There I was, minding my own business and looking for something light and fluffy to post before the kids come home from swimming, when Richard Allan alerted me to the idiots at econlog.econlib.org:
My co-author Zachary Gochenour and I have a new working paper arguing that the Single Tax suffers from a much more fundamental flaw. Namely: A tax on the unimproved value of land distorts the incentive to search for new land and better uses of existing land. If we actually imposed a 100% tax on the unimproved value of land, any incentive to search would disappear. This is no trivial problem: Imagine the long-run effect on the world's oil supply if companies stopped looking for new sources of oil.
I replied as follows, tidied up slightly, with the bit about oil tacked on at the end:
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"A tax on the unimproved value of land distorts the incentive to search for new land and better uses of existing land."
No it doesn't. There is no 'new land', it's all on maps somewhere and it's all under the control of states and therefore it is all owned already. In any event and as a matter of fact, the most desirable, and most expensive bits, are the 'oldest' land in urban centres, that's where the bulk of LVT revenues would come from.
"If we actually imposed a 100% tax on the unimproved value of land, any incentive to search would disappear."
In his la-la-land, they merrily overlook that the main uses of land are farming, putting buildings on, storing stuff on and mining. All of these have been with us throughout history, our economy has advanced a bit since then. So let's assume he means "search for more profitable activities generally" rather than "different things to do with land" or physically "new land", again, nope...
a) This is about incremental improvements. Imagine the landlord rents out ten identical shops or factory units for their market rent. Every tenant has the incentive to maximise his profits from that site, so the ones that put their own sites to its most efficient or best use will keep all the extra profits. Those who put it to inefficient use won't be able to pay the rent and get booted out and replaced with more productive businesses. By and large, the landlord ends up with (say) a third of the total income.
b) Or imagine that somebody has bought a home or a commercial building with a 100% mortgage, he is effectively paying rent or Land Value Tax, only he is paying it to the bank instead of the government. He will still try to get the best use out of the building.
c) Or imagine that the government happens to be the landlord, instead of charging one total figure for 'rent', it splits it up into rent for the buildings and a rent for the location ('Business Rates'). Or imagine that the government sells of some land for its market value with a 100% mortgage provided by a government-owned bank; or it gives people land for free, but charges them Land Value Tax. How is those in any way different from (a) or (b)?
All the truly earned income (about three quarters of their total income or profits) accrues to the tenants, and the value of the location (about a quarter of their total income or profits), which is generated by society as a whole or 'the good governance of the state' (to quote Adam Smith when he explained why LVT was the only good kind of tax) goes back to society. Surely, it is better for this value to go back to society than to a bank or a landlord, and surely it is better for this value to be taken as tax than a tax on their genuinely earned income (the other three-quarters)?
"Imagine the long-run effect on the world's oil supply if companies stopped looking for new sources of oil."
This is the most piss stupid argument of all as you don't even need logic to defeat this one (logic is usually wasted on Faux Lib's and Homeys), we can do this with hard facts. And as a matter of hard fact, most governments operate a fairly Georgist system with oil exploration and extraction, or just about any mining activities, i.e. they auction off licences to explore and extract.
The winning bid for the licence must, by definition, be approx. equal to the rental value of the site (or the rights to do certain things at the site). And the winning bid, if calculated correctly, will leave the company with a good profit on its operations in future, and as a matter of fact, most mining companies and most oil companies make profits, end of discussion, there is no disincentive for exploration at all.
Or does he think that when Western oil companies rock up in Saudi Arabia, that the Saudis don't make them pay every cent for the value of the land/natural resources? The Western oil companies just get to keep the additional profits made by extracting, refining, shipping the stuff.
Tuesday, 14 February 2012
Killer Arguments Against LVT, Not (194)
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21 comments:
I hope the authors responds, I'd be interested in where they could possibly go with this. Oil exploration and the like is as we've discussed quite recently a perfect example of what is actually being taxed. Ofcourse the incentive for exploiting something is even bigger when you get an insane profit instead of a pretty sweet profit, but in any bidding war this would be reduced down to pretty sweet anyway.
-Kj
I read slightly through the paper, and this is very strange from looking at the real world examples:
page 6:since any resources would be taxed at 100%, there is no benefit to searching, and in equilibrium no search occurs and the price of land becomes zero
That's a strange hangup with theoretical economics, because 100% of rent in a situation with bidding for government-owned, or negotiations with a previous owner of the rights for that matter, is the price of land where exploitation is profitable for the highest bidder, not 100% of the market value of the resource.
