfirefighter]

8. That's true in every place I've seen

Typically it's due to several reasons, perhaps the assessments are only done every three years or so. There are political reasons not to jack up assessments as fast as market value.

In the case of any property tax including an LVT, the important thing is to get properties relatively correct, not necessarily absolutely correct. In other words, if your property is worth more than mine, it should be assessed higher.

Market value is only needed in the absolute evolution of a LVT, which could only happen after years of shifts, and years of assessments, each getting closer and closer to reality. Were LVT raised to the point that land had only nominal prices, the assessment wouldn't be for market value, it would be for RENTAL value.

For example, if the tax were assessed against market value, and it were raised to the point that the land would only sell for a few thousand dollars, it's likely that the tax, as a percent of market value, would be greater than 100%. At some point, if all the other taxes were shoved into the LVT, the LVT would have to become a tax on rental value - That same property might have a rental value of $5000, and a LVT of 90% of that.

There would be less volatility under a significant LVT. It encourages development of urban areas, reducing development pressure in rural and surburban areas (thus reducing demand, and prices). More importantly, it takes a lot of the speculative value out of properties - a lot cannot be bought, sat on or under-used, and then sold for a great profit at some point in the future - because as it begins to get valuable, it's taxes become a burden.

For example: two otherwise identical lots, assessed at $50,000 one with a $150,000 home, one vacant. Under most property taxes, the built property pays 4x the vacant one. Under a LVT, they'd both pay the same.

[phantom power]

3. regarding "booms and busts"

I'm beginning to think that the Powers That Be are perfectly happy with booms and busts. Once you reach a certain stature in our plutocracy, you have access to enough insider information, that booms and busts are just convenient sell/buy opportunities. In fact, if you have sufficient insider information, booms and busts are optimal for growing your investment. If that happens to be on the backs of the little people who get screwed, well there's no need to ruin anybody's beautiful mind over that.

On the other hand, it's also possible that I've just got my tinfoil hat on way too tight. :tinfoilhat:

[Dogmudgeon]

4. No tinfoil required

In fact, that's exactly how it works. Joseph Schumpeter also wrote about that -- and he was very much a Capitalist theorist.

Keynsian economics -- introduced to damp the swings of the Business Cycle -- allowed the rich to hook into a new cash cow while preventing potentially business-ruining depressions. The relatively undiversified nature of the financial world made depressions excellent opportunities for getting rich, but inevitably took down a part of the business market at the same time. Keynsianism kept the Rich and the People happy, alike.

Now that the investment base is more diversified, Keynsian practices are no longer as vital as they once were, and are being dismantled.

--p!

[IrateCitizen]

6. Thanks for this substansive post on an important subject!!!

As I've found out more about it, I've come to very much like the idea of an LVT -- if for no other reason than it will put the skids of the mind-numbing and soul-sucking suburban sprawl our country has made normal, and instead re-institute urban planning and development practices that help establish vibrant communities that are a nice place to live.

I don't really have anything to add, other than to say thanks for posting this dcfirefighter! :thumbsup:

[dcfirefighter]

9. Thanks

When Henry George proposed it, he was backed by many labor unions, which makes sense - it forces more reliance on labor and man-made capital, which raises employment and wages.

I live in the greater baltimore / washington corridor - sprawl makes my skin crawl.

There's another thread in the E&E forum regarding drill & cap oil wells in the US West. A LVT would likely induce those wells to be pumped, lowering fuel prices (at the cost of running out earlier).