And the real kicker is on page 8, where they mention "previous attempts at land reform", and use the example of Idi Amin kicking out Indian immigrants out of the country... WTF?
-Kj
The paper is a hatchet job. A sophisticated one but a hatchet job nonetheless. According to Wikipedia, Bryan Caplan is an American economist, a Professor of Economics at George Mason University, Research Fellow at the Mercatus Center, adjunct scholar of the Cato Institute, and blogger for Econlog. He is best known for his work in public choice theory and for his libertarian ideology. And according to the Google link to his Twitter profile, Zachary Gochenour is another atheist libertarian geek which I imagine is a self-description. These are not likely to be neutral commentators on Georgist ideas.
But I'd say that the biggest problem with the paper is that it's theoretical predictions don't match what has actually happened in reality. As Mark says, there would be no Saudi drilling. And as for Norway? Forget it. The Norwegian sector of the North Sea would still be untouched.
Derek: Cato Institute isn't a hotspot for georgist ideas, true. The real world examples is that government, fallible agents as they may be, are more likely to grant private parties all sorts of incentives for exploration of natural resources, while private landlords are not likely to grant rent-reduction for market-research in deciding if a site is right for a chinese restaurant (another example from the article).
-Kj
Kj, excellent work over there. What a bunch of arseholes, they appear to be saying (or at least their faithful Faux Lib sheep seem to be understanding) that LVT automatically means a 100% tax on everything.
For example, they can't distinguish between oil drilling licences or indeed fuel duty (real life examples of LVT which work) and a 100% tax on the profits of oil companies (which clearly wouldn't work).
D, it's not sophisticated at all, the problem is that they are writing it for an unsophisticated and easy to please bunch of f-wits, who appear to be lapping it up. They are so smug and stupid, but the problem is that they are winning the argument, aren't they?
MW: these subtleties will inevitably be lost for someone who claims that rent doesn't exist. That everything is "produced" by searching for it, and everything will be paid for by the homesteader in full, and noone will earn more than an average return on profits. That pretty much rules out that the sovereign wealth funds of Norway, Emirates, Brunei etc. actually exist, pretty nonsensical stuff.
-Kj
Interesting their reference to their idea of ideal taxation is a tax on negative externalities. Having a piece of paper from the government that gives you exclusive occupation of a piece of land imposes a negative externality on everyone in the entire country, starting with those closest to the land in question who have to commute further/pay higher rents if the site is underused/etc/etc, albeit diminishing to nearly zero to those furthest away. But a massive total negative externality nonetheless.
On a thread linked to that one is this claim: (http://econlog.econlib.org/archives/2012/02/problems_with_h.html#187615)
As a practical matter, the only US juridiction to try to impose a real land tax as per Henry (going through the difficult exercise of subtracting the value of improvements to determine land value, instead of using the faux "split rate" method that simply applies a percentage of total property value to land) was Pittsburgh circa 2000.
Land, being fixed in amount, is of course very volatile in price (no supply response to mitigate price movements), and appraisal-based taxes of all sorts are by far the most difficult and costly to administer and vastly the most litigated. (See appraised-property gift tax, estate tax, regular property tax, etc.) They are also the most prone to corruption, for obvious reasons. When the new Pittsburgh land tax system was adopted it was immediately hit with a tsunami of appraisal protests, appeals and litigation, collapsed and was abandoned.
The first requirement for a "good tax" (or "least bad" one) is that it be easy to administer efficiently and equitably. When a tax like this one comes *nowhere near* meeting even the most minimum practical requirement in that regard, there is little reason to spend a lot of time parsing the theory of it. Except for the academic fun of theory parsing.
KLN #195?
Kj, oh yes, some Faux Lib once seriously claimed that there was no such thing as rent, that it was an abstract concept dreamed up by Georgists, dude WTF.
Mom, very conveniently and by and large, the rental value of a site is more or less equal to the cost of the burden placed on everybody else :-)
Frag, that comes nowhere close to a KLN, that's just outright lies and propaganda.
Apart from the point about land selling prices fluctuating a lot, which proves that this particular shit head is either lying again or is genuinely so stupid that he doesn't know that LVT is on RENTAL values which are inherently stable.
Even if you base LVT on selling prices, it's based on relative selling prices, so if all selling prices double (or halve) then the tax on each site stays exactly the same.
"and appraisal-based taxes of all sorts are by far the most difficult and costly to administer and vastly the most litigated."
Good argument against income tax there.
B, sure, we can re-write the whole stupid article and subsitute "income tax" for "land value tax" and it would make just as much (or as little) sense.
I don't think you're really engaging with their main argument.
We can split the oil business into three components: search, extraction+refinery, and royalties. The extraction+refinery business will be unaffected by the royalties (rents): the sovereign will charge as much rent as they can get away with, and the oil company will pay as much rent as still leaves a profit after rent and extraction+refinery costs.
The rent component has no effect on anything else. Taxing the extraction+refinery component would have disincentive effects: less extraction+refinery would take place.
BUT
what about search costs? These have to be spent upfront. The company that paid them will have less money to pay rents. Therefore, they won't be able to bid as much as their competitors. So no searching will take place if their competitors can free ride on their search. This wouldn't happen without LVT.
E.g. Imagine an acre of land costs nothing, and a given acre has a 10% chance of containing oil. Search costs £10 / 10 acres. There is either £100-retail worth of oil per acre, or nothing. Extraction of that amount of oil costs £10. So once the oil is found, the searcher company will be willing to pay £80 rent on the acre that contains oil. But other companies will be willing to pay £90.
The sovereign has to agree beforehand to guarantee extraction rights and charge rent less search costs. Otherwise LVT will disincentivise production.
Caplan and Gochenour argue that this applies to land in cities too. That's what you haven't engaged with.
JJ, thanks.
"The sovereign has to agree beforehand to guarantee extraction rights and charge rent less search costs. Otherwise LVT will disincentivise production."
Yes of course. That's blindingly obvious to you and me but not to Faux Lib's.
More to the point, we can say in practical terms that "the location value of land" and "the value of mineral resources under the land" are two quite distinct areas. Another distinct area is "radio spectrum".
Clearly, it would be impossible to design a single tax system with rules which apply exactly the same to all these different areas.
1. Location rent = LVT. The search and discovery costs of best use if f-ck all. You just look at what otehr people in the area are doing with their plots and choose whichever seems to be yielding the highest rents.
In real life, the annual rent collected from the 600 sq yard car park at the top of my road is pretty much the same as the annual rent I am paying for a house on a 500 sq yd plot. Rather unsurprisingly.
And 99% of the cost of a building is ultimately labour. Half an hour making up your mind what you are going to build, dozens of hours or architects and haggling with the plpanning authorities and hundreds of hours of contruction labour and labour of the people in the factories making bricks and slates and copper pipes and cables. Why is the half an hour "search and discovery cost" so much more relevant than the cost of the rest of the labour?
2. Mineral extraction rights = payments for exploration and extraction rights (whereby, the payment for exploration and discovery might be a payment from government TO to explorer), or, as Norway and Netherlands do, just tax oil companies at high rates (about 80%).
3. Radio spectrum = auction off ten or twenty year licences.
And so on.
JJ, thanks.
"The sovereign has to agree beforehand to guarantee extraction rights and charge rent less search costs. Otherwise LVT will disincentivise production."
Yes of course. That's blindingly obvious to you and me but not to Faux Lib's.
More to the point, we can say in practical terms that "the location value of land" and "the value of mineral resources under the land" are two quite distinct areas. Another distinct area is "radio spectrum".
Clearly, it would be impossible to design a single tax system with rules which apply exactly the same to all these different areas.
1. Location rent = LVT. The search and discovery costs of best use if f-ck all. You just look at what other people in the area are doing with their plots and choose whichever seems to be yielding the highest rents.
In real life, the annual rent collected from the 600 sq yard car park at the top of my road is pretty much the same as the annual rent I am paying for a house on a 500 sq yd plot. Rather unsurprisingly.
And 99% of the cost of a building is ultimately labour. Half an hour making up your mind what you are going to build, dozens of hours for architects and haggling with the planning authorities and hundreds of hours of contruction labour and labour of the people in the factories making bricks and slates and copper pipes and cables. Why is the half an hour "search and discovery cost" so much more relevant than the cost of the rest of the labour?
2. Mineral extraction rights = payments for exploration and extraction rights (whereby, the payment for exploration and discovery might be a payment from government TO to explorer), or, as Norway and Netherlands do, just tax oil companies at high rates (about 80%).
3. Radio spectrum = auction off ten or twenty year licences.
And so on.
Caplan is right that search-costs aren't accounted for in the straight Georgist analysis, but he forgets about common sense. What he is doing is trying to invent a theory that removes the concept of rent, by overstating the issue of search-costs, which *is* an actual issue in some marginal cases, to all land.
In the petroleum-tax in Norway it's dealt with pretty straight forward:
- you get a search and exploration license, which is transferrable within certain limits (qualifying companies)
- the surtax of 50% is applied on top of the normal tax on profits of 28%, but the surtax only applies to above "normal profits"
- all search&exploration costs are deductible, also if you are not in "tax-position", i.e. it's deductible even if you are not receiving income from the oil field in question.
So these special cases with high search costs can be dealt with, and the extra costs of administering such a system (a small army of auditors are watching every license), is usually equal to the potential revenues it brings in. So he is right, but it's not a problem, only in faux-lib world.
Kj, exactly, Norway (and Netherlands and the UK) have all developed rough and ready solutions to this minor issue, but instead of a Faux Lib actually researching real life, they set up imaginary problems.
As it happens, the best kind of oil taxation is designed by me, and is like this:
The govt grants licences to people to explore and drill using an auction process, where each bidder says how much he would like to be paid per barrel extracted, and the rest goes to the government.
So if current price is $100/barrel and the winning bidder thinks it will cost him $40/barrel to extract, he hands over $60/barrel in tax.
If the price goes up to $150, he hands over $90, if the prices drops to $40 or less, he pays nothing.
If he discovers no oil, well tough, but at least he pays not a penny in tax (unlike the current system where the wages and salaries of oil explorers are subject to income tax, even if the exploration is unsuccessful).
A very good plan indeed.
KJ, thanks for the explanation of how it works in the real world, and Mark for your proposed oil taxation system.
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"More to the point, we can say in practical terms that 'the location value of land' and 'the value of mineral resources under the land' are two quite distinct areas."
Yes, value added by your neighbours is different from value of the minerals, but I don't think the difference is important in practical terms. The sovereign owns the land, so it gets to charge rent on the location and sell the minerals.
Caplan and Gochenour claim that search costs exist in cities as well, and that LVT will accidently tax them thus discouraging production. You say "search and discovery costs of best use are f-ck all. You just look at what other people in the area are doing with their plots and choose whichever seems to be yielding the highest rents."
You're both wrong. In an evenly rotating economy, everyone just goes on doing what they've been doing before. All entrepreneurial profits have been competed away. A change in people's preferences enables the making of entrepreneurial profits by exploiting a new business area. So the entrepreneur does indeed have search costs, but the entrepreneurial profits compensate for these. "Search" and "entrepreneurship" are the same thing.
However, in the oil analogy, the "entrepreneurial" (I think I'm abusing the word "entrepreneurial" too much here) profits get competed away too quickly for the searcher to make their money back. As soon as the existence of the oil field is known to outsiders (pretty much instantly), the rents get pushed up. So the government actually has to make an exception to Land Value Tax. (If they could design a tax than only taxed Locations, then they wouldn't have to make an exception to the Location Value Tax, but they would have a separate special tax system for natural resources. But in practice it's difficult to design a tax which only taxes locations.)
Entrepreneurial profits exist when you're making better use of your land than your neighbours. As they start to make better use of their land, rents go up and your entrepreneurial profits are competed away (or your business is really too out-of-date and you can't afford the rent so go bust).
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"Why is the half an hour 'search and discovery cost' so much more relevant than the cost of the rest of the labour?"
In so far as the cost is free-ridable.
Maybe you already seen it, but fraggle is doing a series of posts on the Caplan/Gochenour article. Haven't gotten around to reading it myself, but he's usually very thorough.
Kj, ta.
JJ, you're making it too complicated and making too many concessions to the Faux Lib's.
But I agree with your conclusion:
"Entrepreneurial profits exist when you're making better use of your land than your neighbours.
As they start to make better use of their land, rents go up and your entrepreneurial profits are competed away (or your business is really too out-of-date and you can't afford the rent so go bust)."
Give me an empty shop and ask me whether I ought to run a hair dresser or mobile phone shop or launderette, that requires a lot of research to decide and also skill and effort (and luck) to make a success, and a fair chance I'll get it wrong.
But give me a vacant plot in the middle of a row of shops with flats above and ask me what's the best kind of building to place on it, and I can tell you straight away, at no cost to me and for free.
And better use of land (in terms of what to build on it) gets competed away, hence my example that a car park and a house in a big garden generate approx. the same amount of income.
It might take you ten minutes to do the calculations. That is not really a relevant "search cost".
Or maybe there are shops on one side, houses across the road, a car park to the other side, well, then you have to spend twenty minutes deciding whether to build a shop, a house or extend the car park. Big deal. That is like 0.0001% of the total costs of building the shop, the house or extending the car park.
